VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #0659/01 1431557
ZNY CCCCC ZZH
R 221557Z MAY 08
FM AMEMBASSY MANAGUA
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHC/SECSTATE WASHDC 2644

C O N F I D E N T I A L MANAGUA 000659 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR ITA - DAS BASTIAN 
TREASURY FOR OASIA - DAS O'NEILL 
 
E.O. 12958: DECL: 05/22/2028 
TAGS: ECON PREL ETRD EFIN NU
SUBJECT: NICARAGUA: SCENESETTER FOR COMMERCE DAS BASTIAN AND TREASURY DAS O'NEILL
 
REF: A. MANAGUA 628 
     ¶B. MANAGUA 579 
     ¶C. MANAGUA 573 
     ¶D. MANAGUA 481 
     ¶E. MANAGUA 338 
 
Classified By: Ambassador Paul A. Trivelli for reasons 1.4 b & d. 
 
Introduction 
------------ 
¶1. (U) We look forward to your visit May 27-29 to participate 
in the National Competitiveness Forum we are organizing with 
the Ministry of Trade, Industry, and Development and the 
investment promotion agency ProNicaragua.  Recent visits to 
Nicaragua by Department of Commerce Under Secretary 
Christopher Padilla and Assistant U.S. Trade Representative 
Everett Eissenstat underscored the importance of CAFTA-DR for 
Nicaragua (Refs C and E).  With the Forum, we would like to 
reinforce that message and focus the national dialogue on the 
role of the government in improving competitiveness to take 
advantage of market access offered by CAFTA-DR.  We hope that 
this forum will serve as useful preparation for Nicaraguan 
participation in Commerce Secretary Gutierrez' August 2008 
Americas Competitiveness Forum in Atlanta. 
 
U.S. - Nicaragua Relations 
-------------------------- 

¶2. (U) The Embassy continues to engage with the Nicaraguan 
Government on areas of common interest, despite President 
Daniel Ortega's frequent public criticism of the United 
States.  The military and National Police remain relatively 
independent, apolitical forces, and our cooperation with 
these institutions to counter terrorist and criminal threats 
remains good.  We also support those elements of Nicaragua's 
civil society, private sector, political class, and 
government willing to defend Nicaragua's fragile democracy. 
USAID's program supports efforts to strengthen democracy; 
promote economic growth, especially through market-driven 
assistance for small farmers; and improve education and 
health care systems. MCC is in the third year of a five year, 
$175 million compact that promotes rural business 
development, transportation infrastructure, and property 
registration.  USDA assistance provides financing to small 
farmers and supports government programs on sanitary and 
phytosanitary standards for food exports. U.S. Treasury 
provides important technical assistance on debt management 
and tax collection, while an extensive Peace Corps program 
supports rural development and English-language teaching. 
 
Foreign Policy 
-------------- 

¶3. (C) Ortega has pursued very close ties with Venezuela and 
opened cooperative relations with Iran. Immediately after his 
inauguration, Ortega signed on to Chavez' Bolivarian 
Alternative for the Americas (ALBA), and in late 2007 he 
concluded an agreement with Venezuela that redirects up to 
50% of oil purchases to development programs.  Opposition 
leaders and democracy watchdog groups complain that there is 
no transparent accounting for this off-budget funding. 
President Ortega quickly sided with Venezuela and Ecuador to 
briefly break relations with Colombia in March over 
Colombia's strike into Ecuador against the FARC.  Despite 
reciprocal state visits, Iran, has signed no investment deals 
nor responded to Ortega's request to forgive sovereign 
bilateral debt.  On the multilateral front, President Ortega 
appears likely to succeed in having ardent U.S.-hater and 
former Foreign Minister Miguel d'Escoto chosen to serve a 
one-year term as U.N. General Assembly President beginning 
September 2008. 
 
Political Climate 
----------------- 

¶4. (C) President Ortega has skillfully used his political 
pact with former President and convicted Felon Arnoldo Aleman 
to wrest control over all branches of government and blur the 
distinction between party and state.  The centerpiece of 
Ortega's "second phase of the revolution" is the introduction 
of Qadhafi-style "direct democracy" in Nicaragua through the 
establishment of Citizen Power Councils (CPCs).  These 
groups, nominally representing civil society, but in fact 
directed by First Lady Rosario Murillo, are bypassing elected 
municipal governments and increasingly assuming a leading 
role in the distribution of FSLN patronage such as housing 
and discounted food. 
 
