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Economists Warn of ‘Spillover’ Effect

The U.S. Federal Reserve’s announcement last week of a possible economic recession could spell big troubles for Nicaragua, a country whose economy is intimately linked to that of the United States.

The anticipated recession, says Nicaraguan economist Adolfo Acevedo, would have a “strong impact” on Nicaragua’s economy, especially in the areas of exports and remittances sent back from the United States. The energy sector could also suffer as the dollar continues to weaken and oil prices climb.

Nicaragua’s energy sector, which is 80% dependent on foreign oil, is set to receive another blow in the coming weeks as two seasonal cane-burning energy plants get ready to go offline now that the sugarcane harvest is over – a situation that could lead to a renewal of the energy rationing blackouts, the government has warned.

Respected independent economist Néstor Avendaño says that Nicaragua, more than any other country in Central America, could be hit particularly hard by the spillover from a U.S. recession. And unlike previous economic downturns in the United States – such as the dot-com bubble burst in 2001, which didn’t have any real affect on the remittances – the approaching recession could take a heavy toll on the construction sector, which employs many Nicaraguans living in the United States.

Seventy-five percent of Nicaraguans say they have family members living abroad and 40% receive remittance money, mostly from the United States, according to a survey released last February by the firm M&R Consultants. The amount of remittance money sent to Nicaragua each year from the United States is around $657 million, according to the survey (NT, Feb. 8).

Avendaño noted that 90% of remittance money sent to Nicaragua is injected immediately into the local economy for consumer purchasing. So any decline in the amount of remittances will undoubtedly affect consumerism within the Nicaraguan economy, he said.

Nicaragua’s commercial relations could also suffer from a U.S. recession. Some 30% of all Nicaraguan exports go to the United States, so a recession there could mean less disposable income to purchase Nicaraguan products, Avendaño said.

But not all economists agree that a U.S. recession would affect Nicaraguan exports.

Alejandro Martínez Cuenca, the former Sandinista government’s Trade Minister in the 1980s and owner of cigar brand La Joya de Nicaragua, said that most of Nicaragua’s exports to the United States are basic food products – such as coffee, sugar, meat and fish – that wouldn’t necessarily be affected by a U.S. recession.

“Nicaragua is not a sophisticated exporter,” Martínez told The Nica Times this week. Martínez said he thinks the possibility of a U.S. recession is a concern, but does not present an “alarming” scenario for Nicaragua. He said the biggest concerns for Nicaragua would be in the area of remittances and in declining tourism from the United States.

“The problem would be if there is a psychological effect from the mortgage crisis and people want to stay at home and not travel to another country,” he said, hedging that possibility by saying that so far there’s been no indication here that that’s started to happen.

Martínez, who recently returned from the United States and does regular business there as one of Nicaragua’s largest tobacco exporters, said he’s not even convinced that there will be a recession there, and said that the recent measures by the Bush administration to re-inject cash back into the economy could help to spur consumerism until “other economic indicators recover.”

However, economist Avendaño said, the Sandinista government shouldn’t just sit around and hope for the best. The problem, he said, is that he doesn’t see the Ortega administration taking any appropriate steps to brace for harder times, such as by lowering interest rates.

“Does the government even have an economic team? I think not,” Avendaño charged. “This plane is without a pilot.”

The economist predicts that the economic downslide in the United States will start to really be felt here in Nicaragua within the next three months.

If the United States manages to fight off recession, Avendaño predicts, the Nicaraguan economy will grow at 4% this year, but will grow at only 3% if the recession hits.

For a country that represents only 5% of all Central America’s economic production, every point counts.



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