2017 Article IV Consultation-Press Release; and Staff Report


2017 Article IV Consultation-Press Release; and Staff Report


1. Nicaragua’s debt statistics are reported at the consolidated public sector (CPS) level. This DSA therefore covers the consolidated debt of the budgetary central government, decentralized entities, the state-owned enterprises, and the central bank.3 Consistent with the 2013 DSA and the 2015 DSA, we assume that relief has been obtained on HIPC terms for all eligible debt where negotiations are still pending.4

2. There is a large stock of debt to non-Paris Club creditors which is still pending debt relief under the HIPC Initiative. This debt amounts to about US$1 billion, with total relief expected to be in the range of US$700 million. Most of this debt is on the books of the Central Bank of Nicaragua, and two official creditors account for the bulk of this debt. Although agreements exist between the central bank and these two creditors at a technical level, progress at the political level has been a stumbling block in both cases and discussions have been put on hold for some time. The Nicaraguan authorities expect to resume negotiations in the forthcoming year. This debt is not currently being serviced.

3. Public and publicly guaranteed (PPG) external debt stands at 32 percent of GDP and is mostly owed to multilateral creditors. About 76 percent of external debt is held by multilaterals, with the largest being the Inter-American Development Bank (IaDB), accounting for 38 percent of outstanding external PPG debt, followed by the Central American Bank for Economic Integration (CABEI) at 14 percent. Nicaragua is eligible for blended loans from both the IaDB and CABEI. In the IaDB’s case, 40 percent of new funding is on a highly concessional basis and 60 percent carries a low but market-linked adjustable rate. Until 2015, Nicaragua was subject to a concessionality requirement by the World Bank as an IDA-only country and contracted loans had a grant element of at least 35 percent; however, since 2015 it has been an IDA-gap country and this requirement no longer applies. About 72 percent of PPG external debt outstanding is at fixed rates.

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Does not include SDR allocations

Source: Central Bank of Nicaragua and staff calculations

4. Public domestic debt is about 10 percent of GDP. Of this, 28 percent is comprised of Bonos de la República de Nicaragua (BRNs), which are government bonds with an original maturity of 3–7 years. Another 24 percent is Bonos Para la Indemnización (BPIs), issued as compensation to those who lost property in the expropriations of the 1980s. BPIs are not used for funding purposes, and their issuance has declined substantially in recent years as most claims have been resolved. The total stock of BPIs has declined from US$975 million at end-2006 to US$312 million at end-2016.5 A further 11 percent consists of Bonos Bancarios (banking bonds), which were issued to banks during the banking crisis of the early 2000s and here again the outstanding stock is gradually declining. About 29 percent represents the domestic debt of SOEs and municipalities, mainly to the banking sector and institutions associated with the cooperation with Venezuela, such as CARUNA, Bancorp and ALBANISA. The remainder are outstanding central bank securities used by the central bank for open market operations. Of these domestic debt instruments, most are dollar-denominated or dollar indexed, except for a portion of the banking bonds. A recent joint technical assistance mission from the Bank, Fund and CEMLA to promote the development of the domestic debt market, identified market segmentation as an issue which needs to be addressed going forward. This is due to the existence of several debt instruments coupled with a small investor base. The mission made recommendations on ways to increase liquidity in this market, including by issuing BRNs with shorter maturities.

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Consolidates out bonds held by the reserve fund of INSS

Pre-2016 data represents staff estimates. End-2016 data is preliminary.

Sources: National authorities and staff calculations

5. Fiscal risks arise from several sources. Nicaragua is vulnerable to the impact of climate change and disasters such as earthquakes and floods, which can have considerable fiscal impacts (see Selected Issues Paper). The authorities are in the process of broadening the scope of debt statistics by compiling data on domestic debt of municipalities and SOEs. Preliminary data was provided to staff and is incorporated in this analysis. The financial sector is sound and well-supervised, although there are gaps in the supervisory perimeter. Box 3 of the Staff Report highlights the main fiscal risks for Nicaragua and stresses areas where data and analysis could be improved.

6. Private external debt has increased in recent years due to the oil cooperation with Venezuela, but is on a declining trend. Private external debt rose by about 8 percentage points of GDP between 2010 and 2013, when the flows from Venezuela were at their peak. Since 2013, it has been declining gradually, and stood at 45 percent of GDP at end-2016.

