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Spillover Expected From U.S. Crisis

MANAGUA – In an increasingly globalized economy, the financial crisis in the United States is like an earthquake that could trigger a tsunami in Nicaragua and the rest of Central America, according to economic experts consulted this week by The Nica Times.

But at the same time, analysts predict, the global nature of the crisis could be felt less here than in other parts of the world, presenting Nicaragua with some unique opportunities for growth if the country manages the situation intelligently.

Nicaragua’s macroeconomic indicators for the year to date show that remittances and exports are still on the rise, up 16 percent and 34 percent, respectively. Yet despite the robust vital signs, the financial crisis in the United States is like a storm gathering on Nicaragua’s horizon, analysts warn.

“The bottom line is that when the United States sneezes, Nicaragua catches a cold. So when the United States catches the flu, Nicaragua is going to get it even worse,” said lawmaker Francisco Aguirre, head of the National Assembly’s Economic, Production and Budget Commission.

“We are not some island with a great economy; we are on the same planet Earth that is being shaken by this financial crisis,” Aguirre added.

The economic analyst said that once the financialmarket problem converts into a real economic problem in the region, Nicaragua’s trade partners will start importing fewer Nicaraguan commodities and the national economy will suffer. And as the U.S. housing market crisis puts a serious damper on the construction sector, more Nicaraguans living and working in the United States will have a harder time sending back remittance money, which provides a vital cash-injection into the Nicaraguan economy.

“Sooner of later, this is going to translate into a reduction in remittances,” Aguirre said. “Trust me, it will happen.”

Economist Silvio de Franco, a former president of Nicaragua’s Central Bank, said the strongest effects might not be felt until next year since most of country’s exports are sold on the future commodities market and remittances “have their own life cycle.” But the effects will be felt sooner or later, he said.

“Normally when there is a certain recession in the United States, people consume less meat, and the prices of other commodities, such as corn, go down,” de Franco said. “So we’ll see the effects.”

The coffee sector also raised concerns this week after the export price of coffee has fallen by 20 percent since August.

Still, de Franco said, the real economic effects in Nicaragua will most likely be “felt more next year than this year.”

James Roberts, a financial analyst with the Heritage Foundation’s Center for International Trade and Economics, a conservative U.S. think tank, told The Nica Times this week that he thinks the spillover in Latin America from the U.S. financial crisis “will be difficult and substantial,” especially pertaining to the drop in commodities prices and the loss of export markets.

“It hasn’t been felt yet, but it will be within a matter of months,” he predicted.

What Goes Up…

The flipside of the financial crisis in the United States is that it has had a plummeting effect on international oil prices, which have fallen by more than 40 percent from their historic highs several months ago.

In an interview with The Nica Times last May, Aguirre of the Economic Commission predicted that Nicaragua’s economy, which was on the brink of disaster as oil prices soared past $130 a barrel, “could be saved” by a “downturn in the economy of the major oil consumers” (NT, May 30).

While no one is celebrating the U.S. financial crisis, it did have the anticipated affect of sinking oil prices, which at press time had fallen to around $75 a barrel, a 52-week low.

Economists say the falling oil costs will help offset the effects of the financial crisis here; already this week the prices of super and diesel were reduced slightly at the pump.

But the drop in oil costs is also affecting Venezuela’s oil revenues and, therefore, could have a negative effect on that country’s commitments to help Nicaragua with infrastructure and social aid projects, said economist Mario Arana, former Central Bank president and Finance Minister.

“Nicaragua will benefit from the fall of petroleum costs, but could lose a source of cooperation associated with Venezuela,” Arana said. “There could be restrictions in cooperation.”

So while President Daniel Ortega famously said last week that the financial crisis was “God punishing the United States,” falling oil prices could have a secondary effect of Venezuelan President Hugo Chávez punishing Nicaragua.

Yet because the nature of Venezuelan aid for Nicaragua has never been very clear to begin with, it’s equally unclear what will happen next.

Banks Remain Stable

Economists have noted that, at least in the immediate term, Nicaragua and Central America appear to be less affected by the financial crisis than other regions of the world where economies and financial markets are tethered tightly to Wall Street.

Even within Latin America, de Franco said, the crisis won’t be as severe in “a small country like Nicaragua” as it will in larger economies in South America, such as Brazil and Paraguay.

Plus, Aguirre noted, Nicaragua’s own financial system, which went through a financial crisis eight years ago, appears to be weathering the latest storm. That has to do in part with the fact that Nicaragua adopted some modern banking laws following the 2000-2001 collapse of Nicaragua’s banking system, which led to government’s own bailout plan – a bond program famously known as the “Cenis.”

Central Bank President Antenor Rosales reported last week that Nicaragua’s foreign reserves remain stable and unaffected by the recent collapse of prominent U.S. financial firms. Nicaragua’s financial system also remains stable, he said, thanks in part to new banking laws that prohibit financial institutions here from investing in potentially risky and unrelated sectors of the economy.

Aguirre credits the banking policies – including a 100 percent insurance coverage for bank deposits – for helping to strengthen the country’s financial system and hopefully prevent any future run on the banks here.

“What the United States is experiencing has already been lived on a much smaller scale in Chile, at the end of the last century, and in Nicaragua in 2000,” Aguirre said. “We already had to take that bitter pill, but now the Nicaraguan banks are in a stronger position than the U.S. banks.”

Silver Lining

Despite the gloomy and uncertain scenario facing Nicaragua for the months to come, economists say there may be silver lining if the country plays its cards right.

De Franco said Nicaragua could turn the global crisis into a Nicaraguan “tourism boom” if it promotes itself as a nearshore, inexpensive destination for travelers.

“Europe is going to become very expensive,” he noted. “Nicaragua is much closer (to the United States) and has a tourism offering that can be very attractive. There will always be people who travel, and Nicaragua is going to be much less expensive than going to Europe or even to Mexico.”

A potential increase in tourism could also bring an increase in real estate activity here, as the baby boomer generation looks for new alternative investment opportunities or new markets where their dollars can go further, especially if they are uncertain about the stability of their stock-heavy retirement pensions.

Former Central Bank President Arana agreed that Nicaragua can turn crisis into opportunity if the country is careful about “maintaining its image for investment.”

“In a certain way, Central America is seen as less attached to the crisis than other parts of the world, so we have the possibility of (promoting the image) of a region that is more stable, less risky and with more potential than other parts of the world,” he told The Nica Times. “In Central America, and in Nicaragua, there is an important opportunity that we shouldn’t minimize.

Just the opposite, we need to take advantage of this perception that exists; it’s a positive factor.”

Now more than ever, Arana stressed, the government needs to do all it can to promote itself positively and aggressively as a country that is attractive to investors.



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