Country Report Nicaragua
Nicaragua has a weak political and economic structure, as well as a low standard of living. Economic growth has been quite strong in recent years. Nicaragua’s heavy reliance on support Venezuela is a big vulnerability.
Strengths and weaknesses
Significant and stable workers' remittance inflows
Workers' remittances accounted for 9.7% of GDP in 2012. Although the inflow of remittances showed a dip in 2009, the inflow has remained rather constant and at a high level.
President Ortega and his followers control large parts of the bureaucracy, the judiciary and the economy. This has a negative impact on the predictability of government policy, which hampers foreign investment.
Large current account deficit
Nicaragua’s current account deficit has fluctuated around 15% of GDP in recent years. Around 70% of the current account balance is financed by FDI, but most of this FDI comes from Venezuela. If Venezuela stops its support, a balance of payments crisis looms.
Low level of household income
With an income of USD 1,120 per head in 2012, Nicaragua is one of the poorest countries on the continent. Nicaragua’s real income level is still more than 30% below its pre-civil war peak of the late seventies.
1. Economic growth prospects
Economic growth amounted to 5.2% in 2012, and was thus slightly higher than in the previous two years. The main contributor to growth was private consumption, which grew by 3.8% and added 3.2%-point to GDP growth. The increase in consumption was the result of higher workers remittances inflows (+11.3%) and a 12.6% increase in social expenditure, including health, social services and housing. Another important contributor to growth was gross fixed investment, which grew by 12.0%, adding 2.6%-point to GDP growth (figure 1). The increase in investment mainly takes place in the construction sector. Part of the investment is coming from abroad. Foreign investment has increased recently, which may be related to the slight improvement of the stance of the government against foreign companies that has become visible in recent years. However, a sizeable part of foreign direct investment comes from Venezuela and is likely to be driven more by political motives.
2. Possible impact of Chavez death on Nicaragua
Hugo Chavez death has raised questions whether Venezuela is willing and capable of maintaining its favorable oil program, PetroCaribe. For Nicaragua the program includes a yearly USD 400m discount on Nicaragua’s oil bill and the financing of social programs to reduce poverty. Besides, Venezuela takes an important share of FDI in Nicaragua. A complete stop of the program would put Nicaragua directly into a balance of payments crisis. Nicaragua’s trade balance deficit would probably worsen to roughly 30% of GDP, while the inflow of FDI would probably be halved (figure 2). Although Venezuela seems unlikely to stop its support completely in the near future, its growing macroeconomic imbalances may force it to reduce its aid.
Nicaragua’s political structure is weak, as political power is in the hands of a small group. Current President Ortega (one-time rebel leader and former president from 1979 to 1990) and his followers control large parts of the bureaucracy, the judiciary and the economy. Furthermore, both the presidential elections in 2011 and the municipal elections in 2008 and 2012, can be qualified as unfair. Besides, the quality of institutions is low and corruption is high. Nicaragua’s economic structure can also be qualified as weak. Among others, Nicaragua’s public debt level is high and its economic base narrow, as it consists mainly of agriculture, manufacturing and tourism. Nicaragua’s export basket is also quiet narrow, as 50% of its exports goes to the US and exports mainly consists of coffee, clothing and fiber cables. Other weaknesses are the small size the economy and the low income level per head. A positive development is that President Ortega’s policies have become more business-friendly in recent years, even as his domestic rhetoric remains left-wing. In case Venezuela stops its favorable oil program Nicaragua’s trade balance deficit would worsen considerably, while the inflow of FDI would probably be halved.