BUSINESS SECTOR PRIVATELY EXPRESSES DISPLEASURE

C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 002368

SIPDIS

SIPDIS

STATE FOR WHA, WHA/CEN, WHA/EPSC, AND EEB
TREASURY FOR SARA GRAY
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 10/22/2017
TAGS: ECON EFIN EPET EINV PREL PGOV ETRD NU
SUBJECT: BUSINESS SECTOR PRIVATELY EXPRESSES DISPLEASURE
WITH ORTEGA

REF: A. MANAGUA 2116


B. MANAGUA 1789

C. MANAGUA 1753

D. MANAGUA 2351

Classified By: Amb. Paul Trivelli for reasons 1.4 b&d


1. (C) Summary: On September 19, the Ambassador hosted his
third Economic Roundtable with representatives of the private
sector. While economic indicators are generally positive,
some participants questioned whether economic growth can be
sustained given power shortages and a deteriorating
investment climate. Roundtable participants voiced concern
about the GON's continued disrespect for due process,
manifested most recently by its seizure and subsequent return
of Exxon fuel storage tanks in Corinto to accommodate
Venezuelan oil. A common complaint was the lack of
competence in the FSLN government. Participants felt
Ortega's speeches are intended to satisfy Hugo Chavez and to
regain his standing as a Latin American "revolutionary." For
a full list of roundtable participants, see Paragraph 16.
End Summary

Economic Overview
--------------


2. (C) During the September 19 meeting of the Ambassador's
Economic Roundtable, participants from diverse sectors
reported that strong consumer spending and commercial banking
continue to drive growth. Businesses selling consumer goods,
including cars and motorcycles, reported double digit growth
in sales in the last few months. Exports for the last seven
months are up 20% over the same period last year. Roundtable
participants believe that the average Nicaraguan simply
ignores President Ortega's political rhetoric, instead
focusing on everyday life and buying the things he/she needs.
Many roundtable participants saw no signs of consumer
retrenchment and felt consumer demand and capacity to
purchase remained strong.


3. (C) Despite these upbeat reports, other roundtable
participants questioned whether economic growth could be
sustained, given the continued power shortages (Ref C) and
the deterioration of the investment climate following GON
attacks on private sector investors (Refs A and B). They
pointed out that the Central Bank has scaled up inflation
projections for 2007 from 7% to 10%, largely because of the
international price of oil. Many reported that foreign
investors have lost confidence in Nicaragua. Bank
representatives believe the U.S. mortgage crisis will reduce
remittances from Nicaraguans in the U.S., thereby shrinking
consumer spending.

Power Shortages
--------------


4. (C) Roundtable participants stated that electricity
shortages (rolling blackouts) have had a serious impact on
production and sales (Ref C). Some vendors of perishable
goods have adjusted delivery times to avoid scheduled power
outages. One distributor delivers smaller quantities of
chicken more often, on a schedule set to match hours when
stores have electricity to run refrigerators. This strategy
does not work with dairy and ice cream, however, where sales
have fallen sharply. One dairy products company is
attempting to make up for the drop in sales by introducing a
line of fruit juices. According to one banker,
agro-processors are cutting back as their overhead costs
(mostly electricity and fuel) rise. He fears production may
not be able to meet consumer demand, resulting in shortages
that will force inflation above the 10% now projected.

Banking
--------------


5. (C) Bankers pointed to robust growth in lending capacity
and deposits. They argued that borrower confidence is
returning to pre-2006 election levels. (Note: While deposits
are up in cordobas, in dollar terms they remain flat. End
note.) In a recent meeting with the Central Bank, the
National Association of Private Banks of Nicaragua (ASOBANP)
welcomed the BCN's plans to reduce the legal reserve
requirement by 3%, from 19.25% to 16.25%, its pre-June 2006
level. (Note: The BCN publicly announced the change on
October 11. End Note.) At least one banker noted, however, a
slight rise in missed consumer loan repayments.


6. (C) Bankers highlighted two concerns which could affect
their industry: Nicaragua's weak public registry for private
property, and the lack of a financial intelligence unit
(FIU). The current private property registry is so
politicized and open to corruption that its documents are not
reliable, limiting the growth of mortgage lending. The GON's
recent use of legal and administrative measures to seize the
property of U.S. investors (Refs A and B) calls into question
Ortega's pledge to respect private property; making it
difficult for the bankers to foresee a near-term solution to
this problem.


7. (C) The bankers will meet with the Caribbean Financial
Action Task Force to discuss Nicaragua's need to establish a
FIU and the GON's ability to meet international anti-money
laundering requirements. They are concerned that banking
operations could suffer if transactions to and from Nicaragua
receive greater international scrutiny. (Note: On September
24, post held an event to raise public awareness on this
issue (Ref D). End note.)