¶5. (C) November 2008 municipal elections dominate the political landscape at this time. Ortega's FSLN party will face a tenuous opposition alliance in what many view as a referendum on his direct democracy model. Venezuelan financial support for FSLN candidates and CPC manipulation of the voter registration process threaten to undermine the credibility of these elections.
 
Macroeconomic and Financial Outlook 
----------------------------------- 

¶6. (C) Although critical of free trade and capitalism, Ortega 
has maintained the legal and regulatory underpinnings of the 
market-based economic model of his predecessors.  Economic 
growth for 2007 was 3.7% and is forecast for 3.8% in 2008, 
though many independent economists forecast something closer 
to 3.0%.  Under an International Monetary Fund program signed 
in October 2007, the Nicaraguan Government agreed to 
implement free market policies linked to targets on fiscal 
discipline, spending on poverty, and energy regulation. 
However, Ortega's frequent populist rhetoric calls into 
question his government's commitment to these targets. 
Inflation is on track to exceed 22% this year, boosted by 
rising fuel prices and a 30% increase in the minimum wage for 
most occupations. The lack of a strong policy response to 
rising inflation is worrisome, given the likelihood that 
off-budget Venezuelan assistance has created excess 
liquidity. 
 
¶7. (C) In an effort to discredit opposition leader and former 
Finance Minister Eduardo Montealegre, on April 15, 2008, the 
government refused to pay principal and interest due on bonds 
(Negotiable Investment Certificates, CENIs) issued in 2001 to 
compensate healthy banks for absorbing the assets and 
liabilities of insolvent banks (Ref D).  As a consequence, 
recent improvements in Nicaragua's sovereign credit rating, 
thanks to a series of debt relief programs and support from 
U.S. Treasury, are at risk.  Other policy measures reflect 
similar political motivations.  For example, the government 
disbanded a successful agricultural development program that 
provided improved seeds and technical assistance to farmers 
in favor of a program that provides a families identified by 
local CPCs with livestock and unimproved seeds.  Budget 
execution remains far below targets, leaving needed 
infrastructure and other capital projects on the drawing 
board. 
 
Trade and Investment 
-------------------- 

¶8. (U) On April 1, 2006, CAFTA-DR entered into force for the 
United States and Nicaragua. Nicaraguan exports to the United 
States, which account for 55% of Nicaragua's total exports, 
were $1,608.4 million in 2007, up 36.3% from 2005.  Textile 
and apparel account for 60% of those exports, while 
automobile wiring harnesses add another 10%.  Other leading 
export products are coffee, meat, cigars, sugar, ethanol, and 
fresh fruits and vegetables--all of which have seen 
remarkable growth since CAFTA went into effect.  U.S. 
exports, meanwhile, were 846.8 million in 2007, up 43.6% from 
¶2005.  Other important trading partners for Nicaragua are its 
Central American neighbors, Mexico, and the European Union, 
with which it is negotiating a trade agreement as part of a 
Central American bloc. 
 
¶9. (C)  Foreign investment inflows totaled $337 million in 
2007, including U.S. firm Cone Denim's $100 million mill (Ref 
A) and Mexican and Spanish investment of $120 million in 
telecommunications infrastructure. However, despite important 
protections for investment included in CAFTA-DR, the 
investment climate has steadily worsened since Ortega took 
office.  On more than a dozen occasions, the government has 
used its tax, customs, and property administrations to 
pressure individuals and companies into accepting 
noncommercial terms in concessions or contracts.  Uncertain 
property rights also contribute to the deterioration of the 
investment climate, especially for tourism investment. 
 
¶10. (C) For the first time, employment has fallen in the 
all-important apparel manufacturing sector.  One large 
Taiwanese apparel manufacturer recently announced plans to 
shutter its plants, eliminating 14,000 jobs, and 2 other 
firms closed operations in late 2007.  Hanes Brands recently 
announced it had canceled plans to establish a manufacturing 
facility here. 
TRIVELLI