Standard & Poor's rates Nicaragua with B+

  • Friday, February 12, 2016
The sovereign rating B + with stable outlook is based on the "economic performance, low debt burden of the government, political stability and partnership between government and the private sector through dialogue".
From a statement issued by the Central Bank of Nicaragua:

The Republic of Nicaragua has low per capita income, monetary policy rigidities, and vulnerability to external shocks. Nicaragua also has low general government debt and debt-service burdens, and political stability.

We are assigning 'B+' long-term and 'B' short-term local and foreign currency sovereign credit ratings to Nicaragua.

The outlook is stable, reflecting our expectation that Nicaragua will maintain a favorable debt profile due to moderate fiscal deficits, good access to official funding on concessional terms, and steady GDP growth above 4%.

RATING ACTION
On Feb. 11, 2016, Standard & Poor's Ratings Services assigned its 'B+' long-term local and foreign currency sovereign credit ratings to the Republic of Nicaragua. The outlook on the long-term ratings is stable. We also assigned 'B' short-term local and foreign currency sovereign credit ratings.

We also assigned a transfer and convertibility (T&C) assessment of 'BB-' to Nicaragua.


RATIONALE
Nicaragua's low per capita income, monetary policy rigidities, and vulnerability to external shocks constrain the ratings. The low general government debt and debt-service burdens, and the country's political stability support the ratings.

We estimate GDP per capita will be just above $2,000 in 2016 despite steady economic growth in recent years. GDP growth per capita averaged 2.6% during the last decade, similar to the growth rate of other countries we rate with a similar level of economic development. Over the next three years, trend GDP growth is likely to be just above 4%, assuming stable growth in the U.S.

economy and broad continuity in domestic economic policies. We project per capita GDP growth to average 3.2% over the next three years. However, the country is vulnerable to commodity price volatility and to natural disasters.

The combination of a crawling peg exchange rate, a high level of dollarization, and a small domestic capital market limits the effectiveness of monetary policy. The exchange rate is expected to depreciate 5% annually against the U.S. dollar, contributing to an average inflation rate likely around 7% during 2016-2019. The level of dollarization of the financial system is high. Dollar deposits account for 75% of total deposits, while 91% of all loans are in dollars.

Nicaragua has a low debt burden and favorable debt profile thanks to debt relief, modest fiscal deficits, and stable economic performance in recent years. We expect that general government debt (which includes the central government, the central bank, and the city of Managua) will increase on average by 3.6% of GDP annually during 2016-2019 due to both moderate fiscal deficits and steady planned depreciation of the currency. We project net general government debt to be 34% of GDP this year and to remain broadly stable in 2017-2019. Moreover, interest payments on the debt are projected to remain at less than 5% of general government revenues.

However, the country's shortfall in basic services and infrastructure is likely to continue to constrain fiscal flexibility. All of the general government debt is denominated in foreign currency or indexed to a foreign currency, which poses a potential vulnerability to unexpected changes in the exchange rate.

Nicaragua's political stability and its political consensus on pragmatic economic policies, as well as its low crime rate compared with other Latin American countries, should sustain private-sector investment in the coming three years. The success of anticrime policies has largely insulated the country from the drug-related violence common throughout Central America and Mexico and has facilitated private investment and tourism. The government and the private sector have established formal policy cooperation through social dialogue and official mechanisms for consultation.

We expect broad continuity in economic policies after the November 2016 national elections. However, a weak system of checks and balances restricts institutional and governance effectiveness in Nicaragua. Moreover, although the government has made important strides in recent years in improving the collection of economic data and is working to address the issue with the technical assistance of the International Monetary Fund, shortcomings in data on the country's balance of payments reduce transparency.

We expect that Nicaragua will be able to manage a potential sudden loss of funding from Venezuela through its PetroCaribe program. Such inflows have diminished in recent years, along with low oil prices. A sudden loss of Venezuelan financing could lead the government to begin paying directly through its budget for some of the quasifiscal social spending currently undertaken by other nongovernment companies under the PetroCaribe program.

Under such a scenario, we expect that the government will take additional fiscal measures to contain the negative impact of such spending on its fiscal deficit. All debt owed under the PetroCaribe program is classified as private-sector debt and does not have a sovereign guarantee.

We expect gross external financing needs (current account payments, short-term debt, plus all other debt maturing within a year) to average 100% of current account receipts (CARs) and usable reserves (official reserves less required reserves for foreign currency bank deposits by residents) for 2016-2019. We also project that narrow net external debt (all external debt less foreign exchange reserves and external liquid assets held by the rest of the public sector and the financial sector) will be 103% of CARs in 2016.

We estimate that contingent liabilities are limited, according to our criteria. Total banking-sector assets as a share of GDP are estimated at 56% in 2015. We believe that contingent liabilities from public-sector enterprises are also limited.

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