Oil Sector
--------------


8. (C) Roundtable participants expressed serious concern
about the GON's disrespect for due process as was manifest in
the seizure and subsequent return of Exxon's fuel storage
tanks at Corinto I (Ref A). (Note: Exxon will soon sign a
hospitality agreement with national oil company Petronic for
use of fuel storage tanks at Corinto I. End Note.) The
government's desire to exert as much influence and/or control
over the energy sector as possible is evident. The Exxon
representative believes that the absence of a formal GON plan
to take control of Exxon's refinery near Managua does not
mean that the "idea has not crossed some peoples' minds."
Participants expressed concern that as oil prices reach
record highs, the GON will force gasoline retailers to
negotiate with the government to "find a (non-market)
solution to high prices."


9. (C) Nicaragua's relationship with Venezuela continues to
create difficulties for local fuel distributors. Venezuelan
shipments of petroleum products arrive faster than Petronic
can handle them. The state-owned company lacks storage
facilities, technical staff, and logistical planning
capabilities. Petronic is also unable to comply with
international safety standards, as it showed with a recent
trial shipment to Exxon. Even worse, according to the Exxon
representative, Petronic views Exxon's logistical
requirements and safety protocols as evidence of a lack of
cooperation. Roundtable participants agreed that some
members of the GON see Petronic and Venezuelan oil as a
"giant ATM," from which they can withdraw cash whenever they
want.

Views on GON Performance
--------------


10. (C) Roundtable participants noted repeatedly problems
arising from the lack of competence within the Sandinista
government. Ortega's move to cut the salaries of GON
officials resulted in a loss of technocrats and
intellectuals, leaving "yes-men who do not know how to make
decisions, only to follow orders." They agreed with the
assessment that most of Ortega's inner circle had been
"inactive for the last 16 years, so they have not changed
their perspective on policy." Participants also criticized
Ortega's wholesale disregard for the previous
administration's policy initiatives. For example, the GON
discontinued a very successful seed distribution program
which had increased bean and corn yields, creating a surplus
for export. In contrast, this season there is a shortage of
beans.


11. (C) Most roundtable participants believe that Ortega's
rhetoric is designed to please Hugo Chavez and to help Ortega
regain his "rightful" place as a Latin American
"revolutionary." One politically connected participant said
that members of the FSLN, including some in government, find
Ortega's rhetoric extremely antagonistic. "Ortega is not
liked by those around him," he claimed, "but Ortega does not
care."


12. (C) Roundtable participants stated that the limited
central government response to Hurricane Felix may have
weakened Ortega's position. Most Nicaraguans saw that the
Nicaraguan Army led GON relief efforts instead of the central
government. Roundtable participants took the opportunity to
express their appreciation for USG hurricane relief efforts.


13. (C) The Ambassador told the participants that the U.S.
continues to be fully engaged in Nicaragua, but we have
serious concerns about this government and the future of
democracy here. He also noted the USG's concern with the
poor quality of policy making and the centralization of
decision-making.

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


14. (C) During the discussion, roundtable participants
exposed the private sector's ambivalence regarding the need
to defend democratic institutions and the free markets. One
participant pointed out that 60% of the Nicaraguan population
is functionally illiterate, lacking the capacity to assess
Ortega's rhetoric or understand government actions. He
stated that it was "up to entrepreneurs to have the guts to
publicly condemn the government's attitude." He exhorted
other participants to "stop being afraid." Another
participant thought that prominent businessman Carlos Pellas
had sent enough of a private sector message to Ortega in his
recent speech to COSEP - the business federation, when he
said, "Businessmen do not need subsidies or hand-outs, they
need a rule of law that guarantees justice and serves to
protect, not to threaten."


15. (C) Nicaragua's business leaders are torn between wanting
to work as a group to defend democracy and free enterprise
and working privately to cut individual deals with FSLN power
brokers. While they understand that they must unite to
defend themselves from Ortega's attacks, no one wants to
expose themselves to an attack by angering Ortega. End
Comment.


16. (C) Nicaraguan Private Sector Participants:

Luciano ASTORGA, General Manager, Bank of Central America
(BAC),Nicaragua (49.9% owned by GE Financial)

Alberto CHAMORRO, Director ) Bank of Central America (BAC),
Nicaragua (49.9% owned by GE Financial)

Carlos Reynaldo LACAYO, CEO - Grupo Calsa (Personal care
product distribution)

Joaquim de MAGALHAES, General Manager, Esso Nicaragua

Alejandro MARTINEZ Cuenca, President ) International
Foundation for Global Economic Challenge (Economist, FSLN
member, cigar manufacturer, Economy Minister in 1980s)

Ramiro ORTIZ, Jr., Director ) Banpro (Nicaragua's largest
bank)

Mario SALVO, Technical Director of El Eskimo (dairy, ice
cream); Former Minister of Agriculture
TRIVELLI