New York, March 30, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Nicaragua's B3 long-term local and foreign currency issuer ratings. The outlook on Nicaragua remains stable.
The decision to affirm Nicaragua's B3 ratings reflects the following considerations:
1. Nicaragua's economy has quickly recovered with limited evidence of economic scarring
2. Despite multiple shocks, a moderate debt burden and high debt affordability are supported by a tight fiscal stance
3. Risks from sanctions remain, but official external financing has continued to flow
The stable outlook reflects Moody's view that upside and downside risks to Nicaragua's credit profile remain balanced. Moody's believes that the sovereign's strong adjustment capacity will continue to guide fiscal policymaking as the economy returns to a steadier equilibrium following the volatility from the multiple economic shocks and the subsequent strong recovery. Nevertheless, risks from lingering social tensions and the possibility of international sanctions persist. Recovering foreign direct investment inflows will support moderate economic growth and help to contain external liquidity risks associated with recurrent current account deficits.
Concurrent to today's rating action, Nicaragua's local-currency country ceiling remains unchanged at B1. The two-notch between the local-currency ceiling and the sovereign rating mainly balances a relatively limited government footprint in the economy with weak institutions and governance strength, elevated domestic political risks and low-to-moderate external imbalances. The foreign-currency ceiling remains unchanged at B2. The one-notch gap between the foreign-currency ceiling and the local-currency ceiling mainly reflects the very low risk of potential transfer and convertibility controls in the event of a default despite the high level of domestic dollarization.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE RATINGS AT B3
FIRST DRIVER: NICARAGUA'S ECONOMY HAS QUICKLY RECOVERED WITH LIMITED EVIDENCE OF ECONOMIC SCARRING
Moody's estimates that Nicaragua's economy bounced back 10.3% in 2021 following three years of contraction in 2018-20, with a broad-based recovery driven by strong family remittances that supported consumption, favorable export growth, and more importantly, a marked recovery in foreign direct investment (FDI) flows in 2021. FDI inflows fell in 2018-19 during the period of socio-political unrest and remained low throughout 2020 due to the global pandemic. A strong increase in FDI supported a recovery of private investment and may likely support future growth prospects.
In spite of ongoing uncertainty about the sustainable level of post-pandemic growth, the authorities estimate potential growth to be close to 4%, in contrast to 2018-19 when they estimated a rate below 3% owing to the lower rate of capital accumulation as a result of the socio-political crisis. Although investment has recovered quickly, labor participation rates, and that of formal employment as measured by the number of contributors to the social security system, have not yet recovered to their 2017 levels before the social protests began. Moody's forecasts that economic activity will expand 3.5% in 2022 and 3% in 2023. Despite lingering political tensions, limited evidence of economic scarring coupled with prospects of steady growth support Nicaragua's economic strength.
SECOND DRIVER: DESPITE MULTIPLE SHOCKS, A MODERATE DEBT BURDEN AND HIGH DEBT AFFORDABILITY ARE SUPPORTED BY A TIGHT FISCAL STANCE
The general government fiscal deficit narrowed to 1.6% in 2021 from 2.3% in 2020 reflecting a 22% increase in revenues. The authorities maintained a tight fiscal stance since 2018, underpinned by a 2019 reform package that raised tax revenues and contributions to the social security system. The measures underpinned fiscal consolidation efforts through the negative economic effects of the global pandemic and a climate shock from two successive hurricane impacts in November 2020. The authorities have signaled their commitment to gradually reducing the fiscal deficit to a level closer to 1% of GDP. Moody's forecasts that the general government deficit will narrow to 1.3% in 2022 with government debt declining to 46.2% in 2022 after peaking at 48.1% 2020, a moderate level compared to the 60.1% of GDP median for B-rated sovereigns.
Despite a commitment to low fiscal deficits, debt ratios are unlikely to return to 2017 levels and government debt remains highly dollarized. Even though Moody's expects government debt will continue to decline in the coming years, the share of foreign currency-denominated debt will remain relatively high at some 85% in 2022-24. The interest burden will remain low with a ratio of interest payments-to-government revenue in the order of 4%, compared to the 11.1% median for B-rated sovereigns in 2021, reflecting Nicaragua's high reliance on official multilateral and bilateral credit.
