Fitch Ratings reduced its risk rating for Nicaragua from “B with a negative outlook” to “B- with a negative outlook”, attributing it to a “greater than estimated economic contraction, a growing fiscal deficit, weaker external liquidity and a greater risk of internal and external financial restrictions “.
This is the second time in the year that Fitch Ratings has reviewed the Nicaraguan risk rating, the first was in June, when it maintained its “B” rating, but revised its outlook from “stable” to “negative” downward.
The rating agency recognizes that although violence is lower today, instability persists and the country is exposed to other kinds of pressure, both internal and external.
“Although the level of violence has decreased since the last Fitch review in June, the risk of political instability remains high and undermines the prospects of an economic recovery. The dialogue between the government and the opposition made little progress, and the government is subject to increasing international pressure on its handling of the recent political protests,” the agency’s analysis indicates.
Economic factors
The rating agency reiterates that in 2018 and 2019, the Nicaraguan economy will contract 4% and 1%, respectively. In addition, the country’s ties with the external sector have been affected by the crisis, especially investment and tourism.
Foreign Direct Investment (FDI) has been visibly affected, according to figures from Fitch Ratings, which indicate that in the first six months of the year it was reduced by US $ 126 million, that is, a year-on-year fall of 23%.
Seven months on, the economic crisis continues
The net FDI for this year will reach only 3.2% of the Gross Domestic Product (GDP), compared to 5.9% in 2017. That is to say, the agency considers that only US $ 428.16 million will be reached this year.
Public sector
The economic contraction has also put pressure on Nicaragua’s public finances. The revenues of the Central Government in terms of GDP will be reduced 1.6 percentage points in 2018, the losses are associated with “less economic activity and weaker tax compliance”.
The deficit of the Social Security Institute (INSS) continues to increase, says Fitch, and this factor was pointed out by the International Monetary Fund (IMF) as one of the risks for the country’s economy.
Financing
The flexibility to finance higher deficits is “relatively limited,” and indebtedness is “increasingly expensive,” Fitch said. For the firm, the change in the financing strategy for the public deficit is also noticeable, since focusing on external sources such as loans now passes to bond issuance.
“The financing is changing from external subsidies and concessional loans to local capital markets. It is not clear how much new issuance the local market of shallow capital can absorb,” the company said.
