August 23, 2017 / 7:02 PM / in a year

Fitch Affirms Nicaragua at 'B+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, August 23 (Fitch) Fitch Ratings has affirmed Nicaragua's Long-term foreign currency Issuer Default Ratings at 'B+' with a Stable Outlook. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS Nicaragua's credit ratings reflect its macroeconomic stability, economic performance and prudent public financial management relative to the 'B' median. The ratings are constrained by the sovereign's large external vulnerabilities and structural weaknesses including low per capita income, shallow domestic capital market, social and governance indicators. Nicaragua's macroeconomic performance is robust with decreased inflation. The economy has expanded at an average annual rate of 5.2% over the past five years, higher than the 'B' median of 3.5%. External factors (U.S. export demand, low international oil prices, foreign investment receipts and access to external financing) remain broadly supportive for growth. Fitch expects economic growth to moderate slightly toward its 4.5% potential rate in 2017-2018, reflecting reduced investment and consumption stimulus from Venezuela's PetroCaribe programme. Consumer price inflation has converged with the 'B' median. Inflation, which averaged 3.5% in 2016 and was 3.1% yoy in July, has been subdued by low, stable fuel import prices in the context of the predictable crawling peg currency regime. Nicaragua's recent fiscal performance has supported its credit profile relative to peers. The general government debt and interest burdens are moderate at 41.9% of GDP in 2016 and 4% of revenues in 2017, respectively, and below the 'B' median. The central government has a track record of running the budget with a zero primary balance. However, Fitch expects larger general government deficits to gradually increase the debt trajectory beginning in 2019, reversing the previous trend of falling debt levels. Fitch also expects the general government deficit to increase to 1.8% of GDP in 2017, up from 1.6% of GDP in 2016, driven by a step-up in infrastructure outlays and the social security institute (INSS) operational deficit. The fund's operational deficit has increased in recent years to 0.4% of GDP in 2016 and is currently financed from the scheme's reserves (estimated by the IMF to be depleted in 2019), limiting immediate pressure on the debt trajectory. Fitch expects that structural reforms will be required to balance the INSS fund and that the earliest political window for passage of reforms may not occur until 2018 (after the November 2017 municipal elections). Fitch expects the government will continue to meet its financing needs, USD356 million in 2017, with close to USD100 million domestic issuance and multilateral credits. Fitch expects that the financial and external risks from the U.S. congressional NICA Act bill, if passed, would be muted by the limited size of the U.S. voting shares in the affected multilateral lenders. PetroCaribe risks to public and external finances appear manageable. The Venezuelan PetroCaribe programme, which provided FDI and external loans with concessional terms to the Nicaraguan private sector, is winding down. Private external debt to Venezuela totalled USD3.2 billion or 24.8% of GDP in 2016. At current oil prices, Fitch expects a net outflow of funds in 2017 as private borrowers begin repaying close to USD200 million per year during 2017-2019. The government has already absorbed into the budget 0.4% of GDP in related social programmes. The balance-of-payments risks are reduced by PetroCaribe's concessional debt service terms, the central bank's external liquidity (USD2.6 billion net international reserves and a USD200 million contingent line), and moderating import demand. Nicaragua remains vulnerable to other shocks. More than 80% of government debt is foreign-currency denominated and so is exposed to exchange-rate risk. The government has less financing flexibility relative to some 'B' and 'BB' rated peers, reflecting the underdeveloped domestic capital market and a preference for lower-interest official credits for its external financing needs. Nicaragua has large external vulnerabilities. The current account deficit, forecast at 8.4% of GDP in 2017, is large relative to the 'B' median of 5.5% of GDP and those of its Central American neighbors, although FDI finances three-quarters. Its exports, although diversifying, are comparatively intense in agricultural commodities while fuel imports are substantial. The financial system and financial contracts are highly dollarized, driven in part by the stabilized currency arrangement. Net external debt, 91.5% of current external receipts (CXR) in 2016, surpasses the 'B' median of 68.2%. The central bank maintains external liquidity and contingent credit lines from multilateral banks to offset shocks. Net international reserves cover 3.6 months of current external payments and support Nicaragua's international liquidity ratio at 200% of current external debt service and short-term external liabilities. Nicaragua's external debt service is low at 10.7% of CXR in 2017. The Ortega administration maintains a stable macroeconomic policy environment supported by private-sector consultation on economic policy. However, Nicaragua's governance indicators are in line with the 'B' median. The 2016 national elections further centralized political institutions as President Ortega of the FSLN Party won his third consecutive term since 2006, the first lady won the vice presidency, and the FSLN enlarged its legislative majority. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Nicaragua a score equivalent to a rating of 'B' on the Long-term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: --Public finances: +1 notch, reflecting that Nicaragua has a track record of prudent public financial management, which has supported improving macro stability and domestic debt reduction. External debt relief has also lowered general government debt. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are broadly balanced. The main risk factors that, individually or collectively, could trigger a rating action are: Positive: --Sustained economic growth that reduces Nicaragua's per-capita income gap relative to peers; --Reduction of external vulnerabilities; --Sustained improvement in structural weaknesses, including stronger governance and social indicators. Negative: --Weakening of the external balance sheet or external liquidity; --Deterioration of public finances and debt dynamics; --Emergence of increased macroeconomic imbalances or financial instability. KEY ASSUMPTIONS --Fitch assumes that Nicaragua's economy and balance of payments will continue to benefit from relatively low oil prices (USD52.5/bl in 2017, USD55.0/bl in 2018, and USD60.0/bl) and supportive U.S. economic growth rates (2.1% in 2017, 2.6% in 2018, and 2.2% in 2019). Fitch has affirmed Nicaragua's ratings as follows: --Long-term foreign-currency IDR at 'B+'; Outlook Stable; --Long-term local-currency IDR at 'B+'; Outlook Stable; --Short-term foreign-currency IDR at 'B'; --Short-term local-currency IDR at 'B'; --Country Ceiling at 'B+'. Contact: Primary Analyst Kelli Bissett-Tom Associate Director +1-212-908-0564 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Arend Kulenkampff Director +1-646-582-2470 Committee Chairperson James McCormack Managing Director +44 203 530 1286 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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