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