Fitch Revises Nicaragua's Outlook to Stable; Affirms Foreign Currency IDR at 'B-'

By Guy José Bendaña-Guerrero & Asociados

The stabilization of the outlook reflects greater than expected fiscal resilience, early signs of economic recovery from a lengthy period of economic contraction, and pandemic-related multilateral disbursements that have eased near-term financing constraints. Nicaragua's ratings are constrained by the lowest World Bank Governance Indicators average score in Fitch-rated Americas, low income per capita, political stability risks and international sanctions that limit future external financing.

Greater availability of multilateral funding has eased constraints on government spending and financing. In 2020 the general government deficit increased to 1.8% of GDP from 0.3% a year prior; the deficit compares favorably with the 2020 'B' median of 7.2%. The deficit was driven by an 8% increase in central government expenditure while revenues were remarkably resilient, resulting in a central government deficit of 1% of GDP. The deficit of the social security institute (INSS), which has been a driver of general government deficits, reached 0.8% of GDP, an expansion of 0.2pp compared to 2019. Fitch projects that the INSS deficit will gradually grow to 1.4% of GDP by 2023 unless there is a structural reform that improves its actuarial position.

Fitch expects that the general government deficit will widen to 3.2% of GDP in 2021 and narrow to 2.7% by 2022. The wider deficit in 2021 is driven by an increase in expenditure of 16% at the central government level, the largest increase since 2015. Capital expenditure is expected to increase by 36% to 5.9% of GDP. Fitch expects that in 2021 revenues will grow by 10%, a rate not seen since 2017. Central government revenue grew by 20.8% year-on-year in 1Q21, pushed by stronger economic activity.

In 2020, multilateral and bilateral financial institutions disbursed USD829 million (6.7% of GDP) to the Nicaraguan public sector, a 52% increase with respect to the USD546 million average annual disbursement between 2017 and 2019. International multilateral institutions eased their lending requirements in response to the pandemic and to hurricanes Eta and Iota in November 2020. The biggest creditors were CABEI (USD321.6 million), IMF (USD186.8 million), IDB (USD150.2 million) and the World Bank (USD67.7 million).

Many of the loans signed by the government in 2020 are for multiyear programs. Fitch assumes that contracted loans will be disbursed and such disbursements will gradually fall to pre-pandemic levels by 2023. The 2018 NICA Act and other international sanctions may limit new external financing in the coming years, particularly from institutions where the U.S. has a large voting power.

Domestic borrowing continues to play a smaller role in financing, with the government borrowing domestically at high interest rates and maturities under five years. The cost of debt service increased to 3.8% of GDP in 2020 from 3.0% in 2017. High liquidity and subdued demand for corporate credit has supported demand for government bonds. In 2020 the central government sold a record USD195 million (1.5% of GDP) in local bonds. Of these bonds, 56% were payable in USD with a weighted average yield of 10.6% and maturity of 3.3 years; the remaining were in bonds payable in NIO with a weighted average yield of 9.9% and maturity of 4.0 years. Between January and May 2021 the government sold USD170 million in local bonds.

Central government increased deposits by 53% to NIO24.2 billion (5.6% of GDP) due to the record external disbursements and local issuance of debt in 2020. Fitch expects that central government deposits will decline in 2021 to finance the fiscal expansion.