Nicaragua

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast *Including only Central Government, which also covers Social Security

RISK ASSESSMENT

Sluggish growth impacted by the US economy

In 2022, Nicaragua’s economic recovery ran out of steam due to high commodity prices, tougher US sanctions and the FED's monetary tightening policy. The stagnating state of the economy is expected to be confirmed in 2023. First, in the context of high inflation - the Central Bank of Nicaragua's inflation target is between 2% and 4% - the pace of domestic consumption will decelerate sharply. Rising unemployment (at least 4.7% of the labour force expected by 2023) and falling remittances (at least 70% of expatriate remittances in 2022 came from the US) will further erode household disposable income. Second, underinvestment, both private and public, will worsen. The Biden administration imposed new sanctions on sugar imports at the end of October 2022, sending out a signal effect that will further deter FDI. With possible new sanctions in the pipeline, Canadian mining companies could reduce their FDI. The restrictive monetary policy (repo rate of 8.87% in October 2022 and estimated at more than 7.00% in 2023) will harm investment by domestic companies. Their high default rate will further hinder their access to bank credit. The state's narrower fiscal headroom will further squeeze public sector orders on which the construction sector depends. Third, the trade deficit will lead to a further decline in the production of goods and services. Downturns in the US (56% of total exports in 2021) and Central America (28% of total in 2021) will reduce textile production (35% of exports to North and Central America in 2021) and beef production (11% of exports to North and Central America in 2021) of the maquinadoras. Nevertheless, global demand for gold, platinum, coffee and tobacco will prevent any dips in agricultural production (21% of total exports in 2021) and mining (13% of total in 2021).

Durably unfavourable external position, but slight deleveraging

In 2022, the current account deficit narrowed due to large remittance flows. It will be reduced only moderately in 2023. The decrease in hydrocarbon imports (17% of total imports in 2021 and estimated at 9.5% of GDP in 2023) will reduce the trade deficit. This should more than compensate for the decrease in the surplus of the balance of transfers due to weaker remittance flows. Tourism exports remained stable (estimated at less than 3% of GDP in 2023), maintaining the surplus in the balance of goods. If the flow of FDI (estimated at 5.1% of GDP in 2023) falls further, it will still balance the current account deficit. Last, the central bank's reserves, which covered at least 6 months of imports at the end of 2022, will ensure the monetary peg to the USD.

In 2022, even amid continued fiscal consolidation, the debt of the social security agency (Nicaragüense de Seguridad Social) and public enterprises continued to weigh on public finances. In 2023, a surplus (estimated at less than 0.1% of GDP in 2023) is expected to be generated by the central government, increasing the fiscal space still squeezed by the non-financial public sector (deficit estimated at more than 1.1% of GDP in 2023). First, public revenues (19.5% of GDP in 2022) are likely to be smaller due to the economic slowdown. Second, public expenditure (16.4% of GDP in 2022) would decrease to prevent any primary deficit. To compensate for the extension of petrol subsidies, capital expenditure (21% of expenditure in 2022) will be significantly reduced and risks aggravating public under-investment. The debt burden is also set to remain stable (less than 3% of GDP in 2023). Public financing requirements will be covered during the year by domestic issues (the interest rate was at least 8% at the end of 2022) and external - potentially Chinese - borrowings. Debt, which is mainly external (78% of the estimated stock of public debt for 2023), will remain mainly concessional (93% of disbursements came from multilateral organisations, CABEI represented 55% of external financing in 2021) and sustainable in the medium term.

Continued rapprochement with China amid diplomatic isolation

On 7 November 2021, Daniel Ortega, in power since 2007, and his wife Rosario Murillo, were respectively re-elected to the presidency and vice-presidency of the country for a further five-year term (75% of the votes according to the authorities). This election was criticised by the international community, led by the United States and the European Union, for its irregularities (20% turnout according to the opposition) and the arrest of the main opposition candidates a few months before the election. Under the RENACER Act of 2021, the US Congress imposed a series of sanctions against Nicaraguan officials for human rights violations, corruption and electoral malpractice. This legislative provision paves the way for a possible exclusion by the US from CAFTA-DR, new sanctions and potential suspensions of multilateral loans. In this context, the Ortega administration has attempted to forge diplomatic ties with China (less than 0.1% of total exports in 2021, 12% of total imports in 2021) and Russia in the hope of finding new avenues of financing and investment. To do so, the country severed diplomatic ties with Taiwan (2% of total exports in 2021) in 2021. It signed a memorandum of participation in the New Silk Roads in 2022. Regarding the war in Ukraine, it voted against the UN resolution condemning the Russian invasion, before abstaining in subsequent votes at the UN General Assembly. Finally, chronic underinvestment in infrastructure and a harsher regime is leading an increasing number of Nicaraguans to emigrate to North America.

Last updated: April 2023