VZCZCXRO4522
RR RUEHLMC
DE RUEHMU #2000/01 2421411
ZNY CCCCC ZZH
R 301411Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1114
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1152
RUEHLP/AMEMBASSY LA PAZ 0190
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 002000 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA, WHA/CEN, WHA/AND, WHA/EPSC, AND EEB/TPP 
TREASURY FOR SARA GRAY 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: DECL: 08/30/2013 
TAGS: ECON PREL PGOV ETRD EPET EINV NU
SUBJECT: NICARAGUAN ECONOMY COASTING - BUT STRAINS ARE 
SHOWING 
 
REF: A. MANAGUA 1952 
     ¶B. MANAGUA 1933 
     ¶C. MANAGUA 1922 
     ¶D. MANAGUA 1771 
     ¶E. MANAGUA 1622 
     ¶F. MANAGUA 1077 
 
Classified By: Ambassador P. Trivelli for reasons 1.5 b&d. 
 
¶1. (C) Summary: The Ambassador's Second Economic Roundtable 
reviewed the performance of different economic sectors and 
painted a picture of an economy coasting on the achievements 
of the Bolanos administration, early signs of a slowdown, and 
increasing strains between the GON and businesses.  The 
banking sector has been performing well, but bank 
representatives state that corporate clients are maintaining 
market positions rather than embarking on new investments. 
Nicaraguan retailers expressed concern with Ortega's mixed 
policy signals, but claim this has not slowed down consumer 
spending.  Agricultural sector representatives note that 
while conflicts between and within ministries have created 
uncertainty for producers, they are still expecting a strong 
coffee harvest in 2007.  They have doubts, however, as to 
whether beef and cheese production will match 2006 record 
levels.  For the oil sector, Nicaragua's deal with Venezuela 
has added serious challenges to selling petroleum products. 
Overall, Sandinista government policies and rhetoric are 
starting to take their toll on the private sector.  End 
Summary. 
 
Overview 
-------- 

¶2. (C) The Ambassador's Second Economic Roundtable reviewed 
the performance of various sectors and revealed increasing 
strains between the GON and businesses.  A sector-by-sector 
overview showed an economy coasting on the achievements of 
the last administration and high commodity prices, but 
showing early signs of a slowdown. (Sector overviews detailed 
below).  Almost all participants pointed to the deceleration 
of the construction sector (-7.8% for 2007) as a signal that 
private investors are holding back on new projects, and the 
government is not carrying out infrastructure investment (Ref 
B).  The ongoing problems in the electricity sector, leading 
to extensive black-outs, are hurting production throughout 
the economy.  Many participants also stated that most 
businesses were waiting for the agreement with the IMF to be 
signed as a signal of GON commitment to current macroeconomic 
policies.  They could not predict whether private sector 
investment would increase once the agreement is in place in 
October (Ref D). 
 
¶3. (C) At the Roundtable's request, the Ambassador spoke on 
USG views on the growing Nicaragua-Iran relationship, and USG 
reaction to the increasingly negative Ortega rhetoric.  On 
both issues, the Ambassador emphasized that the USG continues 
engaging the GON and trying to foster productive working 
level relationships.  He emphasized that he has spoken with 
Foreign Minister Santos and President Ortega about the 
international image Nicaragua is building, but the reception 
has been lukewarm.  Roundtable members were pleased to learn 
that the USG has chosen not to take an antagonistic approach 
with the GON.  A list of Nicaraguan Roundtable participants 
can be found in Paragraph 16.  The next roundtable will take 
place on September 19. 
 
Banking Sector 
-------------- 

¶4. (C) The banking sector has been performing well, with 
deposits already surpassing 2006 highs (Ref C).  Banks have 
raised interest rates on savings, creating an incentive for 
depositors, but cutting into the banks' margins.  Private 
companies are the biggest savers, leading bankers to theorize 
that businesses prefer to hold more liquid positions instead 
of re-supplying inventories or embarking on new investments. 
The slowest area for banks is mortgage lending, as a 
consequence of the slow down in housing construction. 
Mortgage sales came to a halt from December 2006 to January 
2007, picking-up a bit toward the middle of the year. 
 
¶5. (C) So far, banks have not encountered major problems in 
their relations with the new government.  Banking 
representatives believe that Ortega's lack of credibility in 
the private sector overall, will limit his ability to 
influence events in their sector.  They report that their 
relations with the Central Bank continue to be productive. 
The bankers did highlight a worrying trend of FSLN and PLC 
party members using judges appointed by their parties to 
support dead-beat debtors against banks' efforts to seize 
collateral. 
 
¶6. (C) The bankers reported interesting developments in the 
micro-finance sector.  There are 300 microfinance 
institutions registered in Nicaragua, 297 of which are NGO's 
and three are regulated institutions.  All together they 
handle USD 400 million in assets, with two of the regulated 
institutions handling half.  Due to the non-profit nature of 
the majority of the players in the sector, multiple attempts 
(by the World Bank and the National Assembly) at creating a 
regulatory structure have failed.  Consolidation through 
buy-outs and mergers is unlikely.  However, as the larger 
MFIs in Nicaragua become more efficient, the interest rates 
they charge have declined by half in the last five years. 
This should create enough competition to force many of the 
small institutions to leave the market. 
 
