Fitch Affirms Nicaragua at 'B+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Nicaragua's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook. The Country Ceiling is affirmed at 'B+'. The Short-Term Foreign and Local Currency IDRs are affirmed at '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 structural weaknesses including low per capita income, a shallow domestic capital market, social and governance indicators, and external vulnerabilities.

Nicaragua maintains a disciplined fiscal policy. Fitch expects the general government to post a 1.1% of GDP overall deficit and a primary balance in 2016, after a primary surplus of 0.1% of GDP in 2015. Successive Nicaraguan administrations have delivered a track record of primary surpluses over the past 25 years as well as timely tax and expenditure adjustment. Government revenues are growing faster than the economy during 2014-2016 to 25.5% of GDP in 2016 greater than the 'B' median, supporting expenditure growth. The sovereign demonstrates greater predictability of fiscal policy through the election cycle than most 'B'-rated peers.

General government debt is projected to decline, to 41.2% of GDP in 2016 below the 'B' median at 52.4% of GDP, due primarily to the retirement of domestic debt held by the central bank and privately held historical compensation bonds. The interest burden is low and sustainable at 4.3% of revenues in 2016-2017. The foreign currency share of general government debt is high at 81.9% in 2016 above the 'B' median of two-thirds, although the concessional nature of most of Nicaragua's external debt reduces refinancing risks. Expanded access to multilateral and official financing is expected to cover the government's USD242 million external financing needs Fitch forecasts for 2016.

Growth is forecast to moderate from 4.5% in 2016 to 4.0% in 2018. This reflects rising oil prices, slowing credit growth, the expectation that gradually rising USD interest rates and weak economic conditions in key bilateral partners will constrain foreign investment (we forecast net FDI conservatively at around 5.5% of GDP in 2016-2018) and loan financing flows to the private sector. Nicaragua's five-year average growth of 4.8% exceeds the 'B' median, supported by increased investment, economic and export diversification as well as relative security and lower labor costs than regional peers. Low oil prices spurred a pick-up in construction and consumption in 2015, contributing to 4.9% economic expansion. Construction and credit growth slowed in the first half of 2016 (1H16).

Inflation dropped to a record-low average 4.0% in 2015 driven by low oil prices, and average consumer prices are expected to rise by just 3.8% in 2016. Headline and core inflation were 4.11% and 3.89% year-over-year (yoy), respectively, in July. Inflation expectations are anchored to the crawling exchange rate peg to the USD with 5% annual depreciation. However, Nicaragua's vulnerability to food and energy price shocks contributes, in part, to the country's higher 5.6% five-year average inflation than the 'B' median of 4.5%.

Nicaragua's governance indicators are in line with the 'B' median. Political developments during June-August point to the consolidation of power over the governing Sandinista National Liberation Front (FSLN) party and government institutions by President Daniel Ortega, in Fitch's opinion. Several opposition legislators were dismissed from the National Assembly, the president and vice presidential candidates of the minority opposition party coalition were disqualified for upcoming elections on Nov. 6, 2016, and the leader of the largest opposition party removed by judicial institutions. The FSLN nominated the First Lady to be the vice presidential candidate. Some opposition parties may boycott the election.

Fitch expects a third consecutive term for President Ortega would support continuity in economic policy. Nicaragua's macroeconomic policy framework has been broadly consistent across two decades and administrations of opposite ideological leanings, and through economic and political cycles. The government's consultative mechanism with the private sector on economic policymaking continues to function and financial system deposits are stable. The impact of political events on investor expectations is too early to discern.

Nicaragua's external finances remain vulnerable to shocks. The large current account deficit (CAD), expected to rise from 7.8% of GDP in 2016 to 8.5% of GDP in 2018, is financed primarily with foreign direct investment (FDI). The CAD plus net FDI is forecast at 2.0% of GDP in 2016, on par with the 'B' median. Net external debt at 50.6% of GDP in 2015 exceeds the 'B' median at 21.2% of GDP. The Heavily Indebted Poor Countries (HIPC) initiative has lowered public external debt but PetroCaribe financing has driven private-sector net external debt to 30.8% of GDP in 2015. External interest payments are low at 3.4% of CXR in 2016. Financial dollarization is among the highest in the rating category, at 73% of deposits.

The central bank has strengthened its external liquidity, raising international reserves to four months CXP and maintains a USD200 million contingent liquidity line from the Central American Bank for Economic Integration (BCIE). Nicaragua's international liquidity ratio, estimated at 220% for 2016, is stronger than the 'B' median, and its gross external financing needs have remained less than international reserves since 2009.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Nicaragua a score equivalent to a rating of 'B' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term FC IDR by applying its QO, relative to rated peers, as follows:

--Public finances: +1 notch, to reflect Nicaragua's track record of prudent public financial management that has supported improving macro conditions and domestic debt reduction.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES

The main factors that could, individually or collectively, lead to a rating action are:

Negative:

--Political developments that undermine growth prospects, external financing, and policy continuity;

--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.

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.

KEY ASSUMPTIONS

--Fitch forecasts that U.S. economic growth of 1.8% in 2016 and 2.1% in 2017 (lower than our last review) will support Nicaragua's economic growth and external accounts, given the strong trade and financial linkages between the two countries. Economic and fiscal challenges in Venezuela and Brazil will restrict foreign investment and project financing from these countries during 2016. 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 USD35 in 2016 and USD45 per barrel in 2017, 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. 16 Aug 2016)

https://www.fitchratings.com/site/re/885997

Sovereign Rating Criteria (pub. 18 Jul 2016)

https://www.fitchratings.com/site/re/885219

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010745

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010745

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Kelli Bissett-Tom
Associate Director
+1-212-908-0564
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Richard Francis
Director
+1-212-908-0858
or
Committee Chairperson
Paul Gamble
Senior Director
+44 20 3530 1623
paul.gamble@fitchratings.com
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kelli Bissett-Tom
Associate Director
+1-212-908-0564
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Richard Francis
Director
+1-212-908-0858
or
Committee Chairperson
Paul Gamble
Senior Director
+44 20 3530 1623
paul.gamble@fitchratings.com
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com