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Nicaraguan Economy
A press release issued on June 23, by the International Monetary Fund says Nicaragua’s economy is currently stable, however, “there are growing challenges from a deteriorating global outlook, notably rising prices of oil and other commodities.”
During a 12 day mission to review progress of the Poverty Reduction and Growth Facility Arrangement (PRGF), mission lead Luis Cubeddu met with government authorities and several other groups.
The press release states, “There has also been significant progress in the implementation of the structural reform agenda” Presumably referring to a new law approved by the National Assembly deterring the illegal consumption of electricity.
Various other subjects were discussed and Cubeddu states that talks will continue, “…to resolve outstanding isssues.” When resolved, “documents for completion of the first review under the PRGF arrangement will be presented to the IMF Board for its consideration.”
Ortega’s willingness to continue dialogue with the IMF may been seen as a small positive for Investors shaken by recent headlines out of Nicaragua. Considering Ortega’s developing dependence on Chavez and Ahmadinejad, two of the wackiest demagogues around, the IMF seems almost trustworthy.
Nicaragua’s Coastal Law
Investors in ocean front property in Nicaragua might need a pair of binoculars to see the surf, if the upcoming coastal law ends up reflecting the current property title suspensions.
Since 1937, Presidents, Somoza, Ortega (the Marxist one), Chammora, Aleman, Bolanos and now Ortega again, have all had their land reform agendas that have resulted in a hodgepodge of legal ambiguity. Throw in years of squatter’s rights, and Daniel Ortega was correct to announce that his administration would try and sort out the previous potpourri of property laws and create some definitive and reliable statutes. Statutes that international investors were hoping they could rely on to help build the future of tourism and retirement property in Nicaragua.
In an effort to correct the problem however, the administrations’ actions could be the death knell for investors in Nicaragua.
One of the most important issues that the pending new Coastal Law will establish, is how close to the shore (of any body of water) developers can build.
According to a recent article in the Miami Herald,
“In a series of memorandums sent out earlier this year, Attorney General Hernan Estrada ordered a suspension of all property titles within 2,624 feet of any body of water.”
That’s about 800 meters or half of a mile inland from the shoreline. In contrast, the previous restriction created 30 meters or about 96 feet of public beach.
The problem is that most of the ocean front property that has been sold or is currently on the market occupies land within that half-mile. The vast majority of these holding are owned by U.S. investors and are somewhere in a pre-construction stage. This means that if the Ortega administration so desired, and implemented the current suspension, it could effectively block any construction on beach front property within that distance. And that, has a lot of people worried.
Investors who have bought ocean front property in Nicaragua are cautiously hopeful that the new coastal law will be growth positive and reject any “confiscatory” implications. For now, we’ll just have to wait and see.
World Bank & Nicaragua Water/Small Business Funding
The World Bank’s board of Directors announced last week that it had approved “a zero-interest credit for $20 million to support the government of Nicaragua to improve water and sanitation services in rural areas.” An additional $20 million in zero-interest credit will go “to enhance the competitiveness of micro, small, and medium enterprises (MSMEs) and the business climate that affects those firms.”
According to the World Bank Press Release on June 12, 2008, the money earmarked for the development of the water and sanitation infrastructure is focused on improving the access to water in rural and indigenous communities.
The other $20 million for the MSMEs will be “implemented over five years and improve the quality and affordability of services to MSMESs through four components:
- Improvements to the business and investment climate for MSMEs.
- Matching grants for MSMEs to support, inter alia innovations, environmental improvements, and forward and backward linkages.
- Innovative financial services such as a plot partial credit risk guarantee system for MSMEs in coordination with regulated financial institutions.
- Improve strategic, technical and coordination abilities of MIFIC in the field of competitiveness… The primary focus of the projects’ interventions will be on urban MSMEs.”
“Both $20 million zero-interest credits funded by the International Development Association have a reimbursement period of 40 years with a 10-year grace period.”
If the credits are appropriately applied, this is good news for rural communities and small and medium businesses in Nicaragua that desperately need infrastructure assistance.
This is also encouraging news for investors in Nicaragua that rely on the govenments’ involvement to create a stable and reliable economic environment.
With his domestic popularity in decline, President Daniel Ortega should welcome the news too, and view this as a vote of confidence from the World Bank and the international community to continue the policy of opening Nicaragua to direct investment.
Daniel Ortega continues to butt heads with big investors in Nicaragua. This week Ortega’s Sandinista government slapped a lien on the country’s only all inclusive hotel. The Spanish owned Hotel Barcelo Montelimar considered by many as the finest hotel in Nicaragua, says it’s being “harassed” by the Nicaraguan government.
The government claims the owners owe back taxes and that the 1993 purchase price of 3 million dollars for the luxury hotel was “ridiculous.” They may have a point, albeit sour grapes. According the hotel’s web site, “The Barcelo Montelimar Beach Resort and Casino, a five-star Nicaraguan jewel is nestled amid the lush tropical rainforests on the glittering coast of the Pacific Ocean. This magnificent beachfront resort in Playa Montelimar boasts four kilometers of sandy shoreline, 293 guest accommodations, and the largest swimming pool in South America.” Sounds like someone got a killer deal.
