Despite growth, Nicaragua has high hill to climb

Over the past few years, Nicaragua’s foreign direct investment has grown exponentially, exports have doubled, the trade deficit has decreased, poverty has been reduced slightly and the economy has expanded. Last year, Nicaragua’s real GDP growth was the second-strongest in Central America, after Panama, and the economy is projected to maintain at least 4% growth for 2012 and 2013, improving upon its 3.2% average growth over the past decade.

The World Trade Organization, the World Bank and the International Monetary Fund have all patted Nicaragua on the back for being a good disciple of the multilaterals’ structural adjustments and macroeconomic norms.

Yet despite Nicaragua’s gains, the long view of the country’s economic growth potential is still a bit dubious, according to Moody’s Investor Service.

“Nicaragua’s long-term growth prospects remain hindered by structural deficiencies,” the credit rating agency said in a country report released last week. “In Moody’s view, a large infrastructure investment gap, low human capital, and weak institutions represent important obstacles to achieving greater economic development and poverty reduction.”

Overall, Moody’s gives Nicaragua a B3 for its foreign and local-currency ratings, which it says “are constrained by the country’s limited economic development, weak institutions, high levels of dollarization, and external vulnerabilities.”

In Moody’s sovereign rating mechanics for Nicaragua, the country scored “low” in the categories of Institutional Strength and Government Financial Strength and “very low” in Economic Strength. Nicaragua’s only “high” score was in the category of Susceptibility to Current Risk.

“Moody’s assessment of Nicaragua’s Economic Strength as very low is based on the small size of its economy and low income per capita relative to other countries in the sovereign rating universe,” the report reads. “We expect that the economy will reach $10 billion in 2012, compared to a median of $18.7 billion for all sovereigns in the ‘B’ rating category. Poverty declined to 42.5% in 2009 (the most recent data available) from 48.3% in 2005, but remains high. Meanwhile, on a purchasing parity power (PPP) basis, at $2,941 in 2011, Nicaragua’s income per capita was the lowest in the Central American region.”

Moody’s adds, “among its rating peers, Nicaragua is comparable to Cambodia (B2; $2,372), Papua New Guinea (B1; $2,695) and Moldova (B3; $3,392).”

Moody’s also says that concerns about corruption and democracy are affecting Nicaragua’s ability to court foreign donors.

“Corruption allegations during electoral processes are also frequent,” the report reads, making special note of President Daniel Ortega circumventing the constitution to get himself reelected last year. “Concerns about this type of occurrence also affect the predisposition of foreign donors to provide Nicaragua with much needed capital to cover its current account deficits. After allegations of fraud in local elections in 2008, donors suspended payments of over $100 million (1.2% of GDP) in protest.”

The positives

The credit-rating report also highlights things that Nicaragua is doing to improve its situation. Moody’s notes that Nicaragua’s efforts to change its energy matrix to renewable energy sources will save the government approximately $900 million between 2012-2016, due to lower oil imports and subsidies. Nicaragua’s energy minister announced this week that Nicaragua has already reduced its dependency on oil from 80% to 60%.

Moody’s also highlights what it views are positives in the area of Nicaragua’s institutional strength.

“First, the resumption of aid flows is credit positive for Nicaragua. The Inter-American Development Bank will disburse some $45 million in planned budget assistance and will be able to start working on a new country strategy for Nicaragua through 2017. In addition, the government has maintained strong relations with the IMF for the past six years and this should guarantee negotiations with the Fund for a new Extended Credit Facility (ECF),” the report reads.

Moody’s also underscores the importance of the open communication between the government and the private sector through COSEP. Nicaragua’s National Public Debt Strategy (2013-15) is also considered favorable.

While there are many external question marks hovering over Nicaragua’s economic future—the health of Venezuelan President Hugo Chávez, the pending U.S. fiscal cliff, and Euro Zone troubles, to name a few—the country could reach 5% next year, according to the most optimistic forecasts.

Economists say that’s still not enough to make much headway against the country’s grinding poverty, but even modest growth is better than the opposite.