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### Viewing cable 08MANAGUA1096, MICROFINANCE CONCERNS DOMINATE ECONOMIC ROUNDTABLE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08MANAGUA1096 | 2008-08-22 22:57 | 2011-06-23 08:00 | CONFIDENTIAL | Embassy Managua

`

    VZCZCXRO7011
    RR RUEHLMC
    DE RUEHMU #1096/01 2352257
    ZNY CCCCC ZZH
    R 222257Z AUG 08
    FM AMEMBASSY MANAGUA
    TO RUEHC/SECSTATE WASHDC 3084
    INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
    RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHINGTON DC

` `

    C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 001096

    SIPDIS

    STATE FOR WHA/CEN, WHA/EPSC AND EEB
    TREASURY FOR SARA SENICH
    USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN

    E.O. 12958: DECL: 08/22/2028
    TAGS: ECON EFIN ETRD PREL PGOV NU
    SUBJECT: MICROFINANCE CONCERNS DOMINATE ECONOMIC ROUNDTABLE

    REF: MANAGUA 0932

    Classified By: DCM Richard Sanders for reasons 1.4 b & d.

    Summary
    -------

    ¶1. (C) Participants in Ambassador Trivelli's farewell
    Economic Roundtable on July 29 expressed alarm that President
    Ortega's rhetoric and economic policies are now showing
    visible and negative effects on the economy.  In particular,
    Ortega's tirade in July against microfinance institutions
    (MFIs) seems to have fed violent protests in northern
    Nicaragua, raising lending risk to that segment of the
    economy and the cost of credit to poor farmers and small
    merchants nationwide (Reftel).  Prominent bankers report that
    rising country risk has caused some international bankers to
    rescind lines of credit.  One participant described 2008 as a
    "transition year," predicting that by the end of the year
    investor appetite for Nicaragua will be all but gone.
    Participants agreed that the investigation into a government
    bank bailout will continue to cast a pall over the political
    landscape as municipal elections in November draw closer.  A
    list of roundtable participants may be found in Paragraph 11.
     End summary.

    Microfinance Protests
    ---------------------

    ¶2. (C) Ambassador Trivelli's farewell roundtable took place
    in the midst of a gathering political storm surrounding
    microfinance institutions in Nicaragua.  Gabriel Solorzano,
    President of FINDESA (Nicaragua's second-largest MFI),
    provided a synopsis of the events in Nueva Segovia which
    began with peaceful protests.  Emotions fed by President
    Ortega's tirade in July against microfinance institutions
    culminated in violent protests, fires, and even the
    kidnapping of a local branch manager of a prominent MFI
    (Reftel).  While the violence in Nueva Segovia has ceased,
    the political initiative to label MFIs as usurious and tools
    of foreign "neoliberals" and "imperialists" is likely to
    continue.  To date, police have made no arrests.
    ¶3. (C) According to Solorzano, two individuals were primarily
    responsible for stirring up a group of agricultural workers
    in two or three northern departments.  One of them is a
    long-time FLSN party member who is now a mayoral candidate
    for the Nicaraguan Liberal Alliance in the city of Ocotal.
    The other is in arrears on debt owed to several MFIs.  He
    stands accused of borrowing $650,000 with either fake
    collateral or collateral already pledged to support other
    loans.  In response to the protests, a number of MFIs have
    offered to restructure loans to stressed clients, but no
    protesters have shown interest to date.

    ¶4. (C) Meanwhile, the FSLN propaganda machine has hammered
    away, accusing the international community of lending to
    Nicaragua at exorbitant rates.  In 2007, President Ortega
    launched a political initiative he called "Zero Usury," under
    which he promised small- and medium-sized businesses "just
    and fair" credit through a new rural development bank and
    Venezuelan credit schemes.  Recently, however, Ortega has
    focused most of his criticism on MFIs, most of which are
    nongovernment organizations funded by international donors.
    Ironically, Ortega's rhetoric and resulting political
    protests will only force MFIs in Nicaragua to tighten credit
    requirements and raise rates to compensate for increased
    country risk.

    ¶5. (C) As an alternative to MFIs, the FSLN propaganda machine
    is pushing ALBA-CARUNA (an FSLN savings and loan cooperative
    now funded by Venezuela under the Bolivarian Alternative for
    the Americas) as a viable alternative to "usurious" MFIs.
    Government and FSLN officials claim that ALBA-CARUNA can lend
    to poor farmers and others who lack collateral or steady
    income with an interest rate of 8.0%.  This rate is close to
    prime and unsustainable in an economy experiencing 20% annual
    inflation.  However, Solorzano reports that nearly all MFI
    clients in Nueva Segovia have declined to switch to
    ALBA-CARUNA, a fact that he interprets as strong evidence of
    the value that the market places on current MFI lending
    practices.  Solorzano points out that at an average interest
    rate of 26% -- despite high administrative costs normally
    associated with serving this sector -- MFIs in Nicaragua
    offer the second lowest interest rate in Latin America.  In
    Peru, MFIs charge around 55% and in Mexico 100%.

