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### Viewing cable 08MANAGUA54, NICARAGUA: PRIVATE SECTOR GLOOMY ON PROSPECTS FOR

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08MANAGUA54 | 2008-01-16 14:12 | 2011-06-23 08:00 | CONFIDENTIAL | Embassy Managua

`

    VZCZCXRO3814
    RR RUEHLMC
    DE RUEHMU #0054/01 0161412
    ZNY CCCCC ZZH
    R 161412Z JAN 08
    FM AMEMBASSY MANAGUA
    TO RUEHC/SECSTATE WASHDC 1926
    INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHINGTON DC
    RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
    RHEHNSC/NSC WASHINGTON DC

` `

    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

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