How the Nicaraguan crisis has impacted businesses in Central America

Multinationals in Nicaragua have been caught in the middle of a devastating political and economic crisis with no end in sight. The conditions leading to the social uprising that began in April have been mounting over time as President Daniel Ortega’s rule has grown increasingly authoritarian, weakening and undermining democratic institutions while cementing a monopoly to power. This destabilized the nation, claiming hundreds of casualties, and paralyzing livelihoods and businesses as a harsh recession ensues. Consumption and investment have dwindled, while the government’s fiscal position deteriorates—prompting international organizations such as the IMF to revise GDP forecasts downwards to -4% for 2018. This economic collapse has rattled all industries and fueled immense uncertainty and challenges in the operating environment moving forward.

Here is how the crisis has affected the economic landscape and distinct industries:

  • The financial sector is being run dry: As the political crisis continues to raise fears, depositors have rushed to withdraw their funds from the private banking system. By October, it was estimated that nearly US$ 1 billion had been withdrawn by individuals since the crisis ensued, which in turn forced banks to tighten lending to maintain liquidity. This made accessing credit for businesses increasingly difficult, and many that relied on financing have been forced into bankruptcy or serious cost cutting initiatives—often by reducing headcount. Inevitably, these tightening credit conditions are further fueling the downturn.
  • Tourism, hotel, restaurant, and entertainment industries have plummeted: As expected, the hospitality industry has been devasted due to heightened security perceptions and consumer behavior shifts. Nicaragua’s reputation as the safest Central American country has now been tainted with violence—thwarting tourism flows. Even if a political resolution was on the horizon, the damage that has been done to the once thriving tourism industry will take many years to restore. Numerous businesses in this sector have shutdown laying off tens of thousands of workers, while airlines reduced or all-out cancelled flights to the nation. As the crisis evolves, local and international demand for hospitality services will remain depressed, further fueling this sector’s decline and straining businesses’ ability to weather through the turmoil.
  • Investments have been put on hold and industrial production has tumbled: Facing growing uncertainty over the future of Nicaragua’s political and economic landscape, investors have taken a wait-and-see approach, suspending substantial production and current investments. This has particularly shocked the construction industry while industrial output has sharply decelerated. Further, supply chains continue to be disrupted as businesses halt production limiting the availability of needed inputs. Investment—especially from foreigners—and industrial production are not expected to recover until businesses have a clearer vision as to whether Ortega’s regime will succeed in holding onto power until the 2021 elections, and perhaps thereafter; or whether mounting social and international pressure will force an early vote.
  • Consumer demand shifted to basic staples and utilities: In aims to weather the downturn businesses have had to lay off hundreds of thousands of workers, and significantly cut wages and hours of operation. As a result, Nicaraguans’ purchasing power has been severely eroded forcing consumers to prioritize necessities. Businesses focused on providing basic staples and utilities have been relatively more resilient, but even those providing basic services such as electricity have already begun to factor in significant payment delays in coming years as individuals struggle to make ends meet. Meanwhile, the retail industry has seen sales crumble due to these reshaped consumer preferences, which allude to further imminent bankruptcies.
  • Exporting sectors have muddled through: The businesses that have remained the most resilient throughout the crisis, not surprisingly, are those that largely rely on external demand for their products. Mining and agricultural exports have continued to flow out of the nation at modest levels. Earlier disruptions stemming from protests that barricaded roads and blocked transport routes have faded following aggressive government crackdowns. This has allowed the flow of goods in Central America to effectively normalize. However, other disruptions are still present such as private business land grabs by government supporters that generate vast risks to operations.

To monitor the evolution or prospects for a resolution to the crisis, MNCs should track the following factors:

  • Support of armed forces: So long as Ortega’s regime continues to benefit from police and military backing, it becomes more likely that he will be able to cling to power
  • International sanctions: The US Congress is expected to pass more sanctions targeting Nicaraguan government officials while placing stricter conditions on multilateral and bilateral loans to the nation. The financial pressure that this creates for the regime—especially if other nations follow suit—can strain the nation’s foreign reserves and embolden the drive towards an early election
  • Social unrest: As the government violently cracks down on activists and arrests protestors, the opposition’s momentum and unity should be tracked as ongoing fear and repression may restrain the opposition’s ability to mobilize and mandate a political transition
  • Currency controls: The Central Bank has begun to show signs of exerting greater control over financial markets and currency exchanges, which will put downward pressure on the Córdoba, and as this progresses it will deter investment amid heightened perceived risks
  • Migration flow: Businesses should anticipate that the migration outflow from Nicaragua will continue as thousands flee the crisis, which will hold long-term implications for growth depending on the magnitude

FSG will continue to track key developments in Nicaragua as the economic and political crisis evolves to discern the effects on the macroeconomic and business landscape. For more in-depth briefings FSG clients can contact their Client Services Director.

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