NEW YORK--(BUSINESS WIRE)--Nicaragua's re-election of President Daniel Ortega following national elections Sunday, Nov. 6, supports continuity of the country's macro and fiscal policies, Fitch Ratings says.
Since 2006, the Ortega administrations improved Nicaragua's public debt dynamics, reduced external imbalances, and saw solid economic growth and declining inflation (aided by low oil prices). However, key structural weaknesses remain to Nicaragua's creditworthiness, posing policy challenges to fortifying long-term macro stability.
The government plans to maintain its policy course to deepen macro gains. Sustaining investment and economic growth is a top policy priority, and Fitch projects growth at 4.5% in 2016. President Ortega has collaborated closely with the private sector to implement long-term, growth-oriented policies.
This working relationship has been important for business confidence and private investment. Nicaragua diversified its trade and investment partners, in part to offset reduced financial inflows from Venezuela. A new public-private partnership framework passed into law in 2016 to support new infrastructure investment. However, Nicaragua's political checks and balances remain weak, constraining its governance indicators.
The government's 2017 budget sets a central government deficit to 0.9% of GDP. The government plans to run small deficits to increase public infrastructure investment that is to be financed mainly by multilateral development banks. Increased spending by municipalities will likely raise the general government deficit to 1.5% of GDP in 2017.
The government could introduce measures to preserve budget space. Nicaragua's track record of prudent public financial management and timely adjustment to shocks is a comparative rating strength in the 'B' rating category. The IMF recommended changes to the electricity subsidy to better target low-income households and social security reform. Fitch's 2017 fiscal projections assume reforms to the INSS (the social security institute) are implemented to stem its small cash deficits, 0.3% of GDP in 2015, and return INSS' operating position to balance.
Some of the macro structural challenges confronting Nicaragua include its high level of dollarization (at 73% of deposits and 91% of loans). Similarly, the country has a small domestic capital market. The private sector holds only 5% of GDP in central government treasury instruments - one-third of central government domestic debt by Fitch's measure. Private credit, a proxy for the size of the domestic capital market, is low at 37% of GDP in 2015, and the five-year average domestic savings rate, 10% of GDP, is half the emerging markets median.
Nicaragua also has external vulnerabilities. Its current account deficit, 7.8% of GDP in 2016, and its net external debt, close to 100% of current external receipts in 2016, far exceed the 'B' category medians. Its external financing needs are sensitive to foreign investment inflows and the availability of official financing. Commodities form a material share of exports.
Nicaragua has made headway narrowing its current account deficit and reducing public sector external debt with debt forgiveness a few years ago. Strengthened international reserves at four months of current external payments and a USD200-million liquidity line partially buffer external risks.
Risks to private foreign direct investment and growth could materialize over the medium term if bilateral relations with the US deteriorate. Although it is not Fitch's base case scenario, the proposed US "Nica" bill of 2016, if passed and signed into law, could dampen commerce and investment between the two countries.
Nicaragua's Outlook is Stable. Fitch will continue to focus on Nicaragua's investment and growth prospects, the impact of political developments on access to external financing and liquidity, and progress on reducing external imbalances and risks to macro and financial stability.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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