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Cablegate: Nicaragua: Scenesetter for Commerce Das Bastian and Treasury Das O'neill

VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #0659/01 1431557
ZNY CCCCC ZZH
R 221557Z MAY 08
FM AMEMBASSY MANAGUA
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHC/SECSTATE WASHDC 2644

C O N F I D E N T I A L MANAGUA 000659

SENSITIVE
SIPDIS

COMMERCE FOR ITA - DAS BASTIAN
TREASURY FOR OASIA - DAS O'NEILL

E.O. 12958: DECL: 05/22/2028
TAGS: ECON PREL ETRD EFIN NU
SUBJECT: NICARAGUA: SCENESETTER FOR COMMERCE DAS BASTIAN AND TREASURY DAS O'NEILL

REF: A. MANAGUA 628
B. MANAGUA 579
C. MANAGUA 573
D. MANAGUA 481
E. MANAGUA 338

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

Introduction
------------
1. (U) We look forward to your visit May 27-29 to participate
in the National Competitiveness Forum we are organizing with
the Ministry of Trade, Industry, and Development and the
investment promotion agency ProNicaragua. Recent visits to
Nicaragua by Department of Commerce Under Secretary
Christopher Padilla and Assistant U.S. Trade Representative
Everett Eissenstat underscored the importance of CAFTA-DR for
Nicaragua (Refs C and E). With the Forum, we would like to
reinforce that message and focus the national dialogue on the
role of the government in improving competitiveness to take
advantage of market access offered by CAFTA-DR. We hope that
this forum will serve as useful preparation for Nicaraguan
participation in Commerce Secretary Gutierrez' August 2008
Americas Competitiveness Forum in Atlanta.

U.S. - Nicaragua Relations
--------------------------

2. (U) The Embassy continues to engage with the Nicaraguan
Government on areas of common interest, despite President
Daniel Ortega's frequent public criticism of the United
States. The military and National Police remain relatively
independent, apolitical forces, and our cooperation with
these institutions to counter terrorist and criminal threats
remains good. We also support those elements of Nicaragua's
civil society, private sector, political class, and
government willing to defend Nicaragua's fragile democracy.
USAID's program supports efforts to strengthen democracy;
promote economic growth, especially through market-driven
assistance for small farmers; and improve education and
health care systems. MCC is in the third year of a five year,
$175 million compact that promotes rural business
development, transportation infrastructure, and property
registration. USDA assistance provides financing to small
farmers and supports government programs on sanitary and
phytosanitary standards for food exports. U.S. Treasury
provides important technical assistance on debt management
and tax collection, while an extensive Peace Corps program
supports rural development and English-language teaching.

Foreign Policy
--------------

3. (C) Ortega has pursued very close ties with Venezuela and
opened cooperative relations with Iran. Immediately after his
inauguration, Ortega signed on to Chavez' Bolivarian
Alternative for the Americas (ALBA), and in late 2007 he
concluded an agreement with Venezuela that redirects up to
50% of oil purchases to development programs. Opposition
leaders and democracy watchdog groups complain that there is
no transparent accounting for this off-budget funding.
President Ortega quickly sided with Venezuela and Ecuador to
briefly break relations with Colombia in March over
Colombia's strike into Ecuador against the FARC. Despite
reciprocal state visits, Iran, has signed no investment deals
nor responded to Ortega's request to forgive sovereign
bilateral debt. On the multilateral front, President Ortega
appears likely to succeed in having ardent U.S.-hater and
former Foreign Minister Miguel d'Escoto chosen to serve a
one-year term as U.N. General Assembly President beginning
September 2008.

Political Climate
-----------------

4. (C) President Ortega has skillfully used his political
pact with former President and convicted Felon Arnoldo Aleman
to wrest control over all branches of government and blur the
distinction between party and state. The centerpiece of
Ortega's "second phase of the revolution" is the introduction
of Qadhafi-style "direct democracy" in Nicaragua through the
establishment of Citizen Power Councils (CPCs). These
groups, nominally representing civil society, but in fact
directed by First Lady Rosario Murillo, are bypassing elected
municipal governments and increasingly assuming a leading
role in the distribution of FSLN patronage such as housing
and discounted food.

