Nicaragua: Uncertain Outlook

BY CHRONICLE STAFF

Nicaragua's business outlook is increasingly uncertain, partly for political reasons and partly due to the fall-out from the U.S. crisis. However, the blow is being cushioned in part by growing number of contact center and textile companies setting up operations in the country, thanks to inexpensive labor costs compared to other countries in Central America and Latin America. 

"Despite the encouraging economic starting conditions President [Daniel] Ortega found when he took office in January of 2007 -- GDP, exports and foreign currency reserves at historic highs while foreign indebtedness reached a historic low -- it’s not likely that this positive trend can be pursued in a sustainable way," says Alexander Schmidbauer, an analyst who follows Central America closely for Germany's Business Association for Latin America (LAV). 
 
Although Nicaragua's economy grew at 3.8 percent last year, that was the weakest growth in Central America, he points out. Meanwhile, inflation came in at 16.9 percent and is expected to reach even higher levels at the end of this year - compared with 9.4 percent in 2006, he points out.  The International Monetary Fund (IMF) estimates that Nicaragua’s economy will expand by 3.0 percent this year and another 3.5 percent next year. Inflation should reach 20.5 percent this year, it estimates. That will be second-highest rate in Latin America after Venezuela, according to a Latin Business Chronicle analysis of the IMF data.  Next year, it should fall to 11.4 percent, which will still be the highest in Central America.

Part of the reason for the macro economic problems is the increasingly radical policies of Ortega, who also ruled Nicaragua between 1979 and 1990. "Ortega's ideological approximation to Venezuelan president [Hugo] Chávez and Nicaragua’s ALBA-membership are not boosting strongly needed investor confidence," Schmidbauer says. "The recent occupation of the liquefied gas company Tropigas via presidential decree in order to confront an “economic emergency in gas distribution” is another notice that may alienate private investment."

Ortega last month declared an economic state of emergency and ordered the intervention of Tropigas S.A., which covers 60 percent of the domestic liquefied gas market and Ortega blames for the disruption in the distribution chain.  While it claims the ownership of Tropigas won’t be changed, the decree enables the Nicaraguan Institute of Energy (INE), the energy regulation body, to take over the operation of Tropigas.

“The measures adopted by Ortega are likely to be seen as a populist move intended to shore up support amongst the poor, but they are unnecessarily drastic and threaten to further undermine business confidence in his administration,” U.S.-based consultancy IHS Global Insight said in a recent commentary.

Tropigas had asked for an increase of 100 percent in the price of LPG, which is used predominately for cooking. “This triggered Ortega’s disproportionate reaction, who argues that the company...

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Keywords: America Movil, CAFTA, Coldwell Banker, Energy, eTelecare Global Solutions, ExxonMobil, Gran Pacifica, Infinity Energy Resources, International Textile Group, Press 2, Press Freedom, ProNicaragua, Sitel, Tourism, U.S. Trade