MAJOR MACRO ECONOMIC INDICATORS
|2016||2017||2018 (e)||2019 (f)|
|GDP growth (%)||4.7||4.9||-4.0||-5.0|
|Inflation (yearly average, %)||3.5||3.9||5.9||8.0|
|Budget balance (% GDP)||-1.6||-1.6||-3.6||-4.6|
|Current account balance (% GDP)||-7.5||-5.0||-6.2||-6.4|
|Public debt (% GDP)*||45.0||47.0||51.0||53.0|
(e): Estimate. (f): Forecast. *Including central bank debt and the rest of the financial and non-financial public sector.
- Mineral (gold) and agricultural (coffee, sugar, meat) resources
- Membership of Central America/United States and Central America/EU free trade zones
- Significant remittance flows from expatriates
- Highly vulnerable to natural disasters
- Healthcare and education shortcomings and persistent poverty rate
- Inadequate infrastructure (energy, transport)
- Dependent on international aid; highly dollarised economy
- Institutional failings: concentration of power within the executive and the Sandinista party; corruption
- Worst business environment in the region (132/190 in the 2019 Doing Business ranking)
Growth still affected by political unrest
The political crisis that has been ongoing since April 2018 is expected to continue to affect economic activity in 2019. The tourism and construction sectors will be the most affected by the political instability and increased insecurity, with long-term effects because of lower investment (up to five years for the tourism sector, according to the National Chamber of Tourism). However, the relative easing of armed clashes at the end of 2018 should allow some road traffic to resume and encourage a moderate recovery in the wholesale and retail sectors. Foreign investors will likely continue to be cautious, after the honeymoon between President Daniel Ortega and local entrepreneurs ended following the government's violent repression of protests. In addition, private investment will suffer from the contraction of credit due to the loss of liquidity at banks, who were hit by the sharp decline in deposits (15% down in August 2018 compared with April).
Although supported by inflows of expatriate remittances – which were up 9.0% year-on-year in the second quarter of 2018, with a particularly sharp increase from the United States – private consumption should also suffer from the consequences of the crisis. The unemployment rate is expected to continue to climb, while inflation is also set to rise, mainly on higher energy and food prices. The trade balance is expected to contribute negatively to growth, as the crisis has affected exports, despite strong US demand.
Public and current accounts both weakened by the political crisis
Triggered by a widely contested attempt to reform social security, the political crisis has significantly affected the country’s already fragile public spending. The 2019 budget forecasts a significant drop in tax revenues (17.6% down from the first 2018 budget before amendments) due to the contraction of activity. The parallel decrease in expenditure will not be enough to limit the increase in the government deficit. The anticipated decline in multilateral lending as a result of tensions between multinational organisations and the Ortega administration will prevent the government from meeting its financing needs. The government is considering issuing sovereign bonds to close this gap, but the success of this strategy is uncertain. Investors remain cautious about the possibility of US sanctions after the adoption of the Nicaragua Human Rights and Anticorruption Act by the US Senate at the end of September 2018. This act follows on from a first bill passed by the House of Representatives in 2017 aiming to make future loans to Nicaragua (including multilateral loans from international organisations) conditional on the holding of early elections. Despite being subject to the vagaries of the US political agenda, the bill is likely to be adopted in 2019. As a result, Nicaragua could approach China for funding.
The current account will be affected by the decline in exports of tourist services, which will only partially offset the large trade deficit. The trade deficit is structurally high but should be lower in 2019 due to the sharp contraction in imports resulting from weaker domestic demand. Expatriate remittances will not be enough to balance the current account. Capital outflows, limiting external financing opportunities, will force the central bank to draw on its foreign exchange reserves to maintain the cordoba's peg to the US dollar (fixed exchange rate system within a fluctuation range). These reserves shrank from USD 3 billion to USD 2.3 billion between April and the end of September 2018. In this context, a substantial devaluation cannot be ruled out, although the central bank has tools that it can use first to control capital flight, such as limits on dollar purchases by banks.
Increased political risk after bloody repression of protests
After winning a third consecutive term in the November 2016 presidential elections, President Daniel Ortega of the Frente Sandinista de Liberacion Nacional (FSLN) Party enjoyed strong popularity until early 2018. However, attempts (since abandoned) to reform the pension system triggered a major protest movement in mid-April 2018. Repression of the demonstrations, which led to several hundred deaths and many arrests, caused the conflict to deepen. Conciliation talks organised by the Catholic Church are struggling to reach a real agreement, while the government continues to repress demonstrators who are demanding the departure of President Daniel Ortega and his wife, Vice-President Rosario Murillo. United under the Unidad Nacional Azul y Blanco banner since October 2018, but without a designated leader, opposition groups are struggling to assert themselves in the face of the control exercised by Sandinists over the country’s institutions. The presidential couple are thus likely to see out their mandate, which runs until the next elections in 2021. Against this backdrop, relations with the international community are becoming more strained.
Last update: February 2019