How Nicaragua’s Comeback Started to Fall Apart

(Bloomberg Opinion) -- Like many of their neighbors, Nicaraguans each year fondly recall past insurrections. July 19 is Liberation Day, when the Sandinista Revolution seized power in 1979. Oct. 12 is not Columbus Day but the date to celebrate indigenous resistance. So how will April 18 be remembered?

That’s when students, civic groups and political discontents took to the streets this year in Managua and cities other across the country to defy the increasingly despotic rule of revolutionary-turned-strongman Daniel Ortega. The ensuing turmoil has already claimed at least 212 lives, and shows no signs of flagging. Less dramatically, but every bit as dire, the uprising also has thrown one of the region’s most dynamic economies into unprecedented crisis, from which the hemisphere’s marquee strongman may find it hard to escape. 

Tourism and agriculture, the backbone of the Nicaraguan economy, are in disarray. With 70 percent of national highways at least partially blocked by protests, overland cargo traffic to the interior and neighboring Costa Rica has been strangled.

The economy that the International Monetary Fund forecast early this year to expand by 4.7 percent in 2018 is now more likely headed into recession, according to the Economist Intelligence Unit. Unemployment may climb to as much as 10 percent, from 6.2 percent earlier this year.

The escalating conflicts have spooked investors, who by last week had withdrawn some $634 million in dollars and cordobas from local accounts, representing nearly 12 percent of all bank holdings. There’s a great degree of uncertainty that has led to a sudden halt in private investment,” explained Luis A. Rivas, chief operating officer of Promerica Financial Corporation, a commercial bank operating in Nicaragua and throughout Central America. “Credit has also slowed down as financial institutions are acting with caution.” Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all have downgraded Nicaraguan debt in recent weeks.

This is new for Ortega, the onetime Marxist insurgent who has served four presidential terms — and is grooming his wife to succeed him — largely on his ability to deliver growth even as he divided the country and hollowed out democratic institutions.

Ortega’s resilience until now has owed partly to luck, partly to pragmatism. Although Nicaragua has long ranked among the poorest nations in the hemisphere, a commodities boom kept the economy humming and spread perks to key sectors. And by containing Central America’s deadly drug cartels, Ortega’s government also has kept violent crime comparatively low, an important draw for investors looking for stability. “Nicaragua, for all its problems, was considered a bastion of stability in Central America, especially in comparison with its neighbors,” said Abhijit Surya, the Economist Intelligence Unit’s Nicaragua analyst. That diligence set Nicaragua apart from its homicidal neighbors and cut Ortega some slack with the U.S., which counted him as an unlikely ally in its war on drugs.

What set Ortega part from others in the region, however, was what critics have called an alliance of convenience with the country’s business leaders, who in exchange for tax breaks and mostly unfettered markets reportedly agreed to look the other way as his government stacked the courts, gamed elections and intimidated the media.

Business leaders blame the political establishment for undermining democracy. “The politicians were the ones that failed in their role by making pacts that led to the deterioration of political institutions over the years and to their own political demise,” said Rivas.

The dialogue with Nicaraguan business grew fraught earlier this year after Ortega reneged on a pledge to maintain corporate tax exemptions as quid pro quo for private sector support of a severe fiscal retrenchment, including a deeply unpopular pension reform. The deal blew up altogether on April 18, when security forces violently cracked down on protesters marching against the pension plan.

Ortega tried to lure the moguls back to the negotiating table, but by then public outrage had flared into a national emergency. After riot police and armed militias set upon a huge Mother’s Day march, leaving at least 11 dead, the country’s leading business chamber, Cosep, whose members account for half of Nicaragua’s gross domestic product, publicly broke with the government and urged businesses to join a 24-hour strike. “It is clear that the new socioeconomic realities triggered by the protests make the public-private dialogue no longer viable,” said Rivas.

The president’s excesses have come back to bite him. “The deteriorating economy is weakening Ortega,” said Manuel Orozco, a Nicaraguan economist at the Inter-American Dialogue. Orozco reckons that the government spends $10 million a day on payroll and maintenance, an unsustainable sum at a time when the crisis has sapped tax revenue. “The economy is already operating at two-thirds or even half capacity. The multiplier effect of that slowdown is already dire,” Orozco said.

Such woes are serious, but they don’t mean Ortega is finished. He still commands the police and the armed forces, and unofficial armed militias patrol the streets in Toyota pickup trucks at his behest. Nor does the business community agree on how to end the crisis. Some in the private sector have joined the opposition Civic Alliance in calling for Ortega to resign immediately, and others prefer that he schedule early elections. The divergent opinions may give him the wiggle room he needs to divide his opponents and tough out his term, which ends in 2021.

“Economic crisis is a slow death,” said Orozco. "To accelerate the transition, other pressures have to be brought into play." That’s where Washington could help.

The U.S. Congress is considering a proposal to impose sanctions on senior members of the Ortega government for human rights violations.

Such measures alone won’t rein him in: Look no further than Venezuela, where Nicolas Maduro clings to power despite his government’s expanding international rap sheet. But sanctions could help send a message to Managua that April 18 is not just another holiday.

©2018 Bloomberg L.P.