By Luke Bujarski
With President Daniel Ortega seeking a controversial third term in the upcoming November election, both the international community and the people of Nicaragua are closely monitoring this country’s economic progress, as a test to Ortega’s effectiveness and legitimacy as a national leader. In this analysis, we revisit Ortega’s presidency and what his political and economic policies could mean for investors in Nicaragua, and for Central America as a whole.
After a contraction in 2009, rising exports coupled with strong foreign direct investment (largely from Venezuela) in 2010 pulled Nicaragua back on track toward upward growth. Current data also suggest that progress on the economic front looks favorable for 2011. Despite recent gains, it still remains to be seen whether the Ortega administration can continue to push for the kinds of economic policies necessary to affirm its place as a truly viable and stable emerging market.
If so, this will be good news for the country, as well as for the region. If not, then the Sandinista move to reform the Constitution as a way to open the door for Ortega to run a second consecutive term, will probably come back to bite them in 2015. Likewise, it could further destabilize Central America’s economic progress.
Second Term in Office
Overall, Ortega’s pro-business track record points to an administration committed to growing Nicaragua’s economic base through increased foreign investment and exports. According to Javier Chamorro of ProNicaragua, the country’s main investment promotion agency, “our leadership is working on multiple fronts to steer the country towards a better economic future for its 5.8 million inhabitants.” This is reflected in strong growth in foreign direct investment (FDI), a spike in manufacturing and agricultural exports through free trade commitments including the Central America Free Trade Agreement (CAFTA), the opening of a new investment and trade office in China, along with a scattering of social and labor market initiatives that should help investors better predict the cost of doing business in Nicaragua.
2010 was a particularly good year for FDI in Nicaragua, with a total of 38 countries investing $508 million. This included energy projects surpassing US$300 million, with the construction of two wind projects (EOLO and Blue Power and Energy), a hydroelectric project (Tumarin), and the completion of a geothermal energy project (POLARIS). Substantial investments in telecoms were also made by Claro and Telefonica, as well as Russia’s Yota, jumping in to compete on broadband and fixed line services. Likewise, Mexico’s SuKarne recently inaugurated its $100 million intensive cattle fattening project, which should reflect well on the 2011 FDI balance sheet. Canadian mining giant B2Gold Corp also announced plans to expand its La Libertad gold mine half a kilometer westward, after positive drill test results and high Q1 profits.
Exports mainly in agriculture and light manufacturing of garments and miscellaneous automotive parts also jumped by 74 percent since Ortega came into office in 2007, amounting to roughly 3.3 billion by 2010. And, while the vast majority ended up in the United States, roughly seven percent went to Venezuela as a direct result of unilateral trade agreements between the Ortega and Chavez administrations.
Tourism also boosted economic progress, making up ten percent of total FDI attracted in 2010 ($51 million). Expatriates and eco-travelers will most likely continue frequenting Nicaragua’s Caribbean and Pacific shores, with CBS’s hit show Survivor Nicaragua filmed on San Juan del Sur for its second consecutive season in 2011.
Nicaragua is among the US Drug Enforcement Agency’s (DEA) closest partners when it comes to seizure of cocaine shipments.
Tied to FDI
Assuming Ortega wins in November, these positive economic signs could translate into additional domestic policies focused on improving business conditions, as a response to concerns from international groups like the Heritage Foundation over lax property rights laws, financial freedom, social and economic alignment with Venezuela, and the spillover of drug cartels moving into Central America from Mexico.
Relations with Venezuela and other regimes, namely Iran, have perhaps caused the biggest stain on Nicaragua’s image to US foreign investors. However, fears of Nicaragua taking a sharp turn to the left as a political power play is probably unwarranted. That’s because the country’s economy (hence politicians if they want to get reelected) is highly dependent on its success in attracting FDI and ability to export its wares to international markets. And, unlike oil-rich Venezuela, Nicaragua as a small and relatively poor country has few bargaining chips when it comes to foreign policy.
This leaves the question of Ortega’s legitimacy as a third-term candidate. In 2009, Nicaragua’s Supreme Court cleared the way for Ortega to run for a second consecutive term in 2011, even though the Constitution states that only the National Assembly has the right to reform the Constitution. In a 2010 print addition article, the Economist magazine when so far as to call the Ortega bid for reelection “unconstitutional”. While this kind of political sidestepping should be subject to scrutiny, local pro-business advocates see this as an opportunity to stay the course on steady economic progress.
According to Chamorro, “a change in administration has the potential to negatively affect the country’s business climate”. First, it creates an air of uncertainty in the new administration’s approach to economic development. Second, the learning curb for a new administration can leave investors hanging, as investment projects work their way through the political system. In other words, while staying the course may not justify the rewriting of the Constitution, it could have a stabilizing effect on the economy, particularly when it comes to flows of foreign capital.
Likewise, the Ortega administration could prove to be a valuable ally in Central America’s war with drug cartels steadily moving southward from Mexico. Ironically, Nicaragua is among the US Drug Enforcement Agency’s (DEA) closest partners when it comes to seizure of cocaine shipments. Since 2007, the US granted over 37 million dollars to Nicaragua toward the cause, hailing it “one of Central America’s most effective agencies in narcotics interdictions.” In effect, Nicaragua could play a crucial role in warding off organized crime, and as a buffer between its richer cousins to the south – i.e. Costa Rica and Panama, and Central America’s Northern Triangle (Guatemala, Honduras, and El Salvador) where much of the drug activity has concentrated.
Ultimately, as a small, relatively poor country, Nicaragua’s economic successes will depend heavily on its relationship with the rest of the world. This should squeeze the Ortega Administration and the Sandinistas to take proactive steps in securing the country’s economic progress. However, if growth once again begins to slip, this could open the way toward uncertain political change and continued growth in the informal economy. Without a doubt, country watchdogs and foreign investors will pay increasingly closer attention to Ortega’s economic policies as November’s election comes into view.