Underlying Assumptions

7. The macroeconomic framework underlying the DSA assumes a continuation of the current relatively favorable macroeconomic conditions. Real GDP growth is assumed to converge to its potential level of 4.5 percent from 2019 onwards. Staff has revised up its estimate of potential GDP growth from 4 percent in the 2013 and 2015 DSAs (Box 1 of the Staff Report), grounded in revised quantitative estimates and considering the significant investments in infrastructure over the past decade. Inflation should continue to be anchored by the crawling peg exchange rate regime, with the GDP deflator in dollar terms broadly reflecting U.S. inflation.

8. On the external side, the baseline scenario assumes that:

  • The non-interest current account deficit will remain between 6½ and 8 percent of GDP, slightly higher than the 2015 DSA assumptions. This is due in part to the higher growth rate and propensity to import, which is only partially compensated by a marginally lower oil price forecast6. Remittances will decline slightly as a percentage of GDP from 9½ percent to 9 percent over the medium term because of slightly lower comparative average GDP growth in source countries.

  • FDI inflows will moderate somewhat from their 10-year historical average of 6½ percent of GDP as investment in the telecommunications and energy sectors slows.

  • External borrowing by the public sector will remain at 3.9 percent of GDP annually over the medium term, and will continue to be sourced mainly from multilateral creditors, although with declining concessionality.

  • The 2016 revision of the terms of the Venezuela cooperation has resulted in a shift in the assumptions on the flows from Venezuela. Concessional financing flows are assumed to continue but at a level of about 0.3 percent of GDP annually. This is substantially lower than in the 2015 DSA which assumed a gradual decline in financing from 2.3 percent in 2017 to 0.9 percent in 2037. The resulting net outflows to Venezuela are expected to gradually decline from around 1 percent of GDP in 2017 to 0.1 percent of GDP by 2037.

9. The baseline scenario for the public debt DSA assumes:

  • A steadily rising primary deficit beyond 2019. This is driven by an assumption that public investment will remain at current levels and that pensions and healthcare spending of the social security institute will continue to grow in percentage of GDP terms, due to demographic factors.

  • The liquid assets of the INSS reserve fund are projected to be depleted by 2019 and it is assumed that transfers from the budget are required to finance its deficits up until 2037. The difference between the CPS primary balance, revenue, and expenditure projections from the 2015 DSA is mainly due to refinements in the projection methodology and less optimistic assumptions on the expansion of INSS’s active coverage, defined as INSS contributors as a percentage of the labor force. External grants have also been revised downwards relative to the 2015 DSA, and are projected to stabilize at 0.6 percent of GDP.

  • The real interest rate on public debt declines initially due to higher inflation, declining domestic debt, and a favorable external financing profile, but then begins to rise because of increased domestic bond issuance and a reduced grant element from external financing sources. Domestic debt issuance is the residual and no further issuance of BPIs is assumed.

Key Macroeconomic Assumptions Underlying the DSA for the Baseline Scenario

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External Debt Sustainability

10. The evolution of external debt in the baseline scenario is relatively benign. PPG external debt is expected to increase slightly over the projection period in percent of GDP terms (Table 1 and Figure 1). The present value of PPG external debt will rise from 21 percent to 28 percent of GDP, but will remain well under the threshold of 40 percent. A similar trend—a slight increase but still under the threshold—can be observed for other solvency and liquidity indicators (Figure 1). At the same time, private external debt is projected to decline as the debt owed to Venezuela is paid down.

Table 1.

Nicaragua: External Debt Sustainability Framework — Baseline Scenario. 2014–37 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r – g – ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Figure 1.
Figure 1.

Nicaragua: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2017, 173; 10.5089/9781484305638.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2027. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

11. Two of the standardized stress scenarios exhibit a small breach of the thresholds for external PPG debt (Table 2 and Figure 1). This includes the shock of a one-time nominal depreciation of 30 percent in 2018. Under the probability approach, however, the probability of debt distress is lower than the threshold value, so this breach is not considered in formulating the external risk rating.7 Additionally, given the crawling peg exchange rate regime, staff considers such a depreciation to be unlikely. The terms (interest rate) shock of 2 percentage points also results in a breach towards the end of the projection period. This is a more likely shock, given the possible passage of the NICA Act and the country’s eventual accessing of international financial markets.

