Why is Nicaragua’s stock market down 61 percen in March?

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By LatAm Reports Editor

In the first three months of 2024, 10.499 million córdobas were traded on the Nicaraguan Stock Exchange (BDVN), the amount is 61 percent lower than the 27,196 million traded during the first quarter of 2023 and is also the lowest amount in the first quarter of the last four years. At first glance, the figures reflect a sharp reduction in operations; however, specialists explain that it does not imply that fewer instruments have been placed, but that they were acquired in larger deadlines, stimulated by an increase in interest rates.

In terms of volume, that reduction is a reality, but if analyzed by market, it can be seen that during the first quarter most transactions were carried out on the primary market, then that is where the explanation must be sought, says a stockbroker who, for fear of reprisals, asks not to identify himself.

According to the information disclosed on the website of the Nicaraguan Stock Exchange (BVDN), the primary market is where securities or securities are placed for the first time, therefore, they promote a flow of investors’ resources to the issuer. The issuer negotiates through its stock exchange position the values and receives fresh resources for its projects.

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NCB raised interest rate to one year for its letters

In addition, it details that public sector securities are issued through Central Bank auctions. If these securities are purchased by stock exchanges on the orders of a client, the Stock Exchange post is obliged to register this transaction to the Nicaraguan Stock Exchange System. On the other hand, private sector securities or securities negotiable in the BVDN are issued directly through the Stock Exchange and must enter the trading system through the stock exchange position representing the issuer.

According to the specialist, during the first quarter of 2024 two things happened: the first was that the Central Bank of Nicaragua (BCN) did not transpose any letter in dollars, only in córdobas. The other is that unlike what happened in 2023, when the letters in córdobas of the NCB were placed within periods of between seven and 180 days, during the first three months of 2024, practically the total of the letters that were traded in córdobas were placed at 270 and 360 days.

According to the specialist, investors chose these long deadlines, which even last year were not included in the BVDN reports, stimulated by an increase in the interest rate offered by the NCB for its instruments.

The Central Bank was paying 11 percent interest with value maintenance for its letters to one year. It was a good rate, so that increase caused the money not to be invested in letters to seven days, as was the case last year, but to a year because people took advantage of that opportunity because they knew it was not going to be maintained for a long time, says the specialist,

He adds that in fact, before Easter that rate dropped to 10 percent and can continue to fall, so he insists that the reduction of the amounts transferred is a purely market issue, since investors have more letters in their possession.

The BVDN reported that between January and March 2024 8,301 million córdobas were traded in letters from the NCB, and most of the amount is placed at 270 and 360 days. This amount is lower than the 12,409 million córdobas translated in the same period last year.

But the specialist explains that this does not mean that the NCB received all this amount of money last year, but that since most of these letters were placed within seven and fifteen days, every time the deadline expired, the letters were repositioned and the operation was re-registered.

Deadline impacts volume on the Stock Exchange

This happens because the volume of transactions is a cumulative figure, which is growing with what is being transposed. So when the deadlines are short, the figure rises further, but with long deadlines, for example 360 days, they register only once in the year, explains the specialist.

In addition, he gives as an example that, if an investor has a million córdobas or dollars and transfers seven-day instruments, such as the year, he has 52 weeks, that means that the Stock Exchange will register at the end of the year 52 million in transactions, since every time the deadline expires he repositions and registers the operation, even if the investor has only put one million. But if the investor transfers that million to one year, that transaction will not be repeated again in the year and the Stock Exchange will only record a million in transactions.

For his part, the economist and exiled political economist Juan Sebastián Chamorro confirms that it is logical that the rise in the price of the NCB’s letters has stimulated investors to choose the longer term, and by the cumulative system of transactions, this has to impact on the volume transferred.

Stock Exchange placed more letters

The specialist adds that the choice of the 360-day deadline causes transactions to fall in terms of volume, but if the stock is reviewed, i.e. in the amount of NCB letters that are in the hands of the public, it has grown.

For the specialist, more than the fall in the volume of transactions that was caused by the choice of the longer term, the most sensitive thing is that during the first three months of the year the NCB did not transpose letters in dollars, although it clarifies that this is not decisive in the fall that reflects the amount transferred in the reference period.

In addition, it considers that another factor that influenced the fall in the volume of transactions is that during the first months of last year extraordinary operations were carried out, which this year were not repeated. The extraordinary operations that took place were great. Sometimes it happens like when someone has a business and suddenly they have a super good month, because several customers come in and buy him a lot. That happened in the first months of 2023 and it was not repeated this year, he explains.

Internal market affected

These transactions referred to by the specialist were made on the secondary market and as they were not repeated this year, they caused a fall of about one billion córdobas.

According to the information published on the BDVN website, it is known as a secondary market to the negotiations that are taking place with stock instruments that are already in circulation, that is, it is a resale of securities that investors in their possession sell them to other stakeholders to recover their investment. Therefore, the exchange of the monetary flow and securities is between two entities other than the issuer. In this market, instrument holders add the time limit of their investment to their desire and need, as they can sell their securities on the Stock Exchange at any time.

In the case of reports, there is growth of about 40 percent. Reporting or simply reporting transactions are stock market contracts in which the reported one, i.e. the one that needs money, sells the securities to the reporter or investor at a certain price, and the buyer assumes the obligation to transfer to the seller, at the expiration of the established period, the ownership of the securities in exchange for the repayment of an agreed price. 

This article has been translated from the original which first appeared in LA Prensa Grafica