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Cablegate: Microfinance Concerns Dominate Economic Roundtable

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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