Friday 22 September 2023

How Nicaragua went from being the economy with the most pessimism in Central America in 2020, to the second with the best performance

Nicaragua's Central Bank sharply cuts the economic contraction rate in 2020, leaving the country in a better position compared to the other Central American countries that expect greater falls.

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22 September 2023 - At The Banks - Source: BCCR

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Q REPORTS – Nicaragua will fall less than expected and is between the two economies, along with Guatemala, that have best resisted the impact of Covid-19, according to an update of projections presented by the Banco Central de Nicaragua (BCN) – Central Bank – during the “Foro Económica de the Region and Perspectives 2021”, organized by the Central American Bank for Economic Integration (CABEI), which was attended by the presidents of the largest bank issuers in the region.

Panoramic view of the City of Managua.

Specifically, according to the projections presented by Ovidio Reyes, this year they expect the Gross Domestic Product (GDP) to fall between 1.5% and 2.5%, better than the -4.5% initially estimated.

This turnaround in estimates is due to “a greater recovery in national and world economic activity after the shock caused by Covid-19 during the first part of the year.”

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It was the numbers released in the third and fourth quarters of this year, which the Central Bank of Nicaragua kept hidden for more than 100 days, which improved the year-end prospects. An optimism that could transcend to 2021, when the economy is expected to rebound 0.5 percent, but now with the new figures this could improve, Reyes said during his speech.

In addition, the BCN bases its improvement in 2020 on “greater dynamism in the demand for merchandise exports, with a positive impact on key activities such as trade and industry, and on greater stability in the labor market.”

During his speech, Reyes admitted that the impact of hurricanes Iota and Eta, far from negatively impacting the economic projections, came to improve them, because it led to the release of resources through loans, as well as the Covid-19 pandemic, which has also allowed access to fresh resources in multilaterals.

In this context, he highlighted that CABEI has been fundamental not only in 2020 but in the last three years. “It helped to confront the financial imbalances that occurred in 2018 and 2019,” Reyes said.

Another indicator where better performance is also expected is in inflation. In its update it is now expected to finish between 2% and 3%, a slight adjustment from the 3.7% initially projected.

In 2021 they believe that there will be more employment, likewise, that the export sector continues its positive dynamics and that public finances remain stable and sustainable.

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Reyes admitted that the immediate public policy challenge is to protect the population against Covid-19. “The speed with which the vaccine is applied will depend on the economic recovery, hence this is a top priority,” he said.

“In the current macroeconomic context, the growth of public deposits, a prudent fiscal policy and strengthened levels of international reserves stand out, which will be supporting a greater economic recovery in 2021,” the BCN said in a statement issued hours after the presentation of Reyes.

The official said that in Nicaragua “public finances were pressured by tax collection and income to Social Security.”

Reyes demanded that in this new environment there be greater integration of the region, which is effectively taking place in commerce and the financial system.

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“The pandemic and the effects of hurricanes Eta and Iota affected the region equally, which reinforces the argument of seeking joint financing solutions and coordinating monetary and financial policies,” he said.

On the role of the BCN during the crisis, he said that several regional policies have coincided to support the economy. «In some actions we have coincided, such as the decisive reduction of interest rates, policies or monetary reference rates, as well as keeping our liquidity lines open to commercial banks, implementing policies to make the legal reserve more flexible, was also another common area ”, he specified.

Reyes assured that in some cases the banks have implemented innovative policies as allowed by their legal frameworks to promote the delivery of loans with the aim of safeguarding financial intermediation and avoiding a negative spiral in credit and economic activity.

Defend the role of the BCN in the crisis

The official mentioned that the first thing was the reduction of the reference rate of the monetary points until accumulating a reduction of 375 basis points during 2020. The width of the interest rate corridor implemented by the BCN was also reduced. Likewise, through the policy of legal reserve, funds in cordobas were led to the banks, for the equivalent of one percentage point of GDP.

