VZCZCXYZ0003
RR RUEHWEB

DE RUEHMU #2428/01 3051656
ZNY CCCCC ZZH
R 011656Z NOV 06
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 8088
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

C O N F I D E N T I A L MANAGUA 002428 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EB/OMA 
 
E.O. 12958: DECL: 10/31/2016 
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA: IMF NERVOUS ABOUT POSSIBLE ORTEGA WIN 
 
 
Classified By: Ambassador P. Trivelli for reasons 1.4 b&d 
 
¶1. (C) Summary:  In an October 24 meeting with the 
Ambassador, IMF Resident Representative Humberto 
Arbulu-Neira confessed that he was nervous about an Ortega 
win, predicting a negative and contentious relationship 
between Nicaragua and the IMF should this happen. 
Arbulu-Neira thought that Ortega would have to name a 
credible economic team soon after victory to calm fears and 
preclude capital flight.  Irrespective of who wins, 
Arbulu-Neira feels the new president will have to address 
immediate issues in the energy and water sectors.  In 
September Nicaragua met the final two Poverty Reduction 
Growth Facility (PRGF) conditions and received the final 
disbursement of USD 110 million.  An IMF mission will 
arrive November 8 to prepare for an IMF Board meeting on 
December 12, the date on which the PRGF will conclude. 
Because there is no pending loan and the GON is not 
requesting any new program, from now on Nicaragua will work 
with the IMF through standby agreements.  End Summary. 
 
A Bleak Vision of an Ortega Government 
-------------------------------------- 
 
¶2. (C) In an October 24 meeting with the Ambassador, IMF 
Resident Representative Humberto Arbulu-Neira confessed 
that he was nervous about an Ortega win.  He predicted a 
negative and contentious relationship between Nicaragua and 
the IMF should this happen.  Arbulu-Neira feels that if 
Ortega wins he will have to name a credible economic team 
soon after victory to calm fears and preclude investors and 
people with bank deposits from immediately moving liquid 
assets off shore.  If this happened, an Ortega-led 
government might react with capital or foreign exchange 
controls, thus tripping a series of negative events that 
could ultimately lead to an over-regulated, 
government-controlled, and strangled economy.  Before 
things got out of hand, the IMF could step in to provide 
bridge financing, but would have to be assured of 
repayment.  Arbulu-Neira thought that Ortega would more 
likely ask for help from Chavez or Castro than submit to 
IMF conditions. 
 
¶3. (C) Arbulu-Neira fears that Ortega will also nationalize 
the private electricity distributor and force independent 
power producers to sell to the state at money-losing 
prices.  He believes that Ortega will turn immediately to 
Chavez for cheap oil to solve the energy problem; but 
Venezuelan cheap oil deals have not worked well anywhere, 
including Nicaragua (septel), because delivery is 
unreliable and prices uncompetitive.  Arbulu-Neira also 
noted that Venezuela's purchase of bonds to help Argentina 
had only left that country more indebted to foreign 
commercial banks.  Venezuelan banks purchased the bonds 
from the government only to resell them in New York as a 
way to evade Venezuelan currency controls. 
 
Next President Will Not Have It Easy 
------------------------------------ 
 
¶4. (C) Arbulu-Neira thought that whoever the next President 
is, he will have to address infrastructure issues early 
on.  Without drastic changes to the electricity regulatory 
structure, Nicaragua will have a difficult time attracting 
the investment that it sorely needs to meet its growing 
power needs.  This lack of investment in the power sector 
will negatively affect industrial and economic growth. 
Without investment, Nicaraguan power producers will also be 
unable to play a contributing role in the development of a 
Central American spot market for electricity, due to come 
on line in 2008.  Arbulu-Neira noted that Nicaragua's water 
sector needed an injection of $30 million to stay afloat, 
an amount not appearing in the government's budget. 
Arbulu-Neira is also worried about the new president's 
ability to govern given the constitutional reforms severely 
curbing executive power, which were suspended under the Q 
Ley MarcoQ and come into effect on January 20, 2007. 
 
Next Steps for the IMF in Nicaragua 
----------------------------------- 
 
¶5. (C) Arbulu-Neira informed the Ambassador that an IMF 
mission would arrive on November 8 to conduct a week long 
assessment in preparation for an IMF Board meeting on 
December 12.  Arbulu-Neira stated that while there were 
still a few structural adjustments that the IMF would like 
to see, Nicaragua will successfully conclude its PRGF on 
December 12.  Nicaragua met its final two PRGF conditions 
in September when the National Assembly passed the Tax 
Reform Law and the Revised Budget Law, which allowed the 
government to incorporate unexpected revenue into the final 
2006 budget.  The IMF has issued the final disbursement of 
$110 million in funds under the PRGF.  Because there is no 
pending loan and the GON has not requested any new program, 
from now on Nicaragua will work with the IMF through 
standby agreements. 
 
¶6. (C) One of Arbulu-Neira's stated reasons for the meeting 
was to ask the Ambassador whether there was security risk 
for the IMF mission during the week following elections. 
The Ambassador responded that much depended on how smoothly 
the elections went, and the first few days of the vote 
count.  At this point, we do not expect to see 
disturbances, but have taken precautions in light of 
concerns expressed to us by Nicaraguan authorities. 
 
Comment 
------- 
 
¶7. (C) Arbulu-Neira was particularly worried about the 
future of Nicaragua.  He feels strongly that the next 
couple of years will be critical for development of the 
country.  Because the IMF will have no formal program, it 
will have limited influence on any future government until 
things go very wrong. 
TRIVELLI