The point being made in this week’s headlines is that the sanctity of Nicaragua’s “rule of law” and “judicial security” are being exposed by the government’s actions. On the investor’s side I can see their point. The owners of the hotel bought the property in 1993 when the country was still reeling from the Sandinista/Contra conflict. Back then, only those with a long-term vision and the deep pockets to back it up would even consider investing in Nicaragua’s unripe fruit. Consequently they bought at the right time and most likely weathered years of negative cash flow. Now that the hotel is presumably prosperous and Ortega is desperate for public approval and money he feels justified to challenge the legality of the Barcelo deal.
The Hotel Barcelo’s legal representation are scheduled to appear at a hearing this week at the National Assembly’s Tourist Commission. The results of this meeting and the subsequent decisions made by the government in the case could be a telling factor how other investors in Nicaragua should view the permanence of their speculation.
Nicaragua Investment
Investing in real estate in Nicaragua at this point is speculative. No one is getting rich and probably won’t for a while. Today Nicaragua is more of a lifestyle investment, or an educated long term speculation. I say educated, because there are two solid facts, Baby Boomers are getting older, richer, and are buying second homes, and China, Russia, and India are producing a new and vacation eager middle class. Both groups are, and will continue to look for their best options in fulfilling their desires. Development in Nicaragua is and will continue to happen because there is a market for competitively priced real estate in one of the most beautiful destinations in the world, (see Costa Rica, Panama, Mexico).
Like I and others have written, because it is underdeveloped, Nicaragua’s potential is what makes it so attractive to investors. Its pristine Pacific Coast, the diving off of the Corn Islands on the Atlantic Coast, and its historical treasures Granada and Leon, are just a few of the highlights ready for growth in this beautiful and proud country. Geographically, it’s a short plane ride away from the U.S., and there is enough existing infrastructure to access these areas with little effort.
Recently, I have posted about headlines regarding Nicaragua’s political and economic situation cautioning investors to be aware of the tumultuous atmosphere there. I think it is important for potential investors to know what’s going on, that’s what this blog is about. For example recently I’ve written about the many social issues that threaten the stability of the country, their leader’s volatile history, and that he is currently courting allies that are polarizing to say the least. With that said, Ortega is trying to open up the country for investors with the abilities he has, and, there are many (including the press) in Nicaragua who would benefit from seeing Ortega fail.
There is no denying Nicaragua’s prices are attractive to investors. But If you’re looking to put your life-long savings in an ocean front condo and expect immediate rental income to cover the investment costs, you might look elsewhere for the short-term.
Nicaragua is ready for investment input if you have time, there is a vacuum waiting to be filled and it will happen. The only question, is investing in Nicaragua’s future right for you?
The Price of Oil
Francisco Aguirre, president of the National Assembly’s Economic, Production and Budget Committee, recently said “ Nicaragua could be heading for its worst economic depression in 70 years.” according to a recent article in the NicaTimes reported by Tim Rogers.
Citing terms such as, “grave, grim, tailspin, very, very critical, tragedy, and nightmare the article paints a portrait of Daniel Ortega as a president that is unwilling, or worse, unable to remedy Nicaragua’s growing economic decline.
Daniel Ortega and Iran
According to several sources, Daniel Ortega will be heading to Iran for meetings with President Mahmoud Ahmadinejad, to discuss debt forgiveness and Iran’s continued financial support. It is no surprise that Ortega’s developing alliance with Iran is prompting a “wait and see” attitude from the U.S. government and consequently sidelining investors’ confidence in Nicaraguan real estate.
Ortega and FARQ
Another dubious ally that Daniel Ortega seems to be cultivating is his association with FARQ, or, the Armed Revolutionary Forces of Columbia. Recent allegations that Ortega is sponsoring two terrorists and that he had supplied their guerrilla group with weapons, has many worried that Ortega’s past affiliations with the leftist violence is still an issue.
Nicaragua’s Food Crisis
Anti-Hunger demonstrations are capturing the headlines as reportedly over a thousand took part in the rally calling for a comprehensive program to deal with Nicaragua’s growing food shortage problem. On Sunday June 1st, participants in Matagalpa marched to bring attention to issue that has been worsened by the recent skyrocketing price of fuel.
Ortega’s Antagonism
Understandably Daniel Ortega is a polarizing figure. Animosity between the Sandinistas and other more conservative parties has been gaining traction since his election. However, Ortega must realize that his actions are not solely alienating the opposition, they now also threaten international investors pouring millions of dollars in to the country. Recent statements made by Ortega have only served to escalate the tension between these groups. Referring to western financial aid, Ortega recently rebuked, “the colonialist mentality” of countries that offer “conditional aid. There is no doubt that “loans” from the IMF and the World Bank and their Structural Adjustment Programs have hurt Nicaragua’s growth in the past. It is also arguably not constructive for Ortega to alienate foreign investors who are helping to develop Nicaragua’s principal future market, tourism.
