NICARAGUAN ECONOMY COASTING - BUT STRAINS ARE

C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 002000 SIPDIS SIPDIS STATE FOR WHA, WHA/CEN, WHA/AND, WHA/EPSC, AND EEB/TPP TREASURY FOR SARA GRAY USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR E.O. 12958: DECL: 08/30/2013 TAGS: ECON PREL PGOV ETRD EPET EINV NU SUBJECT: NICARAGUAN ECONOMY COASTING - BUT STRAINS ARE SHOWING REF: A. MANAGUA 1952 ¶B. MANAGUA 1933 ¶C. MANAGUA 1922 ¶D. MANAGUA 1771 ¶E. MANAGUA 1622 ¶F. MANAGUA 1077 Classified By: Ambassador P. Trivelli for reasons 1.5 b&d. ¶1. (C) Summary: The Ambassador's Second Economic Roundtable reviewed the performance of different economic sectors and painted a picture of an economy coasting on the achievements of the Bolanos administration, early signs of a slowdown, and increasing strains between the GON and businesses. The banking sector has been performing well, but bank representatives state that corporate clients are maintaining market positions rather than embarking on new investments. Nicaraguan retailers expressed concern with Ortega's mixed policy signals, but claim this has not slowed down consumer spending. Agricultural sector representatives note that while conflicts between and within ministries have created uncertainty for producers, they are still expecting a strong coffee harvest in 2007. They have doubts, however, as to whether beef and cheese production will match 2006 record levels. For the oil sector, Nicaragua's deal with Venezuela has added serious challenges to selling petroleum products. Overall, Sandinista government policies and rhetoric are starting to take their toll on the private sector. End Summary. Overview -------------- ¶2. (C) The Ambassador's Second Economic Roundtable reviewed the performance of various sectors and revealed increasing strains between the GON and businesses. A sector-by-sector overview showed an economy coasting on the achievements of the last administration and high commodity prices, but showing early signs of a slowdown. (Sector overviews detailed below). Almost all participants pointed to the deceleration of the construction sector (-7.8% for 2007) as a signal that private investors are holding back on new projects, and the government is not carrying out infrastructure investment (Ref B). The ongoing problems in the electricity sector, leading to extensive black-outs, are hurting production throughout the economy. Many participants also stated that most businesses were waiting for the agreement with the IMF to be signed as a signal of GON commitment to current macroeconomic policies. They could not predict whether private sector investment would increase once the agreement is in place in October (Ref D). ¶3. (C) At the Roundtable's request, the Ambassador spoke on USG views on the growing Nicaragua-Iran relationship, and USG reaction to the increasingly negative Ortega rhetoric. On both issues, the Ambassador emphasized that the USG continues engaging the GON and trying to foster productive working level relationships. He emphasized that he has spoken with Foreign Minister Santos and President Ortega about the international image Nicaragua is building, but the reception has been lukewarm. Roundtable members were pleased to learn that the USG has chosen not to take an antagonistic approach with the GON. A list of Nicaraguan Roundtable participants can be found in Paragraph 16. The next roundtable will take place on September 19. Banking Sector -------------- ¶4. (C) The banking sector has been performing well, with deposits already surpassing 2006 highs (Ref C). Banks have raised interest rates on savings, creating an incentive for depositors, but cutting into the banks' margins. Private companies are the biggest savers, leading bankers to theorize that businesses prefer to hold more liquid positions instead of re-supplying inventories or embarking on new investments. The slowest area for banks is mortgage lending, as a consequence of the slow down in housing construction. Mortgage sales came to a halt from December 2006 to January 2007, picking-up a bit toward the middle of the year. ¶5. (C) So far, banks have not encountered major problems in their relations with the new government. Banking representatives believe that Ortega's lack of credibility in the private sector overall, will limit his ability to influence events in their sector. They report that their relations with the Central Bank continue to be productive. The bankers did highlight a worrying trend of FSLN and PLC party members using judges appointed by their parties to support dead-beat debtors against banks' efforts to seize collateral. ¶6. (C) The bankers reported interesting developments in the micro-finance sector. There are 300 microfinance institutions registered in Nicaragua, 297 of which are NGO's and three are regulated institutions. All together they handle USD 400 million in assets, with two of the regulated institutions handling half. Due to the non-profit nature of the majority of the players in the sector, multiple attempts (by the World Bank and the National Assembly) at creating a regulatory structure have failed. Consolidation through buy-outs and mergers is unlikely. However, as the larger MFIs in Nicaragua become more efficient, the interest rates they charge have declined by half in the last five years. This should create enough competition to force many of the small institutions to leave the market. Retail Sector -------------- ¶7. (C) While Nicaraguan retailers expressed