NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned first-time ratings to Nicaragua as follows:
--Long-term foreign and local currency Issuer Default Ratings (IDRs) 'B+', Outlook Stable;
--Country Ceiling 'B+';
--Short-term foreign currency IDR 'B'.
KEY RATING DRIVERS
Nicaragua's credit ratings are underpinned by its positive economic growth trend, track record of prudent fiscal policy and debt reduction, and consistent exchange rate and fiscal policies that have supported macroeconomic improvement and declining inflation since the mid-1990s.
The ratings are constrained by Nicaragua's structural weaknesses including the country's low per capita income, shallow domestic capital market, and weaker social and governance indicators than higher-rated peers. The sovereign's debt restructuring history is a further constraint, notwithstanding the government's demonstrated willingness to pay maturing domestic debt. External vulnerabilities include the wide current account deficit, large net external debt and the macroeconomic constraint of high financial dollarization.
Successive Nicaraguan administrations have delivered a track record of primary surpluses over the past 25 years, timely implementation of tax and expenditure adjustment, and debt reduction through the Heavily Indebted Poor Countries (HIPC) initiative and retirement of maturing domestic debt. As a result, general government debt is on sustained downward trajectory, projected to decrease to 36% of GDP in 2017 from 44% of GDP in 2014. The low interest burden is sustainable, averaging 4.6% of revenues over 2015-2017. Despite large social demands, the government has demonstrated budgetary discipline, implementing tax reforms, reducing effective subsidies, and sustaining capital expenditure.
The crawling peg anchors inflation expectations and supports financial stability amid high financial dollarization. However, this exchange rate policy provides the trade-oriented economy with a limited buffer against external shocks and sets a higher inflation floor than peers. Lower oil prices have positively impacted inflation which could average 4% in 2015 and 6% in 2016.
Nicaragua's medium-term growth prospects, at 4.5% on average for 2015-2017, are broadly in line with rating category peers. Factors supporting growth through 2017 include U.S. economic growth, supporting demand for Nicaraguan exports and receipt of remittances; sustained investment into agriculture, manufactured and service exports, and infrastructure; and lastly the boost of the low oil price to private consumption. Nicaragua's relatively low crime rates and labour costs partly compensate for competitiveness constraints and a weak business environment reflected by the World Bank Doing Business survey.
Nicaragua's balance of payments has steadily strengthened since the mid-1990s, thanks to lower external debt service, investment in alternative energy supply, and export diversification. Although still wide, Fitch expects the narrowing current account deficit to average 7.5% of GDP in 2015-2017 supported by export growth, remittances, and declining oil imports as energy generation shifts toward renewables. External financing needs are projected to be sustainable at an annual average of 63% of international reserves over 2015-2017, half of which should be covered by FDI.
External debt relief totalling USD7.3 billion through the HIPC and Multilateral Debt Relief Initiatives has reduced the country's net external debt stock and debt service costs to sustainable levels, 96% and 10% of CXR (2015), respectively. However, the sovereign remains a large net external debtor and nearly 80% of general government debt is exposed to currency risk.
The international liquidity ratio, 200%, is stronger than the 'B' median. The central bank has strengthened its foreign reserves to 4.0 months of CXP and maintains contingent liquidity lines from multilaterals to cover risks of a sudden deterioration of PetroCaribe financing to the private sector and natural disasters.
Fitch expects the general government's fiscal policy will remain prudent, yielding small 0.7%-of-GDP average overall deficits and 0.4%-of-GDP average primary surpluses during 2015-2017. The fiscal stance is projected to loosen as the government implements public infrastructure investment financed mostly with expanded access to World Bank and Inter-American Development Bank lending facilities. Domestic financing flexibility is constrained by the shallow capital market.
Despite Nicaragua's rigid expenditure profile, public financial management has demonstrated fiscal discipline. Nicaragua's tax base has kept pace with managed expenditures; whereas subsidies have been targeted, debt reduction has lowered the interest bill, and the capital budget represents a source of flexibility to adjust discretionary spending. Further, the government has implemented timely tax and expenditure adjustments in response to shocks, including a 2pp of GDP expenditure adjustment in 2009.
The macroeconomic policy framework has demonstrated continuity across two decades, administrations of opposite ideological leanings, and through economic and political cycles. The Sandinista National Liberation Front (FSLN) administration led by President Daniel Ortega has pursued a pragmatic political strategy, engaging and consulting the private sector on economic policy to offset challenges of political polarization.
RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to a rating action are:
Positive:
--Sustained improvement in structural weaknesses, including stronger governance and social indicators, as well as a more robust business environment;
--Faster growth that reduces Nicaragua's per-capita income gap relative to peers;
--Sustained reduction of external vulnerabilities;
--Greater government financing flexibility.
Negative:
--Weakening of the external balance sheet and/or external liquidity, potentially reflecting a reduction in effectiveness of the crawling peg exchange rate regime;
--Deterioration of public financial management and government debt dynamics;
--Emergence of increased macroeconomic imbalances or financial instability.
KEY ASSUMPTIONS
--Fitch forecasts that U.S. economic growth of 2.5% in 2016 and 2.3% in 2017 of will support Nicaragua's economic growth and external accounts, given the strong trade and financial linkages between the two countries. Fitch does not factor development of the proposed interoceanic canal into its economic forecasts.
--Fitch's latest projections also factor in adjustment of the average Brent oil price to USD55 per barrel in 2015 and USD55 in 2016, maintaining reductions of the fuel imports and effective electricity and transportation subsidies.
Additional information is available on www.fitchratings.com
Applicable Criteria
Country Ceilings (pub. 20 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869287
Sovereign Rating Criteria (pub. 12 Aug 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428
Additional Disclosures
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996866
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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