Nicaragua: President Ortega’s fourth presidential term starts with fresh sanctions from the US and the EU

Event

President Daniel Ortega was sworn into office for his fourth consecutive term on 10 January. On that same day, the United States and the European Union imposed sanctions on Nicaraguan officials. The USA, Canada and the EU state that the presidential elections in November were neither free nor fair. In the run-up to the elections, most opposition figures had been disqualified or imprisoned. Moreover, election observers from the EU and the Organisation of American States were not allowed to scrutinise November's poll, and journalists were barred from entering Nicaragua.

Impact

Ortega was in power between 1979 and 1990 and returned as president in 2007. He has been increasing his control on key state institutions and the economy ever since, especially after cracking down on nationwide anti-government protests in 2018. Since these protests, international pressure has been on the rise, with new sanctions regularly being imposed and limitations introduced on multilateral loans to Nicaragua, making it difficult for the country to borrow. Nevertheless, Ortega is likely to remain in control as he currently retains the support of the army. Hence, further sanctions are likely in the coming year.

Rising international pressure is hurting the country’s economic growth (forecasted at 3.5% in 2022) through depressed foreign investment. Moreover, risks are increasing in the financial sector, which could further hinder investments and hurt remittances – an important source of private consumption. Last summer, the government introduced bank legislation in order to circumvent international sanctions. For example, sanctioned officials are allowed to force banks to open accounts, while, if this happens, banks could lose their international bank relations. As a consequence of the new legislation and the increasing amount of sanctions, international banks could become reluctant to maintain relations with local counterparties which in turn could lead to payment delays. Therefore, it might become difficult for Nicaraguans abroad to send remittances back home.

Under the pressure of sanctions, Nicaragua has been shifting its alliances. The Central American country established full diplomatic relations with mainland China and severed its ties with Taiwan in December 2021. The move is designed to increase investments and aid from China, but also to increase Nicaragua’s agriculture exports towards China, and to counterbalance the pressure from the West. This tactic has already proven useful as illustrated by the delivery of Chinese Covid-19 vaccines in December – a couple of days after Nicaragua severed its relation with Taiwan. In total, this delivery could vaccinate 15% of the population. President Ortega has also been improving his relations with Russia to increase funding and investments, but also to have an ally in the UN – besides China – to avoid UN sanctions. Nevertheless, the US still has a lot of bargaining power as Nicaragua’s biggest trading partner. If the US would suspend Nicaragua’s inclusion in the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) – which in the short term remains unlikely – that could harm about a fifth of total current account revenues with higher tariffs. Furthermore, private transfers account for about a quarter of Nicaragua’s current account revenues, and they are mainly coming from the US. 

Nicaragua’s short-term political risk – representing the country’s liquidity – is in category 5/7, an elevated-risk category. The country has an adequate level of foreign exchange reserves while its short-term external debt is also manageable. However, its refinancing options on the financial markets are rather limited and expensive. Credendo’s MLT political risk is in category 6/7. The biggest downside risks are the possibility of violent unrest, imposition of sanctions that harm international bank relations, foreign-investor risk aversion that could put pressure on Nicaragua’s already elevated external debt (estimated at almost 96% of GDP at the end of 2020) and climate change-related risks (e.g. fiercer hurricanes and droughts). 

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com