concern about Ortega's mixed economic signals, they stated that this has not affected the consumption habits of the average Nicaraguan, as purchase levels remained steady. Car sales, in particular, have been strong with an average of 22,000 units sold per year, of which half were new. Sales of motorcycles, mostly Chinese, also increased as people shifted from buses to personal transportation. Sales outside of Managua (in the departments) kept pace with the capital. Retailers pointed to both of these trends as indicators that the lower classes were now able to access consumer credit. They did note, however, that purchases of heavy/large items had slackened a bit. ¶8. (C) As with bankers, retailers indicated that the GON has been laissez-faire with their sector. The major bone of contention had been a contraction in GON current spending during the first three months of the administration. Agricultural Sector -------------- ¶9. (C) Agricultural sector representatives painted a mixed picture. International prices for coffee and beef remain strong, creating strong incentives for expansion in the agricultural area. Cattle farmers seemed to be holding off on purchasing new cows at the end of the 2006-2007 dry season due to its unusual length and severity, especially in northern Nicaragua. As the rainy season started, purchases picked up, but there is disagreement as to whether cattle purchases will match 2006's record breaking production numbers for beef and cheese. Coffee, on the other hand, is set for an increase in volume, reversing a two-year downward trend. Mexican buyers are increasingly interested in Nicaraguan, beef, milk, and coffee, some even considering setting up processing plants in Nicaragua. ¶10. (C) From the agri-business point of view, Ortega's agricultural policies have been confusing at best. Conflicts between and within ministries have resulted in mixed signals and convoluted policies, which are affecting producers' investment decisions. They do not believe that Ortega has delegated decision making power to the majority of his economic ministers. Agricultural sector representatives feel this confusion provides a good opportunity for the private sector to advise the GON on more effective policy. However, disunity in the private sector has resulted in an opportunity lost. Oil Sector -------------- ¶11. (C) Nicaragua's oil deal with Venezuela has created several challenges to selling petroleum products in Nicaragua (Refs A and C). Sector Representatives state that Nicaragua consumes about 28,000 barrels of oil products a day and Esso's refinery, the only one in Nicaragua, supplies 18,000 barrels of that demand. Nicaragua's storage infrastructure is built to handle this modest demand, not the 274,000 barrels a day Chavez has promised (100 million barrels a year). Although the shipments from Venezuela have not come close to meeting Chavez' promises, they have been large enough to top out existing storage capacity. As a result the GON has tried to convince Esso to receive the Venezuelan refined petroleum products on at least two separate occasions. (Note: This meeting took place before the Esso storage tank seizures detailed in Ref A. End note.) Venezuela Tid-Bits -------------- ¶12. (C) One of the banking representatives had just returned from a trip to Bolivia "to see what was going to happen in Nicaragua." He reported that in Bolivia, Venezuelan banks - private on paper but owned by Chavez' cronies and subsidized by the BRV Treasury ) have distorted the market by lending at much cheaper rates than Bolivian banks. As a result, several Bolivian banks have failed, leaving the Venezuelan banks in a much stronger position. ¶13. (C) The oil sector representatives stated that while Venezuela and Nicaragua are publicly moving ahead with the oil refinery plan (a plant to process up to 150,000 barrels a day),in reality, PDVSA has only put up the money for a feasibility study. ¶14. (C) In a final note, one of the retailers declared Venezuelan urea imports to be "a disaster." The urea is coming in at USD 15 per 100 kilo bag, below the Nicaraguan market price of USD 22. The price difference has led private sector suppliers to cut back on their imports. Moreover, 80% of the urea reportedly ended up in Costa Rica via arbitrageurs resulting in spot shortages in the Nicaraguan market. Comment -------------- ¶15. (C) This meeting revealed increasing worries about Ortega's economic policies in Nicaragua's private sector. While the economy continues to coast on the growth created by Bolanos government, Sandinista government policies and rhetoric are starting to take their toll. Business leaders seem to be focused on solidifying their current market positions instead of expanding their businesses. While the Sandinistas have stayed out of non-energy sector businesses, the representatives felt it was only a matter of time before they started looking around for new sources of income. End comment. ¶16. (C) Nicaragua Private Sector Participants: Luciano Astorga, General Manager, Bank of Central America (BAC),Nicaragua (49.9% owned by GE Financial) Ricardo Teran, President/CEO - Corporacion Roberto Teran (Kodak, HP representatives) Felipe Mantica, Operations Manager - Grupo Mantica (Supermarkets) Mario Alonso, Former President of the Central Bank Joaquim de Magalhaes, General Manager, Esso Nicaragua Gabriel Solorzano, President, FINDESA (Second largest Micro-Finance in Nicaragua) Roberto Bendana, cattle rancher and coffee grower. TRIVELLI