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Rating Action:

Moody's changes outlook on Nicaragua's B2 rating to positive from stable; rating affirmed

20 Jul 2017

New York, July 20, 2017 -- Moody's Investors Service has today affirmed the government of Nicaragua's B2 foreign and local currency issuer ratings and changed the outlook to positive from stable.

RATINGS RATIONALE

Two key drivers underpin the positive outlook:

1) Continued fiscal stability and favorable economic prospects relative to peers, despite a significant decline in financial flows from Venezuela

2) Moody's expectation that authorities' macroeconomic policies will mitigate the impact of potential future external shocks, and support the strengthening of the sovereign credit profile

The affirmation of the B2 rating reflects credit strengths including strong economic growth, a policy framework geared towards maintaining macro-economic stability as well as lower-than-peers debt and interest burdens. These strengths balance the credit challenges posed by low per capita income and a high share of foreign currency denominated government debt.

Nicaragua's long-term local currency country risk ceilings remain unchanged at Ba3. The foreign currency bond ceiling and the foreign currency bank deposit ceiling also remain unchanged at B1/NP and B3/NP, respectively.

RATIONALE FOR THE CHANGE TO POSITIVE OUTLOOK

-- FIRST DRIVER: CONTINUING FISCAL STABILITY AND FAVORABLE MACROECONOMIC PROSPECTS AS VENEZUELAN FINANCIAL FLOWS DIMINISH

Despite the significant decline in net financial flows from Venezuela, authorities have maintained fiscal stability over the past two years and maintained an operating environment that offers favorable prospects for growth and the external accounts.

Under the Petrocaribe initiative, Nicaragua has benefited since 2008 from both loans and foreign direct investment (FDI) from Venezuela. These loans financed some off-budgetary social and investment spending. Social spending represented about one third of the loans received, and was mainly directed towards subsidies and social transfers.

At their height in 2010-11 these loans represented 5.9% of GDP, falling to 4.0% in 2014 and 0.7% in 2016. An apparent reliance on financial flows from Venezuela posed a constraint on the sovereign credit profile because of the negative fiscal and economic implications of a potential decline and cessation in these flows.

However, although there has indeed been a decline in these flows, actions taken by the government have limited the fiscal impact of this decline. Off-balance sheet social spending fell to 0.3% of GDP in 2016 from 2.0% in 2012-13. This off-balance sheet spending was only partly absorbed into the government's balance sheet, due to lower costs associated with transportation subsidies as oil prices remained low as well as net cuts in social spending programs. These expenditure cuts helped contain the general government's deficit at a moderate level of about 2% of GDP before grants are included.

Meanwhile, although FDI from Venezuela has also declined in recent years -- falling to 0.9% of GDP in 2016 from 1.6% in 2012 -- Nicaragua has been able to attract investment from other countries, diversifying the sources of investment and leaving net FDI levels relatively constant as a share of GDP. This, in turn, has ensured that a significant portion of the country's current account deficit remains financed by net FDI flows, thus reducing the reliance on external debt. In addition, FDI flows are likely to support growth. Higher investment over the past decade has supported productivity gains in the economy, elevating potential growth to 4.5-5.0%.

Given the resilience of Nicaragua's credit metrics to an external shock in the form of declining financial flows from Venezuela, the positive outlook reflects our view that if fiscal stability and robust growth is maintained over the outlook horizon, Nicaragua's sovereign credit profile will strengthen to levels consistent with a higher rating.

-- SECOND DRIVER: EXPECTATION OF GOVERNMENT POLICIES TO MITIGATE DOMESTIC AND EXTERNAL RISKS

The second driver of the outlook change is Moody's expectation that the government will take action to mitigate the potential risks that could stem from (1) the deterioration in the Social Security Institute's (INSS) financial position, (2) the enactment in the United States of the Nicaraguan Investment Conditionality Act (NICA), and (3) a continued decline in inflows from Venezuela.

Authorities estimate that due to rising deficits of the INSS -- the entity that provides pensions, disability insurance and some health services to the general population -- it will deplete its liquid reserves by 2019 without any policy changes. In such event the central government would likely need to provide financial assistance to INSS. However, Moody's expectation is that over the outlook horizon of 12-18 months the government is likely to pursue pension reforms that would support the sustainability of INSS over the medium- to long-term.

Another potential risk to Nicaragua's growth and external profile is the Nicaraguan Investment Conditionality Act (NICA) in the United States, which would direct US representatives to oppose loans to be provided by multilateral development banks (MDBs) where the US is a member until the Nicaraguan government takes actions to improve the control of corruption and increase elections' transparency among other measures. Although there is little certainty around whether the NICA will be passed, were it to be passed it could affect financing from MDBs -- Nicaragua's main funding source -- as well as investor confidence in Nicaragua, weighing on FDI and economic growth. Moody's baseline expectation is that should the NICA materialize, the government will take policy actions to reduce the fiscal impact of potentially lower loans from MDBs and to support investor confidence. If this baseline expectation were met, the passage of the NICA would be a temporary shock that would not impose lasting damage to Nicaragua's credit profile.

Moody's also expects that Venezuelan cooperation flows will continue to decrease over the coming years and that, as has been the case in recent years, authorities will pursue policies that diminish their potentially negative fiscal impact.

WHAT COULD CHANGE THE RATING - UP

Nicaragua's ratings could be upgraded if: (i) fiscal measures are undertaken to improve the financial position of the social security body and lower potential costs for the central government, (ii) authorities respond to potential external shocks, such as the NICA and a continued decline in Venezuelan support, in ways that maintain Nicaragua's economic, fiscal and external metrics at levels that indicate a continued strengthening of its sovereign credit profile.

WHAT COULD CHANGE THE RATING - DOWN

The positive outlook could return to a stable outlook if (i) the NICA is enacted and no adjustment measures are undertaken, (ii) if the social security's financial position continues to deteriorate and this is left unaddressed, and/or (iii) there is a deterioration in the external accounts due to a shock from a declining Venezuelan support or a significant reduction in external financing from other sources.

GDP per capita (PPP basis, US$): 5,452 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.7% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.3% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8.6% (2016 Actual) (also known as External Balance)

External debt/GDP: 77.8% (2016 Actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 19 July 2017, 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 materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Renzo Merino
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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