Table 2.

Nicaragua: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2017–37

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

12. Private external debt appears to have peaked but risks remain. A significant decline in the inflows from Venezuela implies that from 2017 onwards, there will be net outflows as debt service is higher than new loans. Debt service depends on the capacity of ALBANISA’s assets to generate sufficient returns and maintain a low level of losses. Reportedly, the average return on assets during the operation of the oil cooperation with Venezuela has been 7.5 percent, close to the target return of investments of 8 percent, which would indicate a low level of losses. However, neither ALBANISA’s nor CARUNA’s assets are subject to supervision and externally audited accounts are not published. Thus, the quality of their investment portfolio is unknown.8

13. The ALBANISA contingent liability scenario no longer breaches any of the thresholds. As in the 2013 and 2015 DSAs, a customized scenario has been included which assumes a one-time absorption of the private debt to Venezuela at end-2017, amounting to 22 percent of 2017 GDP, or US$3.2 billion. In present value terms, however, the increase in external debt is less significant (from 20 percent of GDP in 2017 to 35 percent of GDP in 2018), due to the concessional terms. Unlike in the 2013 and 2015 DSAs, this scenario no longer breaches the threshold of PV debt-to-GDP, due primarily to a slightly lower stock amount in GDP terms and the upward revisions to GDP growth for the forecast horizon.

14. The adverse scenario presented in the staff report, which simulates the combined impact of a complete halt of flows from Venezuela and the passage of the NICA Act, is included as an additional customized scenario.9 The Venezuela shock represents the continuation of a declining trend in the cooperation. The assumption is that this results in an additional 0.6 percent of GDP in expenditure as social projects are absorbed by the budget, as well as a reduction in private capital flows beginning in 2017. There is, however, more uncertainty around the impact of the NICA Act. It is not clear yet whether the bill will pass into law, and its potential impact on investment and the availability of concessional resources. Staff’s assumptions include a one-time 25 percent reduction in both FDI and domestic investment in 2018 relative to baseline levels, and a reduction by 50 percent of financing from the IaDB and World Bank from 2018 onwards, which is replaced by other external (but less concessional) and domestic sources. At the same time, FDI and loan financing from Venezuela is assumed to come to a complete stop by 2018. The combined impact on FDI is a drop of 1 percentage point of GDP in 2017 due to the Venezuela shock, plus a further 2 percentage points in 2018 (0.4 attributable to Venezuela and 1.6 to the NICA Act) The shocks lead to a gradual increase in the average interest rate on external debt over the baseline.10 Growth falls from 4.5 percent over the medium term in the baseline to 2.9 percent in 2018, the effective interest rate averages 3.7 percent over the medium term, and FDI declines to an average of about 4 percent of GDP. Following the shock, the economy gradually returns to the baseline steady state by 2027.

15. The adverse scenario breaches the threshold for PV of external PPG debt-to-GDP. Projections for the adverse scenario show a breach of the threshold by 2022. It also briefly breaches the PV of the debt-to-exports ratio. This result, together with the terms (interest rate) shock, drives staff’s assessment that Nicaragua remains at moderate risk of external debt distress.

Key Assumptions for Adverse Scenario: NICA Act/Venezuela

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Public Debt Sustainability

16. In the baseline scenario, public debt is projected to increase to 55 percent of GDP by 2037 (Table 3 and Figure 2). External public debt remains largely stable over the forecast horizon. Domestic public debt is projected to decline initially in percentage of GDP terms as legacy debt is paid down, and then to rise again due to the issuance of new debt to cover pension and healthcare obligations of INSS. The baseline scenario does not breach the PV public debt benchmark of 56 percent of GDP. The chart below shows the contribution of various elements to the increase in debt—the rising primary balance plays the major role, but the increasing average real interest rate also contributes. This is due to an increasing shift to domestic debt, which has a market-determined rate of interest, as well as a gradual decline in access to the most concessional resources of the multilateral development banks.

Table 3.

Nicaragua: Public Sector Debt Sustainability Framework—Baseline Scenario 2017–37

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Consolidated public sector

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure 2.
Figure 2.

Nicaragua: Indicators of Public Debt Under Alternative Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2017, 173; 10.5089/9781484305638.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2027.2/ Revenues are defined inclusive of grants.

Public debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 173; 10.5089/9781484305638.002.A003