Retail Sector 
------------- 

¶7. (C) While Nicaraguan retailers expressed concern about 
Ortega's mixed economic signals, they stated that this has 
not affected the consumption habits of the average 
Nicaraguan, as purchase levels remained steady.  Car sales, 
in particular, have been strong with an average of 22,000 
units sold per year, of which half were new.  Sales of 
motorcycles, mostly Chinese, also increased as people shifted 
from buses to personal transportation.  Sales outside of 
Managua (in the departments) kept pace with the capital. 
Retailers pointed to both of these trends as indicators that 
the lower classes were now able to access consumer credit. 
They did note, however, that purchases of heavy/large items 
had slackened a bit. 
 
¶8. (C) As with bankers, retailers indicated that the GON has 
been laissez-faire with their sector.  The major bone of 
contention had been a contraction in GON current spending 
during the first three months of the administration. 
 
Agricultural Sector 
------------------- 

¶9. (C) Agricultural sector representatives painted a mixed 
picture.  International prices for coffee and beef remain 
strong, creating strong incentives for expansion in the 
agricultural area.  Cattle farmers seemed to be holding off 
on purchasing new cows at the end of the 2006-2007 dry season 
due to its unusual length and severity, especially in 
northern Nicaragua.  As the rainy season started, purchases 
picked up, but there is disagreement as to whether cattle 
purchases will match 2006's record breaking production 
numbers for beef and cheese.  Coffee, on the other hand, is 
set for an increase in volume, reversing a two-year downward 
trend.  Mexican buyers are increasingly interested in 
Nicaraguan, beef, milk, and coffee, some even considering 
setting up processing plants in Nicaragua. 
 
¶10. (C) From the agri-business point of view, Ortega's 
agricultural policies have been confusing at best.  Conflicts 
between and within ministries have resulted in mixed signals 
and convoluted policies, which are affecting producers' 
investment decisions.  They do not believe that Ortega has 
delegated decision making power to the majority of his 
economic ministers.  Agricultural sector representatives feel 
this confusion provides a good opportunity for the private 
sector to advise the GON on more effective policy.  However, 
disunity in the private sector has resulted in an opportunity 
lost. 
 
Oil Sector 
---------- 

¶11. (C) Nicaragua's oil deal with Venezuela has created 
several challenges to selling petroleum products in Nicaragua 
(Refs A and C).  Sector Representatives state that Nicaragua 
consumes about 28,000 barrels of oil products a day and 
Esso's refinery, the only one in Nicaragua, supplies 18,000 
barrels of that demand.  Nicaragua's storage infrastructure 
is built to handle this modest demand, not the 274,000 
barrels a day Chavez has promised (100 million barrels a 
year).  Although the shipments from Venezuela have not come 
close to meeting Chavez' promises, they have been large 
enough to top out existing storage capacity.  As a result the 
GON has tried to convince Esso to receive the Venezuelan 
refined petroleum products on at least two separate 
occasions.  (Note: This meeting took place before the Esso 
storage tank seizures detailed in Ref A. End note.) 
 
Venezuela Tid-Bits 
------------------ 

¶12. (C) One of the banking representatives had just returned 
from a trip to Bolivia "to see what was going to happen in 
Nicaragua."  He reported that in Bolivia, Venezuelan banks - 
private on paper but owned by Chavez' cronies and subsidized 
by the BRV Treasury ) have distorted the market by lending 
at much cheaper rates than Bolivian banks.  As a result, 
several Bolivian banks have failed, leaving the Venezuelan 
banks in a much stronger position. 
¶13. (C) The oil sector representatives stated that while 
Venezuela and Nicaragua are publicly moving ahead with the 
oil refinery plan (a plant to process up to 150,000 barrels a 
day), in reality, PDVSA has only put up the money for a 
feasibility study. 
 
¶14. (C) In a final note, one of the retailers declared 
Venezuelan urea imports to be "a disaster."  The urea is 
coming in at USD 15 per 100 kilo bag, below the Nicaraguan 
market price of USD 22.  The price difference has led private 
sector suppliers to cut back on their imports.  Moreover, 80% 
of the urea reportedly ended up in Costa Rica via 
arbitrageurs resulting in spot shortages in the Nicaraguan 
market. 
 
Comment 
------- 

¶15. (C) This meeting revealed increasing worries about 
Ortega's economic policies in Nicaragua's private sector. 
While the economy continues to coast on the growth created by 
Bolanos government, Sandinista government policies and 
rhetoric are starting to take their toll.  Business leaders 
seem to be focused on solidifying their current market 
positions instead of expanding their businesses.  While the 
Sandinistas have stayed out of non-energy sector businesses, 
the representatives felt it was only a matter of time before 
they started looking around for new sources of income.  End 
comment. 
 
¶16. (C) Nicaragua Private Sector Participants: 
 
Luciano Astorga, General Manager, Bank of Central 
America (BAC), Nicaragua (49.9% owned by GE Financial) 
 
Ricardo Teran, President/CEO - Corporacion Roberto 
Teran (Kodak, HP representatives) 
 
Felipe Mantica, Operations Manager - Grupo Mantica 
(Supermarkets) 
 
Mario Alonso, Former President of the Central Bank 
 
Joaquim de Magalhaes, General Manager, Esso Nicaragua 
 
Gabriel Solorzano, President, FINDESA 
(Second largest Micro-Finance in Nicaragua) 
 
Roberto Bendana, cattle rancher and coffee grower. 
TRIVELLI