MICROFINANCE CONCERNS DOMINATE ECONOMIC ROUNDTABLE

C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 001096 SIPDIS STATE FOR WHA/CEN, WHA/EPSC AND EEB TREASURY FOR SARA SENICH USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN E.O. 12958: DECL: 08/22/2028 TAGS: ECON EFIN ETRD PREL PGOV NU SUBJECT: MICROFINANCE CONCERNS DOMINATE ECONOMIC ROUNDTABLE REF: MANAGUA 0932 Classified By: DCM Richard Sanders for reasons 1.4 b & d. Summary -------------- ¶1. (C) Participants in Ambassador Trivelli's farewell Economic Roundtable on July 29 expressed alarm that President Ortega's rhetoric and economic policies are now showing visible and negative effects on the economy. In particular, Ortega's tirade in July against microfinance institutions (MFIs) seems to have fed violent protests in northern Nicaragua, raising lending risk to that segment of the economy and the cost of credit to poor farmers and small merchants nationwide (Reftel). Prominent bankers report that rising country risk has caused some international bankers to rescind lines of credit. One participant described 2008 as a "transition year," predicting that by the end of the year investor appetite for Nicaragua will be all but gone. Participants agreed that the investigation into a government bank bailout will continue to cast a pall over the political landscape as municipal elections in November draw closer. A list of roundtable participants may be found in Paragraph 11. End summary. Microfinance Protests -------------- ¶2. (C) Ambassador Trivelli's farewell roundtable took place in the midst of a gathering political storm surrounding microfinance institutions in Nicaragua. Gabriel Solorzano, President of FINDESA (Nicaragua's second-largest MFI), provided a synopsis of the events in Nueva Segovia which began with peaceful protests. Emotions fed by President Ortega's tirade in July against microfinance institutions culminated in violent protests, fires, and even the kidnapping of a local branch manager of a prominent MFI (Reftel). While the violence in Nueva Segovia has ceased, the political initiative to label MFIs as usurious and tools of foreign "neoliberals" and "imperialists" is likely to continue. To date, police have made no arrests. ¶3. (C) According to Solorzano, two individuals were primarily responsible for stirring up a group of agricultural workers in two or three northern departments. One of them is a long-time FLSN party member who is now a mayoral candidate for the Nicaraguan Liberal Alliance in the city of Ocotal. The other is in arrears on debt owed to several MFIs. He stands accused of borrowing $650,000 with either fake collateral or collateral already pledged to support other loans. In response to the protests, a number of MFIs have offered to restructure loans to stressed clients, but no protesters have shown interest to date. ¶4. (C) Meanwhile, the FSLN propaganda machine has hammered away, accusing the international community of lending to Nicaragua at exorbitant rates. In 2007, President Ortega launched a political initiative he called "Zero Usury," under which he promised small- and medium-sized businesses "just and fair" credit through a new rural development bank and Venezuelan credit schemes. Recently, however, Ortega has focused most of his criticism on MFIs, most of which are nongovernment organizations funded by international donors. Ironically, Ortega's rhetoric and resulting political protests will only force MFIs in Nicaragua to tighten credit requirements and raise rates to compensate for increased country risk. ¶5. (C) As an alternative to MFIs, the FSLN propaganda machine is pushing ALBA-CARUNA (an FSLN savings and loan cooperative now funded by Venezuela under the Bolivarian Alternative for the Americas) as a viable alternative to "usurious" MFIs. Government and FSLN officials claim that ALBA-CARUNA can lend to poor farmers and others who lack collateral or steady income with an interest rate of 8.0%. This rate is close to prime and unsustainable in an economy experiencing 20% annual inflation. However, Solorzano reports that nearly all MFI clients in Nueva Segovia have declined to switch to ALBA-CARUNA, a fact that he interprets as strong evidence of the value that the market places on current MFI lending practices. Solorzano points out that at an average interest rate of 26% -- despite high administrative costs normally associated with serving this sector -- MFIs in Nicaragua offer the second lowest interest rate in Latin America. In Peru, MFIs charge around 55% and in Mexico 