VZCZCXRO3814
RR RUEHLMC
DE RUEHMU #0054/01 0161412
ZNY CCCCC ZZH
R 161412Z JAN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1926
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 000054 
 
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: 01/07/2018 
TAGS: ECON ETRD EPET EINV PGOV PREL NU
SUBJECT: NICARAGUA: PRIVATE SECTOR GLOOMY ON PROSPECTS FOR 
2008 
 
REF: A. MANAGUA 2539 
     ¶B. MANAGUA 2393 
     ¶C. MANAGUA 2524 
 
Classified By: Amb. Paul Trivelli, Reasons 1.4 (b) and (d) 
 
¶1. (C) Summary: Participants in the Ambassador's Economic 
Roundtable voiced a gloomy outlook for Nicaragua's economy in 
¶2008.  They expressed universal concern regarding the 
direction that Ortega has taken the economy, with all 
participants citing President Ortega's vitriolic rhetoric as 
a primary reason for a rapidly deteriorating investment 
climate.  Only agriculture and apparel manufacturers were 
seen as bright spots.  Bankers are concerned by the 
deterioration in the quality of their credit portfolios. 
Esso described its continuing battles with Ortega, and other 
participants described increasingly difficult relations with 
the government.  As in past roundtables, the conversation 
eventually turned to the possible role for the private sector 
in this challenging political and economic environment.  For 
the first time, participants produced concrete suggestions 
such as private sector preparation of economic data which can 
be used by businesses, think tanks, and universities to drive 
the public debate on economic policy and thereby educate 
popular opinion.  Despite these ideas, we continue to believe 
that business leaders will refrain from making strong public 
statements for fear of potential GON retribution.  For a full 
list of roundtable participants, see Paragraph 12. 
 
2007 OK, 2008 Less So 
--------------------- 

¶2. (C) Roundtable participants voiced a gloomy outlook for 
Nicaragua's economy in 2008.  Most expect 2007 real growth of 
3.0% once the final figures are released, but foresaw lower 
growth in 2008.  Participants view agriculture and free trade 
zone manufacturing (apparel and wiring harnesses) as the 2007 
economy's only highlights.  Agriculture has been bolstered by 
high commodity prices and the fact that recent flooding did 
not damage crops as much as initially feared.  Apparel 
manufacturing continues to grow, but may be showing signs of 
gradual decline.  However, power outages, although shorter 
and fewer in number than earlier in the year, still force 
managers to find ways to mitigate losses rather than increase 
production.  Construction remains depressed, even as the 
government catches up on its spending on infrastructure. 
Rising inflation is a concern for members of the financial 
sector (Ref C), as is the apparent deterioration in the 
quality of loan portfolios.  The point was made that an 
economic slowdown in the United States could reduce demand 
for Nicaraguan exports and also result in a lower level of 
remittances flowing back to Nicaragua. 
 
¶3. (C) CAFTA continues to attract foreign investors to 
Nicaragua, but weak infrastructure, power shortages, and talk 
of higher wages often drives them away.  All participants 
view President Ortega's rhetoric against "yankee imperialism" 
and "global capitalism," and willingness to advance relations 
with radical governments like Cuba, Venezuela, and Iran, as 
negatively affecting the climate for foreign investors. 
There was universal concern regarding the direction that 
Ortega has taken the economy. 
 
Banking - Decrease in Portfolio Quality 
--------------------------------------- 

¶4. (C) Bank deposits, up 3.5% last month alone, and lending, 
up 20% since last year, continue to grow.  (Note: Local 
economists point out that in real terms deposits have 
remained flat in 2007.)  The harvest season should keep banks 
that serve the agricultural sector busy and profitable, 
especially if international prices for coffee, sugar, 
peanuts, and beef stay strong.  In volume terms, mortgage 
lending is up, but the downturn in new housing starts is 
limiting further growth. 
 
¶5. (C) One red flag is ever increasing consumer credit during 
a period of relative economic slowdown and growing inflation, 
particularly when there is no corresponding increase in 
salaries.  Another danger sign is that banks see an apparent 
decline in the quality of their loan portfolios, with past 
due loans rising for the system as a whole to 2.2%, rollover 
loans increasing 40%, and one microfinance lender reporting 
that arrears (i.e., nonpayment for more than 30 days) had 
tripled to 9% as small stores ceased to sell items needing 
refrigeration as a result of power outages. 
 
Government Not Helping 
---------------------- 

¶6. (C) Roundtable participants complained about the increase 
in bureaucratic hurdles for businesses and the lack of 
transparency on the part of the government.  Several 
highlighted Ortega's failure to honor contracts and 
willingness to use Nicaragua's tax and customs authorities to 
harass targeted businesses.  Esso's General Manager said that 
two tax auditors had "parked themselves in Esso offices for 
more than five months;" he had no idea what they were doing 
or when they would leave.  Under Ortega, tax auditors are 
routinely requesting five years worth of documents from 
companies for audit purposes, but rather than conducting a 
real financial analysis they seem more interested in simply 
keeping the documents as a sort of insurance policy should 
the companies one day cross the government. 
 
