VZCZCXRO2991
RR RUEHLMC
DE RUEHMU #0339/01 0841623
ZNY CCCCC ZZH
R 241623Z MAR 08 ZDK
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2298
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 000339 
 
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: 03/24/2018 
TAGS: ECON EFIN ETRD PREL PGOV NU
SUBJECT: NICARAGUAN BUSINESS SECTOR CAUTIOUS IN 2008 
 
 
Classified By: Amb. Paul Trivelli for reasons 1.4 b&d. 
 
¶1. (C) Summary: During their January 31 meeting, participants 
in the Ambassador's Economic Roundtable continued to paint a 
cautious outlook for Nicaragua's economy in 2008.  In 
particular they highlighted the GON's unwillingness to 
address inflation, which reached 16.8% in 2007.  While 
recognizing that international oil and domestic food prices 
played a role in inflation, roundtable participants cited 
other factors and proposed monetary and fiscal measures to 
address the situation.  They expressed serious concern over 
the possible inflationary effects of Venezuelan assistance 
and the lack of transparency with which it is handled. 
Participants also discussed road blocks to Nicaragua's 
ability to take full advantage of CAFTA, highlighting the 
lack of engagement by the GON in trade capacity building for 
local producers.  For a full list of roundtable participants, 
see Paragraph 10.  End Summary. 
 
Inflation Worries 
----------------- 

¶2. (C) Overall, the participants in the Ambassador's Economic 
Roundtable presented a cautious outlook for Nicaragua's 
economy in 2008.  They view the country's 16.8% inflation 
rate for 2007 as the most important drag on growth.  While 
many agreed with the GON's position that external supply 
shocks in the form of high oil and food commodity prices are 
key components of this inflation, they all agreed that this 
does not excuse the government from carrying out monetary and 
fiscal policies to try to limit the effects.  Roundtable 
economists noted that the October floods affected harvests 
causing food shortages for a time.  They also highlighted 
several demand driven domestic components to Nicaragua's 
inflation among them the unchecked three-fold increase in M1 
since 2006, the lowering of the Central Bank's prudential 
reserve rate for private banks by three percentage points in 
September 2007; and the 36% increase in the minimum wage. 
They also blamed the GON's decision to discontinue the 
"enhanced seed" distribution program for falling agricultural 
production and reduced food stocks. 
 
¶3. (C) Roundtable participants were particularly worried 
about the GON's lack of a clear policy response to the 
inflation and its desire instead to engage in expansionary 
measures.  They highlighted the GON's stated desire to spend 
an additional USD 120 million on social programs under the 
Poverty Reduction and Growth Facility, as such spending could 
have serious inflationary effects.  They believe if the GON 
does not re-launch a seed distribution program crop yields 
may not rebound in 2008 and food prices will continue to 
rise.  Such price rises are particularly dangerous, according 
to some participants, because of President Ortega's personal, 
curious belief that high food prices are the result of 
Nicaragua's export of its foodstuffs.  They worry that Ortega 
will eventually seek to control prices and limit exports to 
ensure national "food security." 
 
¶4. (C) Participants proposed monetary and fiscal measures to 
reduce inflation and increase economic growth.  Monetary 
policy proposals included conducting open market operations, 
sending clear messages to demonstrate the GON's commitment to 
reduce inflation, and re-evaluating the current 5% annual 
devaluation (crawling peg).  Fiscal policy proposals included 
reviving the seed distribution program, increasing spending 
on economic infrastructure projects, and improving the 
investment climate to encourage foreign investment.  One 
economist also pointed out that the Central Bank needs to 
change the way it forecasts inflation, because it has rarely 
hit the mark. 
 
Effects of Venezuelan Money 
--------------------------- 

¶5. (C) The unknown factor in Nicaragua's inflation is the 
role of Venezuelan assistance to be provided through an oil 
import scheme.  While President Ortega has asserted in the 
press that Venezuelan assistance totaled USD 386 million in 
2007, the lack of transparency on the origin and use of this 
money concerned the participants, who fear that the 
government will spend the funds on initiatives that are 
inflationary and do not encourage long-term growth. 
Participants agreed that the private sector needs to publicly 
insist on transparency for the USD 300-500 million expected 
to enter Nicaragua through the oil import scheme. (Note: 
While this number is speculative, it has been frequently 
bandied about in the press and by the Roundtable.  End note.) 
 