5. (C) November 2008 municipal elections dominate the political landscape at this time. Ortega's FSLN party will face a tenuous opposition alliance in what many view as a referendum on his direct democracy model. Venezuelan financial support for FSLN candidates and CPC manipulation of the voter registration process threaten to undermine the credibility of these elections.

Macroeconomic and Financial Outlook
-----------------------------------

6. (C) Although critical of free trade and capitalism, Ortega
has maintained the legal and regulatory underpinnings of the
market-based economic model of his predecessors. Economic
growth for 2007 was 3.7% and is forecast for 3.8% in 2008,
though many independent economists forecast something closer
to 3.0%. Under an International Monetary Fund program signed
in October 2007, the Nicaraguan Government agreed to
implement free market policies linked to targets on fiscal
discipline, spending on poverty, and energy regulation.
However, Ortega's frequent populist rhetoric calls into
question his government's commitment to these targets.
Inflation is on track to exceed 22% this year, boosted by
rising fuel prices and a 30% increase in the minimum wage for
most occupations. The lack of a strong policy response to
rising inflation is worrisome, given the likelihood that
off-budget Venezuelan assistance has created excess
liquidity.

7. (C) In an effort to discredit opposition leader and former
Finance Minister Eduardo Montealegre, on April 15, 2008, the
government refused to pay principal and interest due on bonds
(Negotiable Investment Certificates, CENIs) issued in 2001 to
compensate healthy banks for absorbing the assets and
liabilities of insolvent banks (Ref D). As a consequence,
recent improvements in Nicaragua's sovereign credit rating,
thanks to a series of debt relief programs and support from
U.S. Treasury, are at risk. Other policy measures reflect
similar political motivations. For example, the government
disbanded a successful agricultural development program that
provided improved seeds and technical assistance to farmers
in favor of a program that provides a families identified by
local CPCs with livestock and unimproved seeds. Budget
execution remains far below targets, leaving needed
infrastructure and other capital projects on the drawing
board.

Trade and Investment
--------------------

8. (U) On April 1, 2006, CAFTA-DR entered into force for the
United States and Nicaragua. Nicaraguan exports to the United
States, which account for 55% of Nicaragua's total exports,
were $1,608.4 million in 2007, up 36.3% from 2005. Textile
and apparel account for 60% of those exports, while
automobile wiring harnesses add another 10%. Other leading
export products are coffee, meat, cigars, sugar, ethanol, and
fresh fruits and vegetables--all of which have seen
remarkable growth since CAFTA went into effect. U.S.
exports, meanwhile, were 846.8 million in 2007, up 43.6% from
2005. Other important trading partners for Nicaragua are its
Central American neighbors, Mexico, and the European Union,
with which it is negotiating a trade agreement as part of a
Central American bloc.

9. (C) Foreign investment inflows totaled $337 million in
2007, including U.S. firm Cone Denim's $100 million mill (Ref
A) and Mexican and Spanish investment of $120 million in
telecommunications infrastructure. However, despite important
protections for investment included in CAFTA-DR, the
investment climate has steadily worsened since Ortega took
office. On more than a dozen occasions, the government has
used its tax, customs, and property administrations to
pressure individuals and companies into accepting
noncommercial terms in concessions or contracts. Uncertain
property rights also contribute to the deterioration of the
investment climate, especially for tourism investment.

10. (C) For the first time, employment has fallen in the
all-important apparel manufacturing sector. One large
Taiwanese apparel manufacturer recently announced plans to
shutter its plants, eliminating 14,000 jobs, and 2 other
firms closed operations in late 2007. Hanes Brands recently
announced it had canceled plans to establish a manufacturing
facility here.
TRIVELLI

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