Under the updated LIC debt sustainability assessment framework, Nicaragua’s risk of external debt distress is assessed as moderate with limited space to absorb shocks. Over the 10-year projection horizon, all external debt burden indicators under the baseline scenario remain below the threshold, but the present value (PV) of public and publicly guaranteed debt (PPG) external debt-to-GDP ratio breaches the threshold under three standardized stress scenarios: an export contraction shock, a depreciation shock and a combination of external shocks; and the realization of a contingent liability tailored shock related to the external cooperation with Venezuela. The overall risk of public debt distress is also assessed as moderate. The PV of public debt-to-GDP ratio is projected to be below the threshold under the baseline scenario, but it is projected to surpass the threshold under most standardized stress scenarios, notably lower GDP growth, and realization of contingent liability shocks. Therefore, strengthening both external and fiscal buffers is highly desirable.
The CBN holds non-Paris Club official external debt which amounts to around US$350 million as of December 2018. There is no non-guaranteed state-owned-enterprises’ (SOE) debt recorded in Nicaragua.
For 2016 it includes partial data on the domestic debt of SOEs, the Municipality of Managua, and other municipalities for which debt data is available. Estimates for 2017 onwards are based on the 2016 amortization schedule, and an assumption of new domestic financing by domestic suppliers. Debt data on extra budgetary funds, non-guaranteed state-owned enterprises, and debt of all state and local governments is not available, therefore these components of the contingent liabilities are at the LIC-DSF default values. The authorities intend to strengthen their capabilities to widen the coverage of debt reporting and monitoring. In the tailored shock scenarios, contingent liability shock is set as 8.6 percent of GDP in 2020.
The long-term growth projection is based on a growth accounting exercise, using a neoclassical production function with a labor share of 72 percent, assuming a growth rate of labor of 1.3 percent, capital of 1.8 percent and TFP growth of zero percent. The real growth of 3 percent also corresponds to the average observed rate over 2000–10.
In December 2018, the U.S. government enacted the Nicaragua Human Rights and Anticorruption Act, which severely restricts external funding to Nicaragua. In June 2019, Canada followed suit imposing sanctions on targeted Nicaraguan nationals. In October, the European Council established a framework enabling the EU to impose targeted sanctions.
As in the previous DSF, we use the updated three-year moving average CPIA rating.
Other components of the CI score are: real growth rate, import coverage of reserves, import coverage of reserves squared, remittances, and world economic growth (see specific values in Text Table 6).
In the baseline scenario, the private debt to Venezuela is projected to be amortized by a cumulative 1.6 percent of GDP over the medium term, and the stock is projected to decrease gradually to 15½ percent of GDP in 2024.
We apply tailored shock scenarios—contingent liability, natural disaster and commodity price shocks—to Nicaragua and find a breach under contingent liability and natural disaster shock scenarios (Table 3).