There is a lot to consider right now when it comes to investing in Nicaragua. This week’s news out of Nicaragua regarding Daniel Ortega’s alleged involvement with the Armed Revolutionary Forces of Columbia (Farc) is disturbing, considering his past association with violence. As a reminder, Farc is considered by the United States and the European Union as an international terrorist group. The full story could cause investors to pause when considering the political stability of Nicaragua’s current administration and its relationship with the United States and Europe.
On the bright side, for investors whom are aware of the tremendous investment potential in Nicaragua and have not yet made the decision to buy, these headline merely extend the window to get involved at earlier prices. Existing developments need to have a stable political backdrop to sell their product and ongoing negative headlines out of Managua are not helping. This could give the investor a stronger playing hand at the negotiating table.
Whether you are already invested or are taking a wait-and-see stance, Nicaragua is still an investor darling at this point due to its substantial underdeveloped potential. Compared to its regional neighbors, real estate investments in Nicaragua may require a more long-term vision, but the potential is still worth the due diligence.
Ethanol as Biofuel
Today’s production of corn in the US destined to become ethanol accounts for over 25 percent of the traditional food/feed crop. That shift over the last two years has caused a dangerous increase in the price of corn, negatively impacting the growing but still fragile economy in Nicaragua.
Food As Fuel
Since corn is now seen an alternative fuel source, the agricultural commodity is now economically linked to the price of crude oil.
- Barrel price in 2006 – $66.00
- Barrel price today – $129.00
- Projected year end price – $200.00
- Bushel of Corn in 2006 – $2.00
- Bushel of Corn Today – $6.00
- Projected year end price – $8.62
Due in part to the negative economic impact from U.S. subsidized corn imports and recent soaring prices in gasoline, Nicaragua is facing some serious food shortage problems.
How does this effect the poor in Nicaragua? There are two results that are predictable, the first is social unrest. The World Bank estimates 33 countries face social unrest because of soaring food and energy prices. As Bob Marley once sang, “A hungry mob is an angry mob.”
The other expected consequence is increased emigration to the U.S.. According to a report today on China Radio International,
- “63.3 percent of Nicaraguans are inclined to seek jobs in other countries, up from 55.5 percent at the end of 2007…”
- Of those intending to seek jobs abroad, 44.5 percent prefer the United States.
- About 42 percent of respondents said the main reason for seeking jobs abroad was the lack of jobs domestically, while 23.6 percent cited poverty as the cause and 17.1 percent said the rise in food prices was triggering the exodus.
Food that should feed people is being converted to satiate the worlds hunger for gasoline, that’s just wrong.
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According to several news reports the planned month long national transportation strike is taking its toll on the capital city. Sources report that “…travel in the city [Managua] is both risky and tense…” with taxi drivers refusing to enter parts of the city where blockades are set up to disrupt traffic. A bus driver was killed on Wednesday in northern Nicaragua but reportedly there was no conection to the strike.
The strike which started on May 5th is expected to last for 30 days. Transportation organizations including taxis, bus lines, and the trucking industry are demanding a reduction of fuel costs and a freeze on future prices.
The U.S. Embassy in Managua recommends U.S. citizens buy fuel, food, and water to last for at least a week. It also advised that travelers avoid driving through barricades.
If you have to travel in Nicaragua it’s a good idea to review some travel safety tips and be aware of the tension on the specific routes to your intended destination.
World-Wide Food Crisis
Most headlines out of Nicaragua this week are regarding the food crisis. There are many reasons why there is a world-wide food crisis right now, and they are mostly political – but I won’t open that can of worms in this post. Memo to self: must remember this blog is about investment. The subject does remind me of a comment I heard recently. It went, “politics is about two things – the first is money, and…I can’t remember the second.”
Food Crisis In Nicaragua
I feel strongly that investing in foreign real estate ties an investor to that land in ways other than those that are self-serving. Fundamentally, that tie involves an ability to respond to the needs of the people on that land. That response-ability is an insurance that the investment made, like the people of that country will prosper. One won’t happen without the other. Investment supports people, people make investments grow, and in Nicaragua, both have a lot of room to grow.
Food Crisis Action Plan
One way you can insure that your investment in Nicaraguan real estate stays healthy, is to do your part and insure the people of Nicaragua stay healthy too. Here’s a short list of quality organizations to contact.
If you are considering investing in real estate in Nicaragua consider the “Community RE Fund Program” set up by Coldwell Banker in Nicaragua. According to their web site, “The REfund model encourages every participant in a real estate transaction to contribute funds at the time of closing. Investing that creates value in society and the environment while at the same time being financially profitable.” (read more)
Affiliated with the RE Fund program in Nicaragua, Dos Manos is a collection of non-profit organizations that focuses on children’s needs and education.
Unlike politics, investing in a country is about more than just one thing, today’s headlines make it easy to remember what it is. Do what you can to help with the food crisis in Nicaragua.
