NICARAGUA: AMBASSADOR CALLS ON NEW CENTRAL BANK

UNCLAS MANAGUA 000318 SIPDIS SENSITIVE SIPDIS TREASURY FOR JASPER HOEK STATE FOR WHA/CEN, WHA/EPSC, EB/OMA E.O. 12958: N/A TAGS: ECON EFIN EINV NU SUBJECT: NICARAGUA: AMBASSADOR CALLS ON NEW CENTRAL BANK PRESIDENT ¶1. (SBU) Summary. In a courtesy call on January 29, new Central Bank President Antenor Rosales Bolanos told the Ambassador that the government intended to pursue prudent macroeconomic policy as a way of sending the right signals to investors. The government's objective is to find ways to channel more investment toward creating jobs and improving the lives of the poor. Rosales confirmed the government's intention to enter into preliminary talks with the International Monetary Fund (IMF) in February, and then negotiate a new Poverty Reduction and Growth Facility beginning in March. Rosales highlighted recent debt reduction efforts, including $786 million in debt relief from the InterAmerican Development Bank, additional bilateral debt relief from Venezuela and Taiwan, and Nicaragua's commercial debt buy-back effort with the World Bank and bilateral donors. Rosales said that he does not see recent economic agreements with Venezuela and Iran as a reflection of a political vision for Nicaragua, but rather an acknowledgment that Nicaragua depends upon the largesse of these two benefactors for oil. Rosales said that he would prepare ideas in writing as to how additional U.S. technical assistance at the bank could play a role. End Summary. Introduction -------------- ¶2. (U) The Ambassador paid a courtesy call on new Central Bank President Antenor Rosales Bolanos on January 29. Econ Counselor attended; Rosales did not request staff presence. The meeting lasted more than an hour and was cordial and business like. At the close of the meeting, Rosales called in a photographer to take photographs of the Ambassador with him. Macroeconomic Policy -------------- ¶3. (U) Rosales confirmed to the Ambassador his publicly stated desire to maintain macroeconomic stability through exercising prudent monetary policy and controlling inflation. He said that the only way for Nicaragua to alleviate poverty is to create jobs though investment. He explained that maintaining stable macroeconomic policy is the only way to send the right signal to investors and the international business community. ¶4. (U) Rosales also confirmed the government's intention to enter into preliminary talks with the IMF in February, and then to negotiate a new Poverty Reduction and Growth Facility beginning in March. In the interim, the new administration must come to terms with this year's budget (still not passed) and begin work on next year's budget. The IMF will want to see that the government intended to keep expenditures in line with revenues and grants. Debt Reduction -------------- ¶5. (U) The Ambassador congratulated Rosales on the recent announcement that the InterAmerican Development Bank (IDB) is moving to forgive $786 million in debt, about one-half of what Nicaragua owes the bank. Once approved by IDB governors, the country's external debt will fall to below $4 billion (down from more than $11 billion fifteen years ago to $3.7 billion). Rosales added that the effort to arrange financing for the buy-back of bilateral commercial debt is proceeding. He said that Nicaragua needs $64 million, of which the World Bank is willing to fund about half and bilateral donors the rest. In addition to Canada, Rosales mentioned Norway, Finland, and the Netherlands as possible donors. (Note: We understand that Norway has confirmed and deposited funds, Canada and Finland have confirmed but not yet deposited funds, and Sweden, Australia, and the United Kingdom are considering their participation. The Government of the Netherlands declined, but its local Embassy is exploring the possibility of using Embassy funding.) ¶6. (SBU) Rosales said that the effort to obtain further forgiveness on official debt continued. Venezuela had forgiven all of its bilateral debt, amounting to $48 million, as announced by Venezuelan President Hugo Chavez when he signed Alternativa Bolivariana for the Americas (ALBA) agreements with Nicaragua on January 11. Taiwan is also looking at forgiving its bilateral debt, but needs parliamentary approval. Rosales confirmed that Nicaragua is no longer making payments on its bilateral debt to Iran and Libya, but did not confirm whether these countries would write off Nicaraguan debt. (Note: During his visit to Managua on January 13-14, Iranian President Mahmoud Ahmadinejad promised to seek Parliamentary approval to forgive Nicaragua's debt to Iran, totaling $152 million.) Bank Bailout Bonds (The CENI Saga) -------------- ¶7. (SBU) The Ambassador asked about the CENIs (bank bail out bonds dating from 2001) and whether questions surrounding the propriety of the Central Bank having issued them would prevent the Central Bank from making bond payments. Rosales replied that it did not. He stressed that the Central bank "has to pay them" off. Even if the budget does not provide funds, Rosales added, the Central Bank &must honor the CENIs8 and will draw down reserves to make payments, if it has to. He does not believe that the government will pursue a criminal investigation on the CENIs scandal (manufactured by the PLC during the election campaign to tarnish the image of former banker, Minister of Finance, and ALN presidential candidate Eduardo Montealegre). Venezuela