NICARAGUA: IMF NERVOUS ABOUT POSSIBLE ORTEGA WIN

C O N F I D E N T I A L MANAGUA 002428

SIPDIS

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EB/OMA

E.O. 12958: DECL: 10/31/2016
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA: IMF NERVOUS ABOUT POSSIBLE ORTEGA WIN


Classified By: Ambassador P. Trivelli for reasons 1.4 b&d


1. (C) Summary: In an October 24 meeting with the
Ambassador, IMF Resident Representative Humberto
Arbulu-Neira confessed that he was nervous about an Ortega
win, predicting a negative and contentious relationship
between Nicaragua and the IMF should this happen.
Arbulu-Neira thought that Ortega would have to name a
credible economic team soon after victory to calm fears and
preclude capital flight. Irrespective of who wins,
Arbulu-Neira feels the new president will have to address
immediate issues in the energy and water sectors. In
September Nicaragua met the final two Poverty Reduction
Growth Facility (PRGF) conditions and received the final
disbursement of USD 110 million. An IMF mission will
arrive November 8 to prepare for an IMF Board meeting on
December 12, the date on which the PRGF will conclude.
Because there is no pending loan and the GON is not
requesting any new program, from now on Nicaragua will work
with the IMF through standby agreements. End Summary.

A Bleak Vision of an Ortega Government
--------------


2. (C) In an October 24 meeting with the Ambassador, IMF
Resident Representative Humberto Arbulu-Neira confessed
that he was nervous about an Ortega win. He predicted a
negative and contentious relationship between Nicaragua and
the IMF should this happen. Arbulu-Neira feels that if
Ortega wins he will have to name a credible economic team
soon after victory to calm fears and preclude investors and
people with bank deposits from immediately moving liquid
assets off shore. If this happened, an Ortega-led
government might react with capital or foreign exchange
controls, thus tripping a series of negative events that
could ultimately lead to an over-regulated,
government-controlled, and strangled economy. Before
things got out of hand, the IMF could step in to provide
bridge financing, but would have to be assured of
repayment. Arbulu-Neira thought that Ortega would more
likely ask for help from Chavez or Castro than submit to
IMF conditions.


3. (C) Arbulu-Neira fears that Ortega will also nationalize
the private electricity distributor and force independent
power producers to sell to the state at money-losing
prices. He believes that Ortega will turn immediately to
Chavez for cheap oil to solve the energy problem; but
Venezuelan cheap oil deals have not worked well anywhere,
including Nicaragua (septel),because delivery is
unreliable and prices uncompetitive. Arbulu-Neira also
noted that Venezuela's purchase of bonds to help Argentina
had only left that country more indebted to foreign
commercial banks. Venezuelan banks purchased the bonds
from the government only to resell them in New York as a
way to evade Venezuelan currency controls.

Next President Will Not Have It Easy
--------------


4. (C) Arbulu-Neira thought that whoever the next President
is, he will have to address infrastructure issues early
on. Without drastic changes to the electricity regulatory
structure, Nicaragua will have a difficult time attracting
the investment that it sorely needs to meet its growing
power needs. This lack of investment in the power sector
will negatively affect industrial and economic growth.
Without investment, Nicaraguan power producers will also be
unable to play a contributing role in the development of a
Central American spot market for electricity, due to come
on line in 2008. Arbulu-Neira noted that Nicaragua's water
sector needed an injection of $30 million to stay afloat,
an amount not appearing in the government's budget.
Arbulu-Neira is also worried about the new president's
ability to govern given the constitutional reforms severely
curbing executive power, which were suspended under the Q
Ley MarcoQ and come into effect on January 20, 2007.

Next Steps for the IMF in Nicaragua
--------------


5. (C) Arbulu-Neira informed the Ambassador that an IMF
mission would arrive on November 8 to conduct a week long
assessment in preparation for an IMF Board meeting on
December 12. Arbulu-Neira stated that while there were
still a few structural adjustments that the IMF would like
to see, Nicaragua will successfully conclude its PRGF on
December 12. Nicaragua met its final two PRGF conditions
in September when the National Assembly passed the Tax
Reform Law and the Revised Budget Law, which allowed the
government to incorporate unexpected revenue into the final
2006 budget. The IMF has issued the final disbursement of
$110 million in funds under the PRGF. Because there is no
pending loan and the GON has not requested any new program,
from now on Nicaragua will work with the IMF through
standby agreements.


6. (C) One of Arbulu-Neira's stated reasons for the meeting
was to ask the Ambassador whether there was security risk
for the IMF mission during the week following elections.
The Ambassador responded that much depended on how smoothly
the elections went, and the first few days of the vote
count. At this point, we do not expect to see
disturbances, but have taken precautions in light of
concerns expressed to us by Nicaraguan authorities.

Comment
--------------


7. (C) Arbulu-Neira was particularly worried about the
future of Nicaragua. He feels strongly that the next
couple of years will be critical for development of the
country. Because the IMF will have no formal program, it
will have limited influence on any future government until
things go very wrong.
TRIVELLI