“There are several elements that make this measure unconventional, the fact that it allows differentiated reserve requirements by banks and is that loan deliveries are conditioned. Banks that use this measure will be able to reduce their reserve requirements in national currency by up to 10 points and this will occur over a period of three years, ”he stressed.

The high liquidity of the financial system and the environment of low international interest rates have remained relatively stable in the rate policy of dollar instruments, which has led to the stability and accumulation of international reserves, according to Reyes, action with which he feels satisfied.

In the banking financial system, a growth in deposits has been observed as a response of companies and families to generate greater savings in the face of uncertainty as well as due to less mobilization of people, in his opinion. “However, credit has been diminished due to increased risk and a reduction in demand for it. Public finances for their part, despite the increase in the deficit and moderation in spending, have managed to achieve appropriate financing, ”Reyes explained.

He explained that the external sector continues with a mixed behavior, with indicators such as good performance in merchandise exports and in the flow of family remittances, but with data of lower income from tourism and foreign direct investment.

He added that “the combination of these elements has improved the external position, producing a surplus in the current account of the Balance of Payments. On the other hand, the real sector has begun to show signs of recovery as of the third quarter of the year, showing increasingly less negative growth rates in economic activity and a recovery in labor force participation.

Growth in other countries

In this context, how have the other economies in the region evolved?

El Salvador projects a 7% contraction in its economy, a figure lower than the rating estimated by the International Monetary Fund (IMF) which was minus 9% and the World Bank (WB) with minus 8%. This country continues to be strongly supported by remittances, which until November showed a growth of 3.5 percent, declared Douglas Rodríguez, president of the Central Bank of El Salvador.

For his part, Héctor Valdez, governor of the Central Bank of the Dominican Republic, said that a decrease of 6.5% is projected in 2020, explained by the enormous reduction in tourism. This country received more than 7.5 billion dollars in foreign currency for this item with the visit of 6.3 million tourists and due to Covid-19 these figures fell completely.

He, in turn, said that in the midst of the pandemic, the loans obtained from CABEI allowed him to support the agricultural system and carry out support programs for those who have been laid off from their jobs. For 2021 they project a growth between 5.5% and 6%.

Like the Dominican Republic, Costa Rica was also highly impacted in the field of tourism, a sector that has tried to gradually recover with domestic tourism. The president of the Central Bank of Costa Rica, Rodrigo Cuba, said that exports of goods have helped to reduce the deficit in its current account.

He pointed out that private consumption has been very hit and a compression of consumption due to the closure of activities. In the fiscal field, this country had implemented a reform that began to bear fruit this year, but the hit of the pandemic affected tax collection, he explained. The southern neighbor will have a decrease of 4.5% for this year and a partial recovery of 2.6% in 2021.

The president of the Central Bank of Honduras, Wilfredo Cerrato, points out that the economic decrease in his country will be 9.5%, which he considered historical only similar to the one that occurred in 1960 due to problems in the banana plants, which implied a contraction of 6.5%.

It will take three years to regain growth, Cerrato estimated. This year, the country of the northern triangle will close with 35% more reserves and its remittances also grew above 2%, loans grow as well as deposits, he said. “We see a strong risk of inflation for the first half of next year, which may reach 4.5%,” he said. Avoiding further increases in public debt is another of Honduras’ challenges, said the president of the financial institution.

Sergio Recinos, president of the Central Bank of Guatemala, declared that with figures revised to December, they estimate an economic fall of 1.5%, which positions them as one of the least affected countries in Latin America.

In 2021 they estimate a growth of 3.5%, that is, obtaining an almost flat recovery since in 2019 they grew 3.8%. Recinos said that family remittances represent around 12% of GDP and at this moment, fortunately, they have not fallen, but are growing at 6.4%. Inflation is estimated at 5.46% until this year. Increasing employment is his biggest challenge, Recinos said.

From the article “Cómo Nicaragua pasó de ser la economía con mayor pesimismo en Centroamérica en 2020, a la segunda con mejor desempeño” published in La Prensa. Read the original here.

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