    ¶6. (C) One roundtable participant commented that Ortega's
    fear of losing support from his political base is obsessive,
    particularly in Nueva Segovia.  If Ortega doubts that people
    will support him, he may create chaos to put the opposition
    off balance and make it look helpless.  (Comment: Since the
    roundtable, protests against MFIs have dissipated.  Central
    Bank President Antenor Rosales announced that the government
    would propose legislation governing the sector. We expect
    protests to reappear should Ortega find it politically
    convenient.  End comment.)

    Macroeconomic Woes
    ------------------

    ¶7. (C) Luis Rivas, General Manager of BanPro (Nicaragua's
    largest bank), said that rising country risk caused a
    corresponding decrease in international lines of credit to
    Nicaraguan financial institutions.  One example is the
    Central American Bank for Economic Integration (BCIE), which
    reduced its lines of credit to Nicaraguan banks by 25%.
    Moreover, no institution (except the Nicaraguan Institute for
    Social Security) is currently investing in government bonds.
    Part of the problem is that the Board of Directors of the
    Central Bank cannot approve government bond issues for lack
    of a quorum after three of its members resigned.  (Note:
    Local press report that the government has nominated three
    new board members.  End note.)  One participant described
    2008 as a "transition year," predicting that by the end of
    the year investor appetite for Nicaragua will be all but gone.

    ¶8. (C) The head of a prominent think tank said the FSLN has
    been extremely inefficient in managing the government budget.
     Moreover, the FSLN is keeping Venezuelan assistance
    off-budget as much as possible.  Amounting to as much as 50%
    of its oil import bill ($400-500 million a year), these
    sizable expenditures may be injecting considerable liquidity
    into the economy and thus fueling inflation.  One roundtable
    participant speculated that rising liquidity from Venezuelan
    assistance could cause inflation to reach 30% by the end of
    the year, a figure that a number of independent economists
    have also predicted.  Another economist reasoned that
    liquidity caused by Venezuelan assistance is partially offset
    by slow execution of the official budget and, therefore,
    inflation would not reach 30%.

    CENIs
    -----

    ¶9. (C) Roundtable participants agreed that the government's
    investigation into a 2000-01 bank bailout financed by bonds
    (known as CENIs) is politically driven.  Among the 39
    individuals that the government is considering indicting for
    fraud, theft, money laundering, and other crimes against the
    state, four will undoubtedly remain prime political targets:
    Eduardo Montealegre (running for Mayor of Managua), Jaime
    Chamorro (owner of La Prensa, the largest daily newspaper and
    the most vocally opposed to Ortega's government of the major
    media), Noel Sacasa (former Central Bank governor), and
    Esteban Duque Estrada (former Finance Minister).  As one
    participant put it, the issue is being manipulated to
    &align8 a political objective, that is, the defeat of
    Montealegre in the mayoral race for Managua on November 9,
    ¶2008.

    Comment
    -------

    ¶10. (C) We found these prominent private sector
    representatives to be unusually outspoken in this farewell
    roundtable event with Ambassador Trivelli.  They exhibited
    great anxiety not only about short-term prospects in
    Nicaragua, but also the medium- to long-term economic
    outlook, as President Ortega's populist polices begin to
    visibly impact the trajectories for investment and economic
    growth.

    Roundtable Participants
    -----------------------

    ¶11. (C) Following is the list of Nicaraguan participants
    (please protect):

    -- Mario ALONSO, former Central Bank President.

    -- Roberto BENDANA, President of Cafe Don Paco and former
    head of the Competitiveness Commission in the Bolanos
    Administration.

    -- Duilio BALTODANO, President of Cisa Agro, an agricultural
    commodities trader and distributor of agricultural inputs and
    equipment.

    -- Alejandro MARTINEZ Cuenca, President of the International
    Foundation for Global Economic Challenge.  Martinez Cuenca is
    also an economist, a businessman, and an FSLN member.  He was
    Ortega's Minister of the Economy in 1980s.

    -- Luis RIVAS, General Manager of Banpro, Nicaragua's largest
    bank and largest holder of CENIs.

    -- Mario SALVO, Technical Director of El Eskimo, a dairy
    processor, and former Minister of Agriculture in the Bolanos
    Administration

    -- Gabriel SOLORZANO, President of FINDESA, the second
    largest microfinance institution in Nicaragua (whose largest
    shareholder is Deutschbank).
    CALLAHAN

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