¶7. (C) Participants agreed that President Ortega does not 
understand the negative consequences of his radical rhetoric. 
 The president has raised the risk of doing business in 
Nicaragua and created strong political disincentives for GON 
officials to support business.  One participant observed that 
Ortega's rhetoric showed that he cared more about 
communicating with grassroots militants and controlling his 
party than about foreign perceptions and Nicaraguan 
capitalists. 
 
¶8. (C) Several participants felt that the government's 
response to inflation reflected a lack of policy skill on the 
part of the government.  The Central Bank (BCN) claims that 
Nicaragua's inflation is supply driven (Ref C), but bankers 
point out that the BCN also moved forward with a three 
percentage point cut in the reserve requirement, thus 
increasing liquidity at a time when it should have 
contemplated reducing it.  Fourteen percent or more inflation 
in 2007 is fueling political pressure to increase wages for 
municipal workers.  Government spending in the run up to the 
2008 municipal elections could well fuel further inflation in 
future. 
 
ALBA Dollars 
------------ 

¶9. (C) One oil company executive reported that President 
Ortega has successfully deployed heavy handed tactics to 
coerce oil companies to purchase Venezuelan oil through 
schemes that siphon petrodollars back to him to fund 
off-budget projects.  This had changed the risk profile of 
doing business in Nicaragua.  Moreover, the politically 
controlled Supreme Court recently ruled that gasoline 
stations must pay millions of dollars in back license fees to 
municipalities, immediately affecting company profits in 2007 
and going forward. 
 
Role of the Private Sector 
-------------------------- 

¶10. (C) Participants decried the lack of a private sector 
leadership in the face of President Ortega's anti-business 
rhetoric and methodical assault on democratic institutions. 
Some contemplated how the private sector might respond.  One 
participant believed that growing public opinion could 
conceivably pressure Ortega into changing his rhetoric and 
choosing policies that are friendlier to the private sector. 
Consumer and business confidence surveys might show Ortega 
how his rhetoric hurts the economy.  Economists, academics, 
and think tanks should focus on furnishing independent 
economic statistics to educate popular opinion and foster 
informed public debate on economic policy.  Civil society 
could host debates throughout the country, thus advancing a 
national dialogue.  One participant noted that the concept of 
"policy" needs to be separated from the concept of 
"politics", a challenge in a country where the same word is 
used for both (i.e., "politica"). 
 
Comment 
------- 

¶11. (C) For the first time, participants produced concrete 
suggestions such as private sector preparation of economic 
data which can be used by businesses, think tanks, and 
universities to drive the public debate on economic policy 
and thereby educate popular opinion.  Despite these ideas, we 
continue to believe that business leaders will refrain from 
making strong public statements for fear of potential GON 
retribution. 
 
Roundtable Participants 
----------------------- 
¶12. (C) Following is the list of Nicaraguan participants 
(please protect): 
 
Mario ALONSO, Former Central Bank President 
 
Mario ARANA, Executive Director FUNIDES 
  (FUNIDES is a local economics think-tank.  Arana 
   is a former Minister of Trade who negotiated CAFTA, 
   and former Central Bank President.) 
 
Julio CARDENAS, Executive Director ) Bancentro 
  (a U.S.-citizen owned bank) 
 
Joaquim DE MAGALHAES, General Manager, Esso/Nicaragua 
  (an ExxonMobil company) 
 
Mercedes Margarita DESHON, General Manager - Banco UNO 
  (a local bank just purchased by Citibank) 
 
Matt HAYNES, Vice President, ITG Cone Denim 
  (a U.S. textile manufacturer incorporating 
   what was once Burlington Industries) 
 
Alejandro MARTINEZ Cuenca, President 
  International Foundation for Global Economic 
  Challenge.  (Martinez is also an economist, a 
  businessman, an FSLN member, and was Ortega's 
  Minister of the Economy in 1980s.) 
 
Eduardo MONTIEL, Professor, INCAE 
  (INCAE is business school with ties to Harvard 
   Business School.  Montiel is also a former Minister 
   of Finance.) 
 
Ramiro ORTIZ, Jr., Director, Banpro 
Luis RIVAS, General Manager, Banpro 
  (both of Nicaragua's largest bank) 
 
Gabriel SOLORZANO, President, FINDESA 
  (Second largest microfinance institution in 
   Nicaragua, affiliated with Deutschbank) 
TRIVELLI