Hundreds of people have been killed since April 2018 in a violent crackdown on anti-government protests. The intensity of the demonstrations has dropped in recent weeks, but popular resentment of President Daniel Ortega ensures that the risk of mass protests will remain high. Nicaragua is expected to enter a recession this year as the political crisis has disrupted economic activity.
Government cuts to the pension system in April 2018 triggered nationwide protests that continue to be violently suppressed by the police and pro-government paramilitaries. More than 300 people are estimated to have been killed and thousands injured, but President Daniel Ortega has refused protesters’ demands to step down. The intensity of the protests has dropped in recent weeks, but the risk of political instability will remain high. There have been incidents of opportunistic looting in the capital, Managua, but in most cases commercial operations have not been directly targeted.
Shortly after protests began, the government scrapped the controversial social security reforms. However, the demonstrations have continued due to growing frustration with the rule of Ortega, who has won three consecutive elections after removing term limits. The violent crackdown may give rise to a growing number of anti-government armed groups, particularly in the north of the country. Cargo may face disruption across Nicaragua due to the on-going protests but roadblocks have been dismantled by security forces.
Civil unrest has undermined Nicaragua’s economic outlook, and real GDP is expected to contract by 0.9% in 2018. Declining economic activity will have a particularly adverse impact on the tourism, agricultural and construction sectors, and the current account deficit is expected to widen from 5% of GDP last year to 8% in 2018. Real GDP growth is forecasted to rebound to 3.9% in 2019 as the scale of the protests declines, but the risk of further political unrest will weigh on investor sentiment.
Bank deposits fell by over 9% between the start of the year and the end of July 2018, and a further deterioration in the security situation could accelerate this trend. An increase in capital flight would make it difficult for Nicaragua to maintain its crawling-peg exchange rate and raise the risk that capital controls are imposed. Government debt is not especially high, at 41.8% of GDP in 2017, but is expected to rise steadily to 60% by 2027 due to outlays of social security, infrastructure and higher interest payments.
US foreign policy poses a risk to the prospect of an economic rebound next year. The US has long threatened to impose the Nicaraguan Investment Conditionality Act (NICA), which would make multilateral loans to Nicaragua conditional on democratic reforms. NICA is unlikely to be passed by the US Senate before 2019, but would block aid amounting to around 3% of GDP. This would have a particularly negative impact on the infrastructure sector, which has relied on financing from the Inter-American Development Bank. However, Nicaragua could seek financial assistance from alternative sources such as Russia.
Ortega has adopted a largely pragmatic approach towards foreign investment, and passed a law on public-private partnerships in October 2016 that seeks to attract investment in key sectors such as utilities and infrastructure. However, he has also eroded Nicaragua’s institutional independence by concentrating power in the executive.
Legal and regulatory risks are high. Changes to penal procedures in July 2017 granted judges the right to hear a range of criminal cases rather than go before a jury, increasing concerns about political interference in commercial disputes. A number of business groups have announced their support for anti-government protests, and companies deemed critical of the current administration may be audited or fined on regulatory grounds.
†† A number of markets are unwilling to write these risks due to on-going political unrest.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Nicaragua, Ethiopia, Mongolia and Kazakhstan all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org.
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