100%. ¶6. (C) One roundtable participant commented that Ortega's fear of losing support from his political base is obsessive, particularly in Nueva Segovia. If Ortega doubts that people will support him, he may create chaos to put the opposition off balance and make it look helpless. (Comment: Since the roundtable, protests against MFIs have dissipated. Central Bank President Antenor Rosales announced that the government would propose legislation governing the sector. We expect protests to reappear should Ortega find it politically convenient. End comment.) Macroeconomic Woes -------------- ¶7. (C) Luis Rivas, General Manager of BanPro (Nicaragua's largest bank),said that rising country risk caused a corresponding decrease in international lines of credit to Nicaraguan financial institutions. One example is the Central American Bank for Economic Integration (BCIE),which reduced its lines of credit to Nicaraguan banks by 25%. Moreover, no institution (except the Nicaraguan Institute for Social Security) is currently investing in government bonds. Part of the problem is that the Board of Directors of the Central Bank cannot approve government bond issues for lack of a quorum after three of its members resigned. (Note: Local press report that the government has nominated three new board members. End note.) One participant described 2008 as a "transition year," predicting that by the end of the year investor appetite for Nicaragua will be all but gone. ¶8. (C) The head of a prominent think tank said the FSLN has been extremely inefficient in managing the government budget. Moreover, the FSLN is keeping Venezuelan assistance off-budget as much as possible. Amounting to as much as 50% of its oil import bill ($400-500 million a year),these sizable expenditures may be injecting considerable liquidity into the economy and thus fueling inflation. One roundtable participant speculated that rising liquidity from Venezuelan assistance could cause inflation to reach 30% by the end of the year, a figure that a number of independent economists have also predicted. Another economist reasoned that liquidity caused by Venezuelan assistance is partially offset by slow execution of the official budget and, therefore, inflation would not reach 30%. CENIs -------------- ¶9. (C) Roundtable participants agreed that the government's investigation into a 2000-01 bank bailout financed by bonds (known as CENIs) is politically driven. Among the 39 individuals that the government is considering indicting for fraud, theft, money laundering, and other crimes against the state, four will undoubtedly remain prime political targets: Eduardo Montealegre (running for Mayor of Managua),Jaime Chamorro (owner of La Prensa, the largest daily newspaper and the most vocally opposed to Ortega's government of the major media),Noel Sacasa (former Central Bank governor),and Esteban Duque Estrada (former Finance Minister). As one participant put it, the issue is being manipulated to &align8 a political objective, that is, the defeat of Montealegre in the mayoral race for Managua on November 9, ¶2008. Comment -------------- ¶10. (C) We found these prominent private sector representatives to be unusually outspoken in this farewell roundtable event with Ambassador Trivelli. They exhibited great anxiety not only about short-term prospects in Nicaragua, but also the medium- to long-term economic outlook, as President Ortega's populist polices begin to visibly impact the trajectories for investment and economic growth. Roundtable Participants -------------- ¶11. (C) Following is the list of Nicaraguan participants (please protect): -- Mario ALONSO, former Central Bank President. -- Roberto BENDANA, President of Cafe Don Paco and former head of the Competitiveness Commission in the Bolanos Administration. -- Duilio BALTODANO, President of Cisa Agro, an agricultural commodities trader and distributor of agricultural inputs and equipment. -- Alejandro MARTINEZ Cuenca, President of the International Foundation for Global Economic Challenge. Martinez Cuenca is also an economist, a businessman, and an FSLN member. He was Ortega's Minister of the Economy in 1980s. -- Luis RIVAS, General Manager of Banpro, Nicaragua's largest bank and largest holder of CENIs. -- Mario SALVO, Technical Director of El Eskimo, a dairy processor, and former Minister of Agriculture in the Bolanos Administration -- Gabriel SOLORZANO, President of FINDESA, the second largest microfinance institution in Nicaragua (whose largest shareholder is Deutschbank). CALLAHAN