• US-Nicaraguan trade relations will continue despite Ortega’s nationalistic economic actions
• Nicaraguan political and economic relations with both Venezuela and Iran will expand
• Foreign investment to decline through 2007-2008, limiting Nicaragua’s 2008 growth
Recent government-backed business initiatives and provocative comments by Nicaragua’s President Daniel Ortega have begun to concern foreign investors who are fearful the Ortega government could begin expropriating private property while simultaneously solidifying his country’s political and economic relationships with both the Iranian and Venezuelan governments.
Since coming to power in January 2007, the Nicaraguan government has seized an Exxon Mobil oil facility, terminated government contracts with a business owned by the opposition’s political leader and ordered the closure of an independent newspaper for failing to repay back taxes. In addition Ortega, speaking before the United Nations (UN) General Assembly last week, denounced Western capitalism, referring to “the global capitalist, imperialist movement” as the enemy.
US-Nicaragua Economic Relationship
Despite Ortega’s seemingly anti-capitalistic UN address and his government’s sudden lurch towards the Sandanista platform of the 1980s, the Nicaraguan government continues to redefine its economic relationship with the United States. President Ortega has repeatedly expressed his government’s commitment to maintaining trade links with the US government, participating in the US-backed Central American Free Trade Agreement (DR-CAFTA).
Nicaragua’s participation in the DR-CAFTA has provided a significant economic boom to the country, increasing the country’s commodity exports by an estimated 29 percent. In addition DR-CAFTA and US-demand for cleaner and more reliable alternative fuel sources has assisted Nicaragua’s nascent ethanol fuel industry.
Moreover, the US remains Nicaragua’s largest foreign aid contributor, providing an estimated US $220 million in aid a year to the government. The US has also dispatched several humanitarian goodwill gestures to the Nicaraguan government and people, including last month’s visit by a US Navy ship to the port city of Corinto, where it provided free medical care to Nicaraguan citizens.
Foreign Investors Remain Squeamish
However, his government’s demonstration of economic regeneration through interaction with Western countries and participation in the DR-CAFTA may not be enough to attract and maintain foreign investors that have witnessed increasing signs of Ortega’s return to his Sandanista past of the 1980s. In 2005 and 2006 foreign investors in Nicaragua spent US $238 million and US $282 million respectfully, mainly tied to Nicaragua’s expanding tourism industry. These economic gains may begin to decrease however, as local residents are increasingly disputing the right of investors to both acquire and develop Nicaraguan land. Neither the Nicaraguan government nor the country’s judicial system has demonstrated a willingness to limit the ability of local residents to interfere in the accusation and development of coastal property for private investors.
Although foreign investment within Nicaragua’s tourist and related industry have provided the bulwark of Nicaragua’s foreign direct investment, continuing antipathy towards the rights of international housing and hotel developers in combination with limited expropriations of privately owned businesses will negatively impact the Nicaraguan economy in the short-term. This climate will likely discourage potential long-term investors and developers.
In fact, these negative economic repercussions may already be occurring. On August 10, 2007, Nicaragua’s Central Bank’s economic reports for the first six-months of 2007 indicated that foreign investment had slowed from 2.5 to 3.4 percent.
Chavez and Ahmadinejad Courting Ortega
In addition increasing rhetoric by Ortega and the growth of Iranian and Venezuelan influence in Nicaragua has also caused a slight slowdown in foreign investment as international companies, particularly those based in the US, develop a wait-and-see approach to Ortega’s economic and political priorities.
In June 2007, the Iranian government announced its intention to invest nearly US $500 million into Nicaragua, announcing the construction of a new hydroelectric project, a new port and the construction of 10,000 houses for impoverished Nicaraguans. Likewise, the Venezuelan government is constructing a US $2.5 billion oil refinery and has signed several oil and development assistance agreements with the Nicaraguan government. Increased investment by both the Iranian and Venezuelan government has been met by the increasing support of President Ortega who has defended the right of Iran and North Korea to develop nuclear power.
Nicaragua’s 2007-2008 Economic Outlook
Nicaragua’s growing relations with both Iran and Venezuela will ensure the continuation of US foreign aid and trade with Nicaragua, designed to ensure neither perceived economic adversary gains a foothold in the country. However, should the Nicaraguan government continue to expropriate private business holdings or fail to protect investment and development deals, foreign investors—particularly as they relate to Nicaragua’s tourism industry—will decrease through the remainder of 2007-2008, causing declining economic growth in Nicaragua.