NICARAGUA: PRIVATE SECTOR GLOOMY ON PROSPECTS FOR

C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 000054 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 E.O. 12958: DECL: 01/07/2018 TAGS: ECON ETRD EPET EINV PGOV PREL NU SUBJECT: NICARAGUA: PRIVATE SECTOR GLOOMY ON PROSPECTS FOR 2008 REF: A. MANAGUA 2539 ¶B. MANAGUA 2393 ¶C. MANAGUA 2524 Classified By: Amb. Paul Trivelli, Reasons 1.4 (b) and (d) ¶1. (C) Summary: Participants in the Ambassador's Economic Roundtable voiced a gloomy outlook for Nicaragua's economy in ¶2008. They expressed universal concern regarding the direction that Ortega has taken the economy, with all participants citing President Ortega's vitriolic rhetoric as a primary reason for a rapidly deteriorating investment climate. Only agriculture and apparel manufacturers were seen as bright spots. Bankers are concerned by the deterioration in the quality of their credit portfolios. Esso described its continuing battles with Ortega, and other participants described increasingly difficult relations with the government. As in past roundtables, the conversation eventually turned to the possible role for the private sector in this challenging political and economic environment. For the first time, participants produced concrete suggestions such as private sector preparation of economic data which can be used by businesses, think tanks, and universities to drive the public debate on economic policy and thereby educate popular opinion. Despite these ideas, we continue to believe that business leaders will refrain from making strong public statements for fear of potential GON retribution. For a full list of roundtable participants, see Paragraph 12. 2007 OK, 2008 Less So -------------- ¶2. (C) Roundtable participants voiced a gloomy outlook for Nicaragua's economy in 2008. Most expect 2007 real growth of 3.0% once the final figures are released, but foresaw lower growth in 2008. Participants view agriculture and free trade zone manufacturing (apparel and wiring harnesses) as the 2007 economy's only highlights. Agriculture has been bolstered by high commodity prices and the fact that recent flooding did not damage crops as much as initially feared. Apparel manufacturing continues to grow, but may be showing signs of gradual decline. However, power outages, although shorter and fewer in number than earlier in the year, still force managers to find ways to mitigate losses rather than increase production. Construction remains depressed, even as the government catches up on its spending on infrastructure. Rising inflation is a concern for members of the financial sector (Ref C),as is the apparent deterioration in the quality of loan portfolios. The point was made that an economic slowdown in the United States could reduce demand for Nicaraguan exports and also result in a lower level of remittances flowing back to Nicaragua. ¶3. (C) CAFTA continues to attract foreign investors to Nicaragua, but weak infrastructure, power shortages, and talk of higher wages often drives them away. All participants view President Ortega's rhetoric against "yankee imperialism" and "global capitalism," and willingness to advance relations with radical governments like Cuba, Venezuela, and Iran, as negatively affecting the climate for foreign investors. There was universal concern regarding the direction that Ortega has taken the economy. Banking - Decrease in Portfolio Quality -------------- ¶4. (C) Bank deposits, up 3.5% last month alone, and lending, up 20% since last year, continue to grow. (Note: Local economists point out that in real terms deposits have remained flat in 2007.) The harvest season should keep banks that serve the agricultural sector busy and profitable, especially if international prices for coffee, sugar, peanuts, and beef stay strong. In volume terms, mortgage lending is up, but the downturn in new housing starts is limiting further growth. ¶5. (C) One red flag is ever increasing consumer credit during a period of relative economic slowdown and growing inflation, particularly when there is no corresponding increase in salaries. Another danger sign is that banks see an apparent decline in the quality of their loan portfolios, with past due loans rising for the system as a whole to 2.2%, rollover loans increasing 40%, and one microfinance lender reporting that arrears (i.e., nonpayment for more than 30 days) had tripled to 9% as small stores ceased to sell items needing refrigeration as a result of power outages. Government Not Helping -------------- ¶6. (C) Roundtable participants complained about the increase in bureaucratic hurdles for businesses and the lack of transparency on the part of the government. Several highlighted Ortega's failure to honor contracts and willingness to use Nicaragua's tax and customs authorities to harass targeted businesses. Esso's General Manager said that