Nicaragua's Investment Boom Continues

President Daniel Ortega may be a former socialist guerrilla but he has created a welcoming environment for foreign investors, writes Gavin Strong, Associate Director, Control Risks.

Since returning to power in 2007 President Daniel Ortega has overseen an economic boom in Nicaragua. The growth has been fuelled by dramatic increases in foreign direct investment (FDI). Between 2006 and 2014, levels of FDI into the country jumped by 208%, reaching $884million in 2014, up from $286million in 2006. And with Ortega all but certain to win the November 2016 presidential election that trend looks likely to continue. Indeed his ruling Sandinista Liberation Front (FSLN/Sandinistas) also look likely to retain a supermajority in the National Assembly (unicameral legislature), with a recent opinion survey conducted by local pollster M&R Consultores, giving the FSLN 65% of the intended vote.

"Between 2006 and 2014, levels of FDI into the country jumped by 208%…"

Despite periodic outbreaks of civil unrest and anti-government resistance, Ortega retains significant support among the electorate. According to M&R Consultores, he has an 81.7% approval rating. Coupled with his control over electoral processes, through the president of the Supreme Electoral Court (CSE) Roberto Rivas, his position looks strong. The continued weakness of the opposition parties further guarantees a comfortable Ortega/FSLN victory. The opposition remains fractured, with attempts to present a single unity candidate to stand against Ortega foundering. Fractures within the opposition have also been fomented by the government and government-controlled institutions, such as the Supreme Court (CSJ), which on the 8th of June stripped Eduardo Montealegre of the leadership of the Independent Liberal Party (PLI), replacing him with Pedro Reyes.

Pro-market guerrilla

The overt politicisation of both the CSE and CSJ reflect broader concerns over the considerable concentration of power in the executive and the erosion of democracy in Nicaragua. Yet these concerns have not had significant implications for Nicaragua’s burgeoning reputation as an extremely investor-friendly destination. Last year FDI fell by 5% to $835million but that was down to temporary factors, with manufacturing being hit by the expiration of a ten-year trade preference arrangement, and mining taking a knock from low global commodity prices. FDI levels are set to rebound in 2016 driven by rising investment in telecommunications, services and a recovery in manufacturing.

Despite his reliance on radical leftist rhetoric to placate his core support group – the poor – Ortega continues to pursue a predominantly pro-market agenda, largely avoiding conflict with the powerful business elite and labour unions, and maintaining constructive relations with international creditors, such as the IMF. Maintaining macroeconomic stability and promoting economic growth – underpinned by increasing levels of foreign investment – and therefore its ability to create employment and invest in public expenditure programmes is integral to preserving the government’s popularity. The president, his family and his inner circle have their own substantial business portfolios, which gives them a vested interest in maintaining an investor-friendly business environment.

Nicaragua’s new friends

The championing of key industries and the fostering of positive relations with non-traditional trade partners – most notably China and Russia – underpin this policy. Chinese companies, including the Hong Kong Nicaragua Canal Development Investment Company (HKND), are becoming the pre-eminent foreign investors in Nicaragua. In addition to the canal and related developments, Chinese companies are making significant investments in the telecommunication and tourism sectors. Although bilateral relations with Russia focus primarily on military co-operation, Russian companies are beginning to establish a toehold in a variety of commercial sectors.

However, the increasing presence of companies from China and Russia has caused disquiet in some quarters, including in the ICT sector. This is particularly the case following the launching of mobile phone and landline services by Beijing-headquartered Xinwei Telecom Technology (Xinwei) in April. Xinwei CEO Wang Jing is also the president of HKND. Xinwei’s market entry will likely limit investment opportunities for other ICT firms operating, or seeking to invest, in Nicaragua. Xinwei is set to receivable favourable treatment in the context of the growing importance of Chinese investment to the Nicaraguan economy in general and the government’s development of flagship infrastructure projects in particular.

Opening up new sectors

The government remains particularly keen to develop the mining sector, which is reflected in Ortega’s periodic pronouncements of its importance to the economy. British firm, Condor Gold, is already active in Nicaragua’s mining sector. According to Ortega, foreign investment in the mining sector is vital as the country lacks the expertise and financial wherewithal to develop and operate large-scale mining concessions. Ortega’s championing of mining has been underpinned by concerted efforts by the government investment agency ProNicaragua to raise the industry’s profile among prospective investors. This has included the deployment of trade delegations to various countries, including Canada, as well as the organization of the country’s inaugural international mining congress—attended by a number of multinationals, including those already operating in the country.

This policy is part of a wider effort – which includes developing the renewable energy sector and the country’s nascent oil and gas industry – to diversify the economy and reduce dependence on the largesse of the Venezuelan government. In June 2015 the National Assembly approved an amendment to the Law for the Promotion of Electricity Generation with Renewable Sources (Law 532), which extended tax benefits for investors until January 2018. The extension is part of a government effort develop the renewable energy sector. It aims to attract $4billion of investment to the sector over the next 15 years to achieve its goal of ensuring that 91% of the country’s electricity is produced from renewable sources by 2027.

"This policy is part of a wider effort to diversify the economy and reduce dependence on the largesse of the Venezuelan government…"

As a result of the extension, investors in Nicaragua’s renewable energy sector will continue to receive exemptions from: import duties, income tax and value-added tax (VAT); municipal-level taxes relating to real estate, sales, registration of property during the construction phase; taxes pertaining to the exploitation of resources; and so-called ‘tax stamps’. All companies – including those already developing projects and market entrants – are eligible for the exemptions. These are likely to be complemented by targeted tax breaks in sub-sectors – such as wind, geothermal and photovoltaic (solar) – as well as efforts to streamline bureaucratic processes.

Despite the government’s pro-market stance, challenges to doing business persist. These include pervasive corruption, an inefficient and heavily politicised judiciary and land issues, such as inconsistency in land titling, inadequate protection of property rights and land invasions. However, such obstacles are offset by the government’s business-friendly agenda; the relatively low-cost and young labour force; and the benign security environment, particularly in comparison to the Northern Triangle countries, El Salvador, Guatemala and Honduras. With Ortega’s rule set to be extended by the election later this year, Nicaragua’s economic boom looks set to continue.