THIRD DRIVER: RISKS FROM SANCTIONS REMAIN BUT OFFICIAL EXTERNAL FINANCING HAS CONTINUED TO FLOW
International sanctions, including those introduced under the Nicaraguan Investment Conditionality Act (the NICA act), which became law in the US in December 2018, have not significantly reduced multilateral financing flows to Nicaragua. Through 2021 the net flow of funds from key multilateral institutions has remained positive such that the stock of outstanding debt to all multilateral development banks has continued to increase.
Following the country's general election, on 10 November 2021, US President Joe Biden approved the Renacer Act that tightened US sanctions. Specifically, the law advocates for increased oversight of loans or financial or technical assistance from US-based entities, as well as visa-blocking sanctions for targeted Nicaraguan individuals. Although multilateral funding flows have not been materially affected by the latest sanctions, the risk of reduced access to official external credit remains. Should US-based multilateral lenders begin to curtail funding flows, the ability of other non-US based multilateral institutions to provide financing that fully substitutes the foregone lending could quickly reach its limits and would entail a strong fiscal adjustment that could complicate policymaking.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's view that upside and downside risks to Nicaragua's credit profile remain balanced. The government's will and ability to adjust will continue to guide fiscal policymaking. After a strong recovery, the economy will report steadier growth following the volatility resulting from multiple shocks, even as risks associated to lingering social tensions persist.
Although sanctions have not resulted in a material decline in multilateral financing flows, the risk that these funds could be curtailed remains latent. Should such a scenario materialize, Moody's expects the authorities will proactively adjust fiscal policy in order to assure a match between government financing requirements and funding sources.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Nicaragua's ESG Credit Impact Score is highly negative (CIS-4), reflecting a very highly negative governance issuer profile score, a high exposure to social risks, and a moderate exposure to environmental risk.
Nicaragua's exposure to environmental risks is moderately negative (E-3 issuer profile score). Nicaragua's geography is dominated by a region known as the Dry Corridor, characterized by recurrent drought and heavy precipitation events that lead to flooding and landslides. The steady rise in the frequency and severity of drought and other climate-related shocks poses a moderate threat to Nicaragua's agricultural sector, which employs nearly 30% of the country's population and accounts for about 15% of GDP.
Exposure to social risks is highly negative (S-4 issuer profile score). Social considerations have played a role in increasing political risk in the country. While Nicaragua does not experience gang-related violence as its neighbors in the Northern Triangle (Guatemala, Honduras and El Salvador), the country's domestic politics were embroiled in a national political conflagration in 2018-19 since the government's attempt at pension reform in April 2018, with violent protests disrupting economic activity. Although the protests have ceased, lingering socio-political tensions remain.
The influence of governance on Nicaragua's credit profile is very highly negative (G-5 issuer profile). The very weak assessment is a reflection of the sovereign's ongoing challenges with respect to the weak rule of law and control of corruption, qualities that Moody's expects will persist over the medium term. These challenges more than offset the benefits from a decade-long record of prudent monetary and fiscal policy, which was partly cultivated through strong relationships with the IMF and multilateral creditors.
GDP per capita (PPP basis, US$): 5,679 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -2% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -2.3% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 5.9% (2020 Actual) (also known as External Balance)
External debt/GDP: 90.4 (2020 Actual)
Economic resiliency: b3
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 25 March 2022, a rating committee was called to discuss the rating of the Nicaragua, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Progress on structural reforms that support economic strength through an improvement in the business climate and a continued recovery in formal employment, could lead to an upgrade. A lifting of international sanctions that ensures ample access to multilateral and official funding, would also enhance creditworthiness.
WHAT COULD CHANGE THE RATINGS DOWN
Downward pressure on the sovereign's credit profile would emerge if fiscal metrics were to deteriorate significantly, or if multilateral financing flows were to be materially reduced, increasing the government's liquidity risk. A prolonged period of weak economic activity as a result of political uncertainty or social unrest would materially weaken Nicaragua's credit profile and could lead to a downgrade.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Jaime Reusche
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
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U.S.A.
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Client Service: 1 212 553 1653
Alejandro Olivo Villa
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
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