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Cablegate: Nicaraguan Business Sector Cautious in 2008

VZCZCXRO2991
RR RUEHLMC
DE RUEHMU #0339/01 0841623
ZNY CCCCC ZZH
R 241623Z MAR 08 ZDK
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2298
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 000339

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: 03/24/2018
TAGS: ECON EFIN ETRD PREL PGOV NU
SUBJECT: NICARAGUAN BUSINESS SECTOR CAUTIOUS IN 2008


Classified By: Amb. Paul Trivelli for reasons 1.4 b&d.

1. (C) Summary: During their January 31 meeting, participants
in the Ambassador's Economic Roundtable continued to paint a
cautious outlook for Nicaragua's economy in 2008. In
particular they highlighted the GON's unwillingness to
address inflation, which reached 16.8% in 2007. While
recognizing that international oil and domestic food prices
played a role in inflation, roundtable participants cited
other factors and proposed monetary and fiscal measures to
address the situation. They expressed serious concern over
the possible inflationary effects of Venezuelan assistance
and the lack of transparency with which it is handled.
Participants also discussed road blocks to Nicaragua's
ability to take full advantage of CAFTA, highlighting the
lack of engagement by the GON in trade capacity building for
local producers. For a full list of roundtable participants,
see Paragraph 10. End Summary.

Inflation Worries
-----------------

2. (C) Overall, the participants in the Ambassador's Economic
Roundtable presented a cautious outlook for Nicaragua's
economy in 2008. They view the country's 16.8% inflation
rate for 2007 as the most important drag on growth. While
many agreed with the GON's position that external supply
shocks in the form of high oil and food commodity prices are
key components of this inflation, they all agreed that this
does not excuse the government from carrying out monetary and
fiscal policies to try to limit the effects. Roundtable
economists noted that the October floods affected harvests
causing food shortages for a time. They also highlighted
several demand driven domestic components to Nicaragua's
inflation among them the unchecked three-fold increase in M1
since 2006, the lowering of the Central Bank's prudential
reserve rate for private banks by three percentage points in
September 2007; and the 36% increase in the minimum wage.
They also blamed the GON's decision to discontinue the
"enhanced seed" distribution program for falling agricultural
production and reduced food stocks.

3. (C) Roundtable participants were particularly worried
about the GON's lack of a clear policy response to the
inflation and its desire instead to engage in expansionary
measures. They highlighted the GON's stated desire to spend
an additional USD 120 million on social programs under the
Poverty Reduction and Growth Facility, as such spending could
have serious inflationary effects. They believe if the GON
does not re-launch a seed distribution program crop yields
may not rebound in 2008 and food prices will continue to
rise. Such price rises are particularly dangerous, according
to some participants, because of President Ortega's personal,
curious belief that high food prices are the result of
Nicaragua's export of its foodstuffs. They worry that Ortega
will eventually seek to control prices and limit exports to
ensure national "food security."

4. (C) Participants proposed monetary and fiscal measures to
reduce inflation and increase economic growth. Monetary
policy proposals included conducting open market operations,
sending clear messages to demonstrate the GON's commitment to
reduce inflation, and re-evaluating the current 5% annual
devaluation (crawling peg). Fiscal policy proposals included
reviving the seed distribution program, increasing spending
on economic infrastructure projects, and improving the
investment climate to encourage foreign investment. One
economist also pointed out that the Central Bank needs to
change the way it forecasts inflation, because it has rarely
hit the mark.

Effects of Venezuelan Money
---------------------------

5. (C) The unknown factor in Nicaragua's inflation is the
role of Venezuelan assistance to be provided through an oil
import scheme. While President Ortega has asserted in the
press that Venezuelan assistance totaled USD 386 million in
2007, the lack of transparency on the origin and use of this
money concerned the participants, who fear that the
government will spend the funds on initiatives that are
inflationary and do not encourage long-term growth.
Participants agreed that the private sector needs to publicly
insist on transparency for the USD 300-500 million expected
to enter Nicaragua through the oil import scheme. (Note:
While this number is speculative, it has been frequently
bandied about in the press and by the Roundtable. End note.)

There are some bright spots and some concerns
---------------------------------------------

6. (C) Despite these gloomy predictions for 2008,
participants did point out several bright spots. Retailers
reported double digit growth in 2007 and a stronger January
in 2008 than in 2007. In their view, the sustainability of
these numbers will depend on the length and depth of the U.S.
economic downturn and its effect on Nicaraguan exports. The
construction sector is picking up, benefiting both from a
rise in home construction and in GON capital spending.
Strong prices for agricultural products are increasing
incomes for rural producers and driving them toward formal
financial institutions. Interestingly, all participants felt
remittances would not be greatly affected by the U.S.
economic slowdown, citing studies that indicate remittances
are not tied to the business cycle. (Note: 2007 remittances
were USD 739.5 million, 6% above 2006. End Note.)

7. (C) However, clouds on the horizon include the closure of
a number of apparel factories, the continued deterioration of
the investment climate, and the corruption and politization
of the judicial system. The apparel plant closures are
particularly worrisome as Nicaragua has not developed
diversity and strength in light manufacturing to absorb the
loss. (Note: Participants attributed the plant closures to
increases in the minimum wage, Chinese competition, and
increased regulatory difficulties with the Ministries of
Labor and Environment. End Note.)

CAFTA ) Still a ways to go
--------------------------

8. (C) For roundtable participants, much still needs to be
done in Nicaragua and the rest of Central America to take
full advantage of CAFTA. Problems affecting all CAFTA
countries include rigidities in labor markets and regulatory
environments; lack of governmental skills in conducting trade
capacity building; too few opportunities for producers to
learn basics such as packaging, labeling and SPS
requirements; and the time and resources required to educate
the population on CAFTA regulations. Participants noted that
throughout the region, fear of possible negative effects of
the agreement has subsided significantly. Anti-trade
rhetoric in the U.S. presidential campaign, however, is
slowing down new investment that would take advantage of the
agreement.

9. (C) Barriers to taking advantage of CAFTA in Nicaragua
center on the lack of GON actions to support the agreement.
Participants noted that Ortega is clearly more interested in
promoting ALBA over CAFTA; as a result the National Assembly
has not taken-up legislation that would improve the private
sector's ability to take advantage of trade agreements. The
Ministry of Trade, Industry, and Development, the natural
lead on CAFTA promotion, has been focused on free trade
negotiations with the EU and showing that there is value in
Nicaragua's ALBA agreements. The slow-down in trade capacity
building programs by donors has also limited the further
diversification of Nicaragua's export base. Participants
believe that trade with the United States will grow more
slowly this year than in the previous three years.

10. (C) Nicaraguan Private Sector Participants:

Mario ALONSO, Former President of the Central Bank

Mario ARANA, Executive Director FUNIDES (Local economic
think-tank), Former President of the Central Bank,
Lead CAFTA negotiator

Luciano ASTORGA, General Manager, General Manager BAC
Nicaragua (Owned by GE Financial)

Julio CARDENAS, Executive Director ) Bancentro
(U.S.-citizen owned bank)

Alberto CHAMORRO, President, E. Chamorro Commercial
and Director, BAC Nicaragua (Owned by GE
Financial)

Joaquim DE MAGALHAES, General Manager, Esso Nicaragua

Erwin KRUGER, President DRACMA (Economic Magazine),
business leader and economist.

Alejandro MARTINEZ Cuenca, President ) International
Foundation for Global Economic Challenge (Economist,
businessman, FSLN member, Economy Minister in 1980s)

Eduardo MONTIEL, Professor, INCAE Business School.
TRIVELLI

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