There are some bright spots and some concerns 
--------------------------------------------- 

¶6. (C) Despite these gloomy predictions for 2008, 
participants did point out several bright spots.  Retailers 
reported double digit growth in 2007 and a stronger January 
in 2008 than in 2007.  In their view, the sustainability of 
these numbers will depend on the length and depth of the U.S. 
economic downturn and its effect on Nicaraguan exports.  The 
construction sector is picking up, benefiting both from a 
rise in home construction and in GON capital spending. 
Strong prices for agricultural products are increasing 
incomes for rural producers and driving them toward formal 
financial institutions.  Interestingly, all participants felt 
remittances would not be greatly affected by the U.S. 
economic slowdown, citing studies that indicate remittances 
are not tied to the business cycle.  (Note: 2007 remittances 
were USD 739.5 million, 6% above 2006. End Note.) 
 
¶7. (C) However, clouds on the horizon include the closure of 
a number of apparel factories, the continued deterioration of 
the investment climate, and the corruption and politization 
of the judicial system.  The apparel plant closures are 
particularly worrisome as Nicaragua has not developed 
diversity and strength in light manufacturing to absorb the 
loss.  (Note: Participants attributed the plant closures to 
increases in the minimum wage, Chinese competition, and 
increased regulatory difficulties with the Ministries of 
Labor and Environment. End Note.) 
 
CAFTA ) Still a ways to go 
-------------------------- 

¶8. (C) For roundtable participants, much still needs to be 
done in Nicaragua and the rest of Central America to take 
full advantage of CAFTA.  Problems affecting all CAFTA 
countries include rigidities in labor markets and regulatory 
environments; lack of governmental skills in conducting trade 
capacity building; too few opportunities for producers to 
learn basics such as packaging, labeling and SPS 
requirements; and the time and resources required to educate 
the population on CAFTA regulations.  Participants noted that 
throughout the region, fear of possible negative effects of 
the agreement has subsided significantly.  Anti-trade 
rhetoric in the U.S. presidential campaign, however, is 
slowing down new investment that would take advantage of the 
agreement. 
 
¶9. (C) Barriers to taking advantage of CAFTA in Nicaragua 
center on the lack of GON actions to support the agreement. 
Participants noted that Ortega is clearly more interested in 
promoting ALBA over CAFTA; as a result the National Assembly 
has not taken-up legislation that would improve the private 
sector's ability to take advantage of trade agreements.  The 
Ministry of Trade, Industry, and Development, the natural 
lead on CAFTA promotion, has been focused on free trade 
negotiations with the EU and showing that there is value in 
Nicaragua's ALBA agreements.  The slow-down in trade capacity 
building programs by donors has also limited the further 
diversification of Nicaragua's export base.  Participants 
believe that trade with the United States will grow more 
slowly this year than in the previous three years. 
 
¶10. (C) Nicaraguan Private Sector Participants: 
 
Mario ALONSO, Former President of the Central Bank 
 
Mario ARANA, Executive Director FUNIDES (Local economic 
think-tank), Former President of the Central Bank, 
Lead CAFTA negotiator 
 
Luciano ASTORGA, General Manager, General Manager BAC 
Nicaragua (Owned by GE Financial) 
 
Julio CARDENAS, Executive Director ) Bancentro 
(U.S.-citizen owned bank) 
 
Alberto CHAMORRO, President, E. Chamorro Commercial 
and Director, BAC Nicaragua (Owned by GE 
Financial) 
 
Joaquim DE MAGALHAES, General Manager, Esso Nicaragua 
 
Erwin KRUGER, President DRACMA (Economic Magazine), 
business leader and economist. 
 
Alejandro MARTINEZ Cuenca, President ) International 
Foundation for Global Economic Challenge (Economist, 
businessman, FSLN member, Economy Minister in 1980s) 
 
Eduardo MONTIEL, Professor, INCAE Business School. 
TRIVELLI