and Iran -------------- ¶8. (SBU) The Ambassador asked how a closer relationship with Venezuela and Iran, announced within days of President Ortega's inauguration, would help Nicaragua's business climate. Rosales responded that he does not see Ortega's move as a reflection of a political vision for Nicaragua, but rather an acknowledgment that Nicaragua depends upon the largesse of these two benefactors for oil. ¶9. (SBU) The Ambassador asked whether support from ALBA countries would be in the form of budget support or loans. Rosales answered that much of the support would likely be in the form of concessional loans or a private sector initiative modeled after the Millennium Challenge Corporation. The government wants to keep donor funds "off-budget" as much as possible, to limit the impact on the national accounts. (Note: Nicaraguan law earmarks percentages of the national budget for certain purposes, such as 6% for tertiary education, 6% for municipalities, and 4% for the judiciary. Adding foreign assistance programs to the budget increases the absolute value of these earmarks.) Rosales believes that any oil refinery built with the Venezuelans, as announced by President Chavez at the ALBA signing, will have to be financed primarily from private sources. Neo Liberalism -------------- ¶10. (SBU) The Ambassador noted that in President Ortega's discourse with the diplomatic community on January 26, Ortega indicated that he had problems with what he termed "neo liberalism." Ortega also mentioned his desire to end "dependency" on the International Monetary Fund (IMF),and that the government would review the privatization of the telephone and power sectors. Ortega lamented the fact that the government will have to pay out $100 million in 2007 on bonds issued to cover indemnities on properties confiscated in the 1980s. "What is the nexus between this rhetoric and economic policy?" wondered the Ambassador. Rosales replied that he sees Ortega's comments as a reflection of the past, not as active policy. When it came to the IMF, Rosales said that Ortega did have a point, i.e., that IMF programs have not resolved the central issue of poverty. In addition, Ortega wants to stake out room for social development, not just economic restructuring, in an IMF program. ¶11. (U) Noting that he had served in Nicaragua in the early 1990s, the Ambassador commented that, contrary to what the new government has been claiming, great progress had been made in the last fifteen years. All the programs in education and health, donor assistance, and economic restructuring obviously have had a positive impact. Rosales admitted that there had been progress during the past fifteen years, but pointed out that there is an important sector (i.e., the poor) which does not feel it. He continued, "But, this is because there has not been enough investment." The government's objective now is to channel investment to create jobs and improve the lives of the poor. U.S. Technical Assistance -------------- ¶12. (U) The Ambassador mentioned that the U.S. Treasury and USAID funded an advisor to assist the Central Bank and Ministry of Finance in strengthening Nicaraguan debt markets. Now that the Capital Markets Law has been enacted, implementing regulations have to be put into effect. Rosales agreed, adding that implementation of this law is one of his top priorities. The Ambassador asked Rosales if he has a need for further technical assistance from the United States. Rosales replied that he will give it some thought and prepare ideas in writing for their next meeting. Thinking out loud, Rosales suggested that there may be a need to do something in the area of domestic debt. Biography: Antenor Rosales Bolanos -------------- ¶13. (SBU) From 1979 to 1994, Antenor Rosales Bolanos served in the Sandinista Army, rising to the rank of colonel in command of the First Military Region. In the mid to late 1990s, he was a partner along with other notable Sandinistas in what was known as Interbank (the Intercontinental Bank). The collapse of Interbank in 2000, for reasons related to mismanagement and nonperforming loans, helped trigger a financial market crisis that necessitated a government bail out of significant proportions. Rosales appears not to have been implicated in misconduct. ¶14. (SBU) More recently, Rosales served as the FSLN's representative on the Board of the Superintendent of Banks and Other Financial Institutions. He has also served on the Board of Directors of the Nicaraguan Renewable Energy and Environmental Company. The company reportedly holds among its assets the majority of capital and intellectual property rights of the Consortium Hydro Copalar MidAmerican Ltd., a European-based engineering and design company under contract to the Mexican Federal Commission of Electricity. Copalar has been a proponent of building another large hydroelectric dam in Nicaragua. ¶15. (SBU) Rosales is a lawyer by training and a notary public. He reportedly holds a masters degree in law. He is listed as a faculty member teaching financial markets law at the University of CentroAmericana in Managua. Associates say he is intelligent and a quick study. He is close to Presidential Advisor for Economic and Financial Affairs Bayardo Arce. In terms of personality, Rosales is one of the more confident appointees in the new administration. He appears to be in his early 50s. ¶16. (U) Post is still awaiting Rosales' official biography. TRIVELLI