The rating agency based its improvement on strengthening the increase in remittances, FDI and tax collection
In the midst of criticism of the lack of effectiveness of the sanctions imposed by the international community, in order to curb the human rights violations still committed by Daniel Ortega’s dictatorship, the Moodys qualifying agency acknowledged that its efforts by the regime to mitigate the effects of sanctions, allowed it to reach record levels of reserves, with which it can be financed until 2026. For this reason, Nicaragua’s credit rating improved from B3 to B2 and kept the outlook stable, despite the high level of corruption; and warned that the economy faces risks, especially political ones.
The agency’s report clarifies that so far access to external official credit has not been “materially limited” because of the existing sanctions, but if this suspension is implemented, the financial mattress would guarantee the regime state financing until 2026. In addition, he said that rating B2 also took into account the weakness of the institutions, and the high susceptibility to risks, in particular political risks and the weakened rule of law.
According to Moodys as a result of the concerted efforts of the authorities to mitigate the challenges of international sanctions, the country’s credit profile has been structurally strengthened, due to the accumulation of important fiscal and external reserves above previous expectations.
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Moodys thinks China would make up for it
Although sanctions limit the State’s foreign financing options and pose downward risks to economic activity if they interrupt investment flows, fiscal and current account surpluses, together with efforts to attract Chinese financing and investment, improve the resilience of the economy to possible shocks compared to the previous assessment of Moodys, says the statement issued by the qualifier.
Moodys believes that the signing and implementation of trade agreements, especially the FTA with China that entered into force in January 2024, has the potential to boost investment flows and positively alter Nicaragua’s export market structure to another large economy with broad demand for its export products.
This would ensure that the economy resists possible disruptions to the trade and financial flows of Western countries. Since currently half of exports go to the U.S. market and about 25 percent to Central America, Panama and the Dominican Republic, all under the conditions of the DR-Cafta. However, Moodys warns that this diversification would be gradually realized.
Financial mattress would fund until 2026
Moodys details that until 2023 access to external credit has not been materially limited by the Nicaraguan Investment Conditionality Act (NICA) and the Renacer Law, although the United States has increased the number of people sanctioned in Nicaragua and has strengthened the application of existing sanctions.
“Moody” estimates that in an adverse scenario in which financing flows to Nicaragua were stopped altogether, the current fiscal reserves would cover the gross financing needs of the State until 2026, the qualifier said.
The financial stability that Ortega has guaranteed until 2026 acquired it with the accumulation of international and fiscal reserves, along with good budgetary results. For Moodys this is particularly important for the solvency of the State in the context of the current sanctions, which could interrupt financing and trade flows.
The international reserve mattress, combined with the buffer of tax reserves, helps mitigate the risks of possible disruption, while giving the authorities a high level of political flexibility, says Moodys’ statement.
Remittances cause current account surplus
After the post- pandemic recovery, in 2021 the Gross Domestic Product (GDP) grew 10.3 percent and since then has continued to grow in a range of between 3.5 and 4 percent, that is, above the initial projections made by Moodys, which were between 2 and 3 percent. The agency attributes this further expansion to the substantial increase in remittances that since 2021, have more than doubled. In 2018 they accounted for 13 percent of GDP and by the end of 2023 they rose to 27 percent.
The large inflows of remittances have led to a structural crisis. Foreign exchange inflows from remittances have caused the current account to return to a surplus, says Moody’s statement.
In addition, it details that the contribution of the sustained entry of Foreign Direct Investment (FDI) has contributed to a rapid accumulation of Gross International Reserves (BRI), above Moodys’s previous projections, so the external reserve buffer is likely to reach 30 per cent of GDP by the end of 2024; and IBRIs along with fiscal reserves mitigate the risks that the economy may face.
Sustained FDI flow raises IPRs
The international reserve mattress, combined with the buffer of tax reserves, helps mitigate the risks of possible shocks and, at the same time, gives the authorities a high level of policy flexibility, says the qualifier’s statement.
In addition, it attributes the increase in collection to the effects of the tax reform that entered into force in 2019 and to the reduction of expenditure. In addition, it projects that it will continue to grow and allow the fiscal mattress that in October 2023 reached 10.2 percent of GDP will continue to fatten.
The shift to fiscal surpluses since 2022 has led to a substantial accumulation of liquid assets deposited with the Central Bank. The overall government’s financial balance went from a 1.6 percent deficit of GDP in 2021 to a 0.8 percent surplus in 2022 due to an increase in tax revenues that reflects the lingering effects of the 2019 tax reform and a moderation of public wages and social spending, despite a temporary increase in subsidies due to inflationary shock, says the rating report.
10.2% of GDP stored in the NCB
Also, the fiscal surplus expanded to 1.5 percent of GDP by 2023, which allowed 10.2 percent of GDP to accumulate in deposits at the Central Bank from October 2023. And it forecasts a small fiscal surplus of about 0.1 percent of GDP at the general government level by 2024, with the possibility of stronger results, as authorities are again enacting measures to reduce spending.
With regard to the general government’s debt, he said that in 2022 it represented 45 per cent of GDP and Moodys estimated that it was reduced to 42.4 per cent of GDP in 2023. This places Nicaragua below most of its peers with a rating of the “B” ratings, despite the multiple clashes it has faced, including widespread protests between 2018 and 2019 that paralyzed economic activity and the 2020 pandemic. Moodys’ projection is that debt continues to shrink, which at the end of 2024 represents 41.2 percent of GDP and 40.7 percent in 2025. This reduction would save more money in the Central Bank of Nicaragua (BCN).
With regard to the B2 rating it granted to it, the Moodys says it takes into account the weakness of the institutions and the high susceptibility to the risk of events, in particular political risk. Nicaragua also scores below the average of the sovereigns with B-rated in all categories of the World Governance Indicators, except for political stability, which is recovering after the 2018-2019 protests. And among the great weaknesses the absence of weights and counterweights that weaken the rule of law, the lack of management of corruption and the little respect to private property.
Moodys points out weaknesses
A particular weakness of Nicaragua’s institutional profile has to do with the rule of law and the control of corruption, where it ranks among the lowest qualified by Moodys. The lack of a credible system of political controls and balances that fosters political debate and hinders voice and accountability, and a diminished perception that the country’s institutions defend respect for contracts and private property and give security to investments, weigh on Nicaragua’s institutions and the strength of Nicaragua’s governance.
The report warns that high risk susceptibility is a reflection of persistent domestic political risks and the continuing threat of stricter sanctions that could stop the flow of capital to and from Nicaragua. Even if the accumulation of large reserves partially mitigates this risk, it does not fully compensate for it, limiting Nicaragua’s credit profile… The small scale of the economy also limits the economic strength of the sovereign, despite the improvement of growth prospects.
Finally, with regard to the stable perspective, Moodys says it reflects that the risks up and down to Nicaragua’s credit profile remain balanced. However, internal and external political tensions increase the risk of tougher sanctions on the country, which could jeopardize trade and financial flows and cause economic shocks that could affect the economy, but admits that this process will be gradual.
This article has been translated from the original which first appeared in La Prensa NI