New York, January 25, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook to
negative from stable on the Government of Nicaragua's long-term
issuer ratings and affirmed the ratings at B2.
The change in outlook to negative reflects Moody's view that a prolonged
sociopolitical crisis in Nicaragua is weighing on the sovereign's
economic and fiscal strengths. With no resolution to the ongoing
conflict in sight, the crisis could materially weaken the government's
credit profile. The negative outlook also incorporates the possibility
of rising liquidity pressures on the Nicaraguan government if official
financing from multilateral institutions were to decline materially as
a result of increasing international pressure.
The affirmation of Nicaragua's B2 ratings considers that despite
Moody's expectation that government debt metrics will likely deteriorate
in the coming years, Nicaragua will continue to report lower debt
ratios than those of its B-rated peers. A government debt
structure characterized by a very long maturity profile and a large share
of official external credit will also support the B2 rating, both
of which mitigate rollover risks. Despite the challenges posed
by the political crisis, Moody's also considers that macroeconomic
policy has remained prudent, signaling policymakers' willingness
to adjust in the context of adverse economic conditions.
Nicaragua's long-term foreign-currency bond ceiling
is unchanged at B1. Its long-term foreign-currency
bank deposit ceiling is unchanged at B3. The short-term
foreign-currency bond and bank deposit ceilings remain unchanged
at Not Prime, while the long-term local currency bond and
bank deposit ceilings are unchanged at Ba3.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN THE OUTLOOK TO NEGATIVE FROM STABLE
PROLONGED POLITICAL CRISIS IS WEIGHING ON ECONOMIC AND FISCAL STRENGTHS
Moody's estimates that real GDP declined by 3.2% in
2018 and that it will contract again this year by 1.0%-2.0%.
Furthermore, the rating agency now expects that the economy will
not return to its previous trend growth rates of over 4.5%
and instead projects economic activity to remain subdued, reporting
average annual growth of around 2.5% in 2020-22.
This contrasts with Moody's previous view that, following
a resolution of the political crisis at some point in 2018 and overall
weak growth in 2018-19, the economy would recover back to
trend growth by 2021-22. The agency expects that investment
will remain weak over the coming years with foreign direct investment
(FDI) reporting lower levels than in the past when net FDI inflows averaged
7% of GDP. Additionally, due to a combination of lower
government revenue and funding constraints, the authorities will
reduce expenditures -- particularly public investment -- which
will also weigh on growth. The tourism sector, an industry
that has performed well in recent years, will not recover to levels
seen in 2017 until 2021-22. A weaker growth performance
will undermine Nicaragua's economic strength, which is already
constrained by wealth levels and the size of the economy below that of
B-rated peers.
Weaker economic activity will affect the fiscal accounts via lower revenue.
Although the authorities have sought to limit the deterioration of the
fiscal accounts, lower revenue and rising pressures from the pension
system -- following a failed reform attempt last year -- will
contribute to the deterioration in government debt metrics. Moody's
forecasts the debt-to-GDP ratio will rise to about 40%
by 2020 from 34% in 2017, while the interest-to-revenue
ratio will increase to about 8% from 4.4%.
Higher debt and interest burdens will undermine Nicaragua's fiscal
strength.
EXTERNAL AND DOMESTIC LIQUIDITY PRESSURES ARE RISING
Liquidity risks in Nicaragua are rising on account of (1) lower FDI inflows;
(2) deposit outflows from the banking system, (3) declining foreign
exchange reserves; and, (4) prospects of reduced financing
from multilateral institutions.
Net FDI inflows amounting to 7.2% of GDP on average in 2014-17
covered a significant portion of Nicaragua's current account deficits,
reducing the country's reliance on external debt financing.
In 2018, net FDI inflows fell 26% in January to September
(year-on-year) as a consequence of the political crisis.
Moody's expects FDI inflows to decline again in 2019, which
will increase external borrowings.
Another element affecting reserves has been deposit outflows from the
banking system. Following the onset of the political crisis,
deposits in the banking system declined by more than 25% between
April and December, with a large share of those withdrawals involving
dollar deposits, which account for 75% of total bank deposits.
Foreign exchange reserves reported a large decline last year. After
peaking at $2.86 billion (21% of GDP) in April 2018,
reserves fell by $712 million through December. Over the
past decade, reserves increased steadily, supporting Nicaragua's
crawling peg exchange rate regime -- a policy feature that operated
as a strong anchor of market expectations vis-à-vis
the exchange rate. Should the reduction in reserves resume in 2019,
this would put additional strain on the external accounts and the exchange
rate regime.
Potential disruptions to official external lending to Nicaragua,
in particular from multilateral development banks (MDBs), would
generate additional external liquidity pressures. The Nicaraguan
Investment Conditionality Act (the "Nica Act"), which became law
in the US in December 2018, calls for conditioning US approval of
multilateral loans to Nicaragua on the "government's adherence to
democratic norms." Some Latin American governments could
support the conditioning of new loans to Nicaragua, following measures
undertaken by the Organization of American States (OAS), potentially
impacting new loans for 2020 onward. Moreover, Moody's
considers that Nicaragua faces risks that already approved loans for 2019
could be suspended if international pressure increases.
RATIONALE FOR THE RATING AFFIRMATION AT B2
Nicaragua's B2 rating is supported by its relatively higher fiscal
strength compared to B-rated peers. Despite Moody's
expectation that debt-to-GDP will increase to about 40%
by 2020, it would still be lower than the 'B' median
of 58%. Similarly, while debt affordability will worsen,
an interest-to-revenue ratio of 8% would still be
lower than the 'B' median of about 12%.
Nicaragua's government debt structure is another credit feature
that supports the B2 rating. Although over 90% of government
debt is denominated in foreign currency, the fact that official
lenders -- mainly MDBs -- make up the majority of the government's
creditors and that this debt has a long maturity profile reduces credit
risks. Unlike other sovereigns that received debt forgiveness under
the Heavily Indebted Poor Countries (HIPC) Initiative over the past decade,
Nicaragua did not access the international bond markets, a condition
that limits its exposure to volatility in international financial markets.
Despite very weak institutional strength, Nicaragua's macroeconomic
policymaking developed a track record of prudent policies in the face
of shocks over the past decade. Moreover, although the severity
of the economic toll of the political crisis has limited the effectiveness
of the monetary and fiscal policy response, authorities have shown
a willingness to adjust under very adverse conditions.
WHAT COULD CHANGE THE RATING DOWN
Moody's would likely downgrade the rating if it became apparent that the
authorities were unwilling -- or unable -- to adjust policies
to mitigate the effect on the fiscal and external accounts of deteriorating
macroeconomic conditions prompted by the ongoing political crisis.
Indications that international pressure was leading to a significant reduction
in the flows of official external financing would significantly increase
credit risks, raising the prospects of heightening government and/or
external liquidity risk materially weakening Nicaragua's credit
profile.
WHAT COULD CHANGE THE RATING UP
Moody's would consider stabilizing the outlook if an impending resolution
of the political crisis led to a stronger-than-expected
recovery in economic activity and eliminated liquidity risks associated
with a possible decline in external official financing.
GDP per capita (PPP basis, US$): 5,852 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.7%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -2.2%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5% (2017 Actual) (also
known as External Balance)
External debt/GDP: 76.8% (2017 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 22 January 2019, a rating committee was called to discuss the
rating of the Government of Nicaragua. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially decreased. The issuer's
fiscal or financial strength, including its debt profile,
has decreased. The issuer has become increasingly susceptible to
event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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
