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DE RUEHMU #1492/01 3501712
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INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RUMIAAA/CDR USSOUTHCOM MIAMI FL

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 001492 
 
SIPDIS 
 
TREASURY FOR SARA SENICH 
 
E.O. 12958: DECL: 12/14/2018 
TAGS: EAID ECON EFIN NU PGOV
SUBJECT: NICARAGUA: IMF REP PREDICTS GLOOMY 2009 
 
Classified By: Ambassador Robert J. Callahan for reasons 1.4 b & d. 
 
 ¶1.  (C) Summary. The IMF's Resident Representative in 
Nicaragua, Humberto Arbulu, told the Ambassador on December 
10 that the GON faces a very difficult 2009, and that the 
Fund had recently downgraded the country's economic growth 
forecast from 4% to 2%.  The December 4-5 IMF review of 
Nicaraguan performance under the Fund's three-year Poverty 
Reduction and Growth Facility (PRGF) was unsatisfactory, and 
the GON must act to approve a fully-financed 2009 budget if 
it is to receive the third PRGF tranche of $25 million.  In 
February 2009 the GON must service $150 million in bond debt, 
a relatively large sum given Nicaragua's limited reserves. 
Failure to meet this obligation could result in a collapse of 
the financial system, led by runs on banks and capital 
flight.  The GON's economic team clearly understands 
Nicaragua's precarious situation, but it has been unable to 
exert any significant influence on President Ortega, who must 
take the political steps necessary to assuage an outraged 
international donor community as the result of fraudulent 
municipal elections on November 9.  End Summary. 
 
¶2.  (C) IMF Resident Representative in Nicaragua Humberto 
Arbulu met with the Ambassador on December 10 to offer his 
views on the results of the December 4-5 review of GON 
progress under the Fund's three-year, $110 million Poverty 
Reduction and Growth Facility (PRGF) agreement.  Arbulu told 
the Ambassador the IMF had downgraded its 2009 Nicaraguan 
economic growth forecast from 4% to 2% based on three 
factors: decreased U.S. demand for Nicaraguan exports as a 
result of the recession, a decrease in demand in Central 
American markets, and lower worldwide commodity prices for 
coffee and other important Nicaraguan agricultural exports. 
Decreased remittances from Nicaraguans working abroad in the 
United States, Costa Rica and Spain will also contribute to 
an economic slowdown in 2009.  Remittances account for 12-15% 
of Nicaraguan GDP (about $800 million); of that amount, 
according to Arbulu, the U.S. share is almost half.  The GON 
will stagger through the end of 2008 able to meet its 
national budgetary requirements, but 2009 will be 
challenging, owing in no small measure to the likely decline 
of foreign budget support from European donors as a 
consequence of the FSLN,s anti-democratic actions. 
 
¶3.  (C) Arbulu told the Ambassador that in February 2009 the 
GON must service $150 million in sovereign bonds, issued as 
compensation for properties seized by the Sandinistas during 
their first period in power (1979-1990), and flagged this 
payment as a flashpoint.  If the GON fails to honor its debt 
obligations, it could face capital flight, runs on banks, and 
a collapse of the financial system.  International reserves 
of $1.1 billion would allow the GON to fully pay the import 
bill for 3 months, after which the exchange rate would 
collapse.  According to Arbulu, the GON,s primary economic 
players--Central Bank President Antenor Rosales and Senior 
Advisor Bayardo Arce--clearly understand the ramifications of 
a default.  Rosales privately told Arbulu that the GON could 
forgo paying civil service salaries as a stop gap measure. 
 
¶4. (C) A self-described optimist, Arbulu confessed that he 
now only gives the three-year PRGF a 50/50 chance of 
continuing in its present form.  At this juncture the IMF is 
not prepared to disburse its third tranche of approximately 
$22-25 million, mainly because the GON lacks an approved, 
fully-funded 2009 budget as a result of European budget 
support donors threatening to end assistance.  Arbulu 
emphasized that under no circumstances would the IMF Board of 
Directors approve disbursements if the GON does not legislate 
its own budget.  He added that the IMF will not conduct 
another review of Nicaragua until these requirements are met. 
 Until recently, Arbulu added, the IMF has played softball 
with the FSLN economic team, but now that global financial 
circumstances have changed and Costa Rica, El Salvador and 
the Dominican Republic are requesting IMF assistance, there 
will be increased scrutiny of Nicaraguan performance under 
the PRGF,s measurements. 
 
¶5.  (C) On the political side, Arbulu told the Ambassador 
that while Arce and Rosales are competent in crafting sound 
national economic policies, their influence on President 
Ortega and First Lady Rosario Murillo is limited.  Arbulu 
confided to the Ambassador that Rosales had told him recently 
that Ortega had paid a very high political price for the 
 
MANAGUA 00001492  002 OF 002 
 
 
November 9 municipal elections and was at the point of no 
return.  Even with Nicaragua's isolation in the international 
donor community, and a costly potential cutoff of 2008-2009 
EU budget assistance, Ortega seems impervious to reason. 
 
COMMENT 
------- 
 
¶6.  (C) Arbulu's sobering 2009 prediction for the Nicaraguan 
economy would sound alarm bells for most rational economists 
or policymakers.  The fact that Arbulu's office is physically 
housed in the Nicaraguan Central Bank (which affords him 
ready access to Rosales' office) along with the fact that he 
has represented the IMF here for over four years, lends 
increased credibility to his analysis. 
CALLAHAN