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