New York, February 14, 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the long-term foreign-currency and local-currency
issuer ratings of the Government of Nicaragua to B3 from B2 and changed
the outlook to stable from negative.
The downgrade of Nicaragua's rating reflects the following key rating
drivers:
1) Economic strength has weakened as a result of the social tensions that
are likely to leave a lasting negative impact on future output growth
due to the weaker investment climate;
2) Risk of reduced access to official external credit is creating funding
challenges and restricting the authorities' ability to support economic
activity.
The stable outlook on the B3 rating reflects Moody's view that the
financial shock from the social unrest has abated and that the adjustment
in the country's external accounts has helped to contain liquidity
risks stemming from lower foreign direct investment (FDI) inflows.
Nicaragua's long-term local-currency bond and bank
deposit ceilings were changed to B1 from Ba3. The long-term
foreign-currency bond ceiling was changed to B2 from B1,
and the foreign-currency bank deposit ceiling changed to Caa1 from
B3. The short-term foreign-currency bond ceiling
and the short-term foreign-currency bank deposit ceilings
remain unchanged at Not Prime (NP).
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO B3
FIRST DRIVER: ECONOMIC STRENGTH HAS WEAKENED AS A RESULT OF THE
SOCIAL TENSIONS THAT ARE LIKELY TO LEAVE A LASTING NEGATIVE IMPACT ON
FUTURE OUTPUT GROWTH DUE TO THE WEAKER INVESTMENT CLIMATE
Moody's believes that the negative effect of the social unrest that
the country experienced has been severe for the Nicaraguan economy.
The economy's growth potential is likely to have declined significantly
as a result of the deterioration in the investment climate that will lead
to a much lower rate of capital accumulation in the future owing to the
deterioration in confidence that has reduced investment and employment.
The authorities estimate that the economy contracted 4.5%
in real terms in 2019 after declining 3.8% in 2018,
a significant change from growth rates that exceeded 4.5%
each of the prior five years.
The investment-fueled economic model that served Nicaragua well
over the past decade and was a key support of its credit profile,
has been structurally weakened. As a result, Moody's
now expects that the economy will report average annual growth of around
0.7% in 2020-22. This contrasts with Moody's
previous view that, although lower than before the social unrest,
growth would remain at around 2.5% in 2020-22.
According to the rating agency, the weaker growth potential is undermining
Nicaragua's economic strength, which was already constrained
by low wealth levels, the small size of its economy and its susceptibility
to climate-related shocks.
SECOND DRIVER: RISK OF REDUCED ACCESS TO OFFICIAL EXTERNAL CREDIT
IS CREATING FUNDING CHALLENGES AND RESTRICTING THE AUTHORITIES'
ABILITY TO SUPPORT ECONOMIC ACTIVITY
International sanctions, including those introduced under the Nicaraguan
Investment Conditionality Act (the NICA act), which became law in
the US in December 2018, is likely to constrain official external
credit and other financing flows to Nicaragua. In light of the
continued contraction in economic activity and tighter financing flows,
the authorities adopted revenue-enhancing measures in early 2019
in order to alleviate fiscal pressures from a continued drop in registered
contributors, and additionally, the government reduced capital
expenditure. External financing now relies more on non-concessional
lending from multilaterals that do not fall under the scope of US sanctions,
while a more favorable liquidity position in the domestic market due to
weak credit growth has opened up a new, albeit limited, financing
alternative. However, funding costs are now higher and the
availability of external credit remains lower, affecting government
liquidity risk and overall susceptibility to event risk.
Moody's estimates that the consolidated public sector deficit narrowed
to around 2.2% of GDP in 2019 from 3.9% in
2018. Although the fiscal adjustment in 2019 was successful in
containing new funding needs, tight fiscal policy will be unsupportive
of a stronger economic recovery. Lower public spending, particularly
on infrastructure, combined with low investor confidence from the
domestic business community and foreign investors, is likely to
prolong the unfavorable economic conditions.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on the rating reflects Moody's view that upside
and downside risks to Nicaragua's credit profile remain balanced.
Moody's believes that the financial shock from the social unrest has abated
and that the adjustment in the country's external accounts due to
weak domestic demand has helped contain liquidity risks stemming from
lower FDI inflows. The recovery in official foreign exchange reserves
signals an easing of balance of payments pressures, balanced by
lingering uncertainty over the future growth trajectory of the economy
and the risk of a reemergence of social unrest as the November 2021 general
election approaches.
ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS
Nicaragua is materially exposed to environmental risks, as its 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 threat to the
country's agriculture sector, which employs 30% of the country's
population and accounts for about 15% of GDP. As such,
weather events can materially influence Nicaragua's key credit metrics,
such as GDP growth volatility, household incomes and agricultural
export earnings. Therefore, we have identified Nicaragua
as one of the countries whose credit profiles are most susceptible to
climate change.
Social risks are also an important consideration for Nicaragua's credit
profile. While Nicaragua does not experience the crime-related
violence as its neighbors in Central America do, domestic politics
have been embroiled in national political upheaval since the government's
initial attempt at pension reform in April 2018. The country's
domestic political unrest was characterized by bouts of violent political
protest. The marked change of tone in relationships between the
government, civil society and the private sector has materially
weakened the country's economic model, adversely affecting long-term
growth prospects and economic strength.
In terms of governance risk, Nicaragua benefits from prudent monetary
and fiscal policies, as well as a long-standing relationship
with the IMF and multilateral creditors. However, Nicaragua's
challenges with respect to the weak rule of law and control of corruption,
are conditions that we expect to persist over the medium term.
WHAT COULD CHANGE THE RATING UP
A stronger-than-expected recovery in economic activity that
signals a return to pre-crisis robust rates of expansion and enhances
economic strength would support an improvement in the sovereign's
credit profile. Similarly, an easing of social tensions between
the government, civil society and business, combined with
a lifting of international sanctions that results in the resumption of
official external financing comparable to pre-crisis levels,
would ease funding constraints and enhance creditworthiness.
WHAT COULD CHANGE THE RATING DOWN
Downward pressure on the sovereign's credit profile would emerge if fiscal
metrics were to deteriorate significantly, increasing government
liquidity risk. A prolonged period of depressed economic activity
as a result of continued political uncertainty or social unrest would
materially weaken Nicaragua's credit profile.
GDP per capita (PPP basis, US$): 5,530 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -3.8% (2018
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.9%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -3.7%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.6% (2018 Actual) (also
known as External Balance)
External debt/GDP: 85.7%
Economic resiliency: b3
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 12 February 2020, 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 decreased.
The issuer has become increasingly susceptible to event risks.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019. 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, 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.
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.
Jaime Reusche
VP - Senior Credit Officer
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