two tax auditors had "parked themselves in Esso offices for more than five months;" he had no idea what they were doing or when they would leave. Under Ortega, tax auditors are routinely requesting five years worth of documents from companies for audit purposes, but rather than conducting a real financial analysis they seem more interested in simply keeping the documents as a sort of insurance policy should the companies one day cross the government. ¶7. (C) Participants agreed that President Ortega does not understand the negative consequences of his radical rhetoric. The president has raised the risk of doing business in Nicaragua and created strong political disincentives for GON officials to support business. One participant observed that Ortega's rhetoric showed that he cared more about communicating with grassroots militants and controlling his party than about foreign perceptions and Nicaraguan capitalists. ¶8. (C) Several participants felt that the government's response to inflation reflected a lack of policy skill on the part of the government. The Central Bank (BCN) claims that Nicaragua's inflation is supply driven (Ref C),but bankers point out that the BCN also moved forward with a three percentage point cut in the reserve requirement, thus increasing liquidity at a time when it should have contemplated reducing it. Fourteen percent or more inflation in 2007 is fueling political pressure to increase wages for municipal workers. Government spending in the run up to the 2008 municipal elections could well fuel further inflation in future. ALBA Dollars -------------- ¶9. (C) One oil company executive reported that President Ortega has successfully deployed heavy handed tactics to coerce oil companies to purchase Venezuelan oil through schemes that siphon petrodollars back to him to fund off-budget projects. This had changed the risk profile of doing business in Nicaragua. Moreover, the politically controlled Supreme Court recently ruled that gasoline stations must pay millions of dollars in back license fees to municipalities, immediately affecting company profits in 2007 and going forward. Role of the Private Sector -------------- ¶10. (C) Participants decried the lack of a private sector leadership in the face of President Ortega's anti-business rhetoric and methodical assault on democratic institutions. Some contemplated how the private sector might respond. One participant believed that growing public opinion could conceivably pressure Ortega into changing his rhetoric and choosing policies that are friendlier to the private sector. Consumer and business confidence surveys might show Ortega how his rhetoric hurts the economy. Economists, academics, and think tanks should focus on furnishing independent economic statistics to educate popular opinion and foster informed public debate on economic policy. Civil society could host debates throughout the country, thus advancing a national dialogue. One participant noted that the concept of "policy" needs to be separated from the concept of "politics", a challenge in a country where the same word is used for both (i.e., "politica"). Comment -------------- ¶11. (C) For the first time, participants produced concrete suggestions such as private sector preparation of economic data which can be used by businesses, think tanks, and universities to drive the public debate on economic policy and thereby educate popular opinion. Despite these ideas, we continue to believe that business leaders will refrain from making strong public statements for fear of potential GON retribution. Roundtable Participants -------------- ¶12. (C) Following is the list of Nicaraguan participants (please protect): Mario ALONSO, Former Central Bank President Mario ARANA, Executive Director FUNIDES (FUNIDES is a local economics think-tank. Arana is a former Minister of Trade who negotiated CAFTA, and former Central Bank President.) Julio CARDENAS, Executive Director ) Bancentro (a U.S.-citizen owned bank) Joaquim DE MAGALHAES, General Manager, Esso/Nicaragua (an ExxonMobil company) Mercedes Margarita DESHON, General Manager - Banco UNO (a local bank just purchased by Citibank) Matt HAYNES, Vice President, ITG Cone Denim (a U.S. textile manufacturer incorporating what was once Burlington Industries) Alejandro MARTINEZ Cuenca, President International Foundation for Global Economic Challenge. (Martinez is also an economist, a businessman, an FSLN member, and was Ortega's Minister of the Economy in 1980s.) Eduardo MONTIEL, Professor, INCAE (INCAE is business school with ties to Harvard Business School. Montiel is also a former Minister of Finance.) Ramiro ORTIZ, Jr., Director, Banpro Luis RIVAS, General Manager, Banpro (both of Nicaragua's largest bank) Gabriel SOLORZANO, President, FINDESA (Second largest microfinance institution in Nicaragua, affiliated with Deutschbank) TRIVELLI