Nicaragua Country Forecast

Policies Will Be Guided by Pragmatism

Daniel Ortega and the FSLN won landslide victories at presidential and legislative elections held on November 6. The president won slightly less than 62.5% of the vote, more than twice the vote share of his closest competitor, and the FSLN won 62 of the elected seats in the National Assembly, giving it a two-thirds majority in the 92-member body.
The opposition claims that the vote was marred by widespread fraud, a position supported by international monitors. While it is highly doubtful that fraud was so widespread as to affect the outcome of the presidential election, the legitimacy of the FSLN’s legislative supermajority is suspect. As such, the manner in which Ortega employs his legislative power will probably determine whether suspicion that it was fraudulently obtained becomes a source of political instability—or diplomatic difficulties—down the road.
The magnitude of Ortega’s victory has prompted warnings from some quarters that the Nicaraguan leader will take his country the path of radical socialism, in the manner of Venezuela’s Hugo Chavez, with whom Ortega has established a close alliance. But Ortega cannot follow Venezuela’s lead, for the simple reason that Nicaragua is not blessed with the abundance of natural resources that has enabled Chavez to maintain a substantial core of support even as his leftist and nationalist policies have wreaked havoc with the economy.
In fact, Ortega has made a conscious effort to distance himself from his Marxist past. His current term has been marked by much controversy, but since returning to the presidency in 2007, Ortega’s actions have generally reflected an acknowledgment that Nicaragua’s economic health depends on attracting foreign investment, creating a supportive climate for private-sector activity, and maintaining good relations with key trade partners.
Chavez’s cancer diagnosis has thrown a cloud of doubt over the Venezuelan leader’s political future, and the recent data out of Caracas points to fiscal strains that could threaten the flow of financial assistance from Venezuela. The Ortega administration’s stepped up efforts to woo major international investors suggests that the president is uncomfortable with the uncertainty, and wants a fall-back plan in place just in case.
Incentives offered by the government, including generous long-term tax breaks, and attractive wage levels will encourage some investors to give Nicaragua a chance, particularly companies whose profitability is especially sensitive to labor costs. A welcoming attitude from Ortega’s government may also attract investors seeking easier access to the US market, but are deterred by the security threat stemming from drug-related violence elsewhere in Central America.
Persistent Impediments to Investment
However, significant obstacles to boosting investment will persist, including Nicaragua’s notoriously poor infrastructure. In addition, the executive branch’s obvious control over the judiciary will deservedly give some investors pause. So, too, will the high expectations of the Nicaraguan electorate that the government will maintain its current high levels of social spending, which create a risk that Ortega will use his control over tax policy to extract more income from the private sector if developments in Venezuela result in a disruption to financial support from that source.
Moreover, his professed desire to attract higher levels of foreign investment and assurances of his respect for private property notwithstanding, Ortega has displayed an inclination to adopt a populist posture with foreign firms when it is in his political interest to do so.
In any case, chronic problems in the important agricultural sector, which accounts for nearly one-third of GDP, will limit the prospects for the achievement of significant economic improvement during the forecast period, and real GDP growth is forecast to average 3.3% per year through 2016. Ortega’s apparent commitment to maintaining fiscal discipline will mitigate the risk of inflation, but given the strong possibility of disruptions to international flows of financial assistance, consumer prices will be prone to volatility, and inflation is forecast to average 7.2% annually over the five-year forecast period.

Economic Forecasts for the Three Alternative Regimes

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