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AmericasJuly 1 2007

Vote of confidence

Nicaragua’s apparently reformed ex-Marxist president is enjoying some success courting private business and international lenders in his quest to combat poverty. Local banks are also doing well. Jane Monahan reports from Managua.
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Daniel Ortega, the leader of Nicaragua’s Sandinista party (Frente Sandinista de Liberación Nacional) won 38% of the vote in November 2006’s elections and reassumed the presidency this January in a remarkable political comeback, after three consecutive electoral defeats.

When he was in power for the first time, from 1979 to 1990, Mr Ortega, now 61, presided over a revolutionary Marxist government, fought a protracted war against US-backed Contra rebels (that left the economy in chaos) and was Washington’s most despised leader in the region.

But despite fears that his re-election would frighten off investors and result in Nicaragua failing to uphold the US-Dominican Republic-Central American Free Trade Agreement(DR-Cafta), which Nicaragua ratified in April 2006, verbal assurances from the new president during his campaign that he would do neither are now being translated into deeds.

In his first six months in office, Mr Ortega has emphasised the importance of co-operation with president Hugo Chavez of Venezuela, but simultaneously has courted private business, local bankers and the International Monetary Fund (IMF) for their support for a plan to reduce poverty. He has also promised to maintain good relations with the US – Nicaragua’s main trading partner – and confirmed his intention of meeting public debt payments, both domestic and foreign.

“There was a great deal of uncertainty [before the election] but now there is cautious optimism [among bankers and investors],” Luis Rivas, general manager of Banco de la Producción (Banpro), the largest of Nicaragua’s commercial banks, with a 28% market share, told The Banker.

The other banks in the system are: Banco de Crédito Centroamericano (Bancentro), in second place with a 23% market share; Banco de América Central (BAC) in third place; Banco de Finanzas (BDF) in fourth; Banco Uno in fifth; Banco Procredit in sixth; and Primer Banco del Istmo in seventh. All seven commercial banks only began operating about 15 years ago after Mr Ortega’s first electoral defeat in 1990. Their combined assets totalled $3bn at end-March 2007, 57% of gross domestic product (GDP).

Deposit recovery

Bank deposits fell 4% in the run-up to last November’s elections, Victor Urcuyo, head of the Superintendency of Banks and Other Financial Institutions (Superintendencia de Bancos y de Otras Instituciones Financieras – SIBOIF, established in 1991), told The Banker. However, the fall was less than that during Nicaragua’s previous elections and this year public deposits “bounced back”, he says. According to the superintendency, total deposits (65% in dollars and 35% in cordobas, the national currency) amounted to $2.2bn at the end of March, which was 6.3% more than end-2006 and 9.2% more than the year before. Similarly, total credits to the private sector grew almost 5% in the first quarter and by 28% compared with the year before – hardly a sign of a worried banking system.

In mid-February, Mr Ortega attended the launch of a $35m venture capital and private-equity fund – at the offices of one of Central America’s largest financial groups, Latin America Financial Services (Lafise), in a smart modern section of Managua, Nicaragua’s otherwise unglitzy capital. The fund is managed by Lafise and financed by the development agencies of Norway, Finland, Switzerland and Belgium, and the Inter-American Development Bank (IDB).

Mr Ortega spoke from a podium. “I feel identified with this project,” he said. “This fund to invest in small and medium-sized companies in Central America [which usually have great difficulty obtaining long-term loans for their growth] will have an impact on productive sectors, on employment and on poverty in Nicaragua, too.

“It is one more step that proves we are committed to respecting private property and foreign investors and that we are a government of reconciliation and national unity,” Mr Ortega said.

Private sector support

Roberto Zamora, general manager of Lafise and of Bancentro, which is part of the Lafise group, told The Banker: “The private sector is giving a vote of confidence to the government, and the president has an opportunity to do something about poverty.”

Reducing poverty is undeniably the biggest challenge facing the government. Take Managua: in many areas dilapidated shacks line dirt roads; people walk barefoot and wear rags; and the national cathedral is still a hollow shell, 35 years after it was damaged by an earthquake. Nationwide, about 80% of the population of 5.2 million survive on less than $2 a day.

Mr Zamora says the economy improved in 2006 in terms of reserves and the volume of exports, especially to the US. Remittances were in the order of $700m; and inflation and the exchange rate are under control. On top of that, in March, Nicaragua obtained $984m in debt relief from the IDB corresponding to the period up to end-2004. As a result of a satisfactory performance under a Poverty Reduction and Growth Facility (PRGF) programme with the IMF and the Multilateral Debt Relief Initiative, the IMF and the World Bank recently cancelled about $200m and $1.5bn in foreign debt respectively.

However, the new government also inherited a budget deficit of 6% of GDP (which will make it difficult to increase spending in 2007), and a domestic public debt of 180% of GDP, economists say.

Antenor Ferrey, the newly appointed president of the Central Bank of Nicaragua, told The Banker: “This year’s 60% reduction in coffee production [traditionally Nicaragua’s number one export – the fall is due to the El Nińo phenomenon] will evidently affect GDP, not to mention high international oil prices, which have a direct effect on growth.” Nicaragua’s fuel imports for transport and electricity generation cost $800m in 2006. (A preferential cheap energy deal with Venezuela kicks in this year. Additionally Mr Chavez is to supply four generators with 15 megawatt capacity each by the end of this year.)

“It will be difficult to achieve a growth rate above 4% in 2007, which is necessary to create jobs,” says Mr Ferrey, who is a lawyer by profession.

As a result, the president has sought the assistance of the country’s only private business confederation, COSEP, and private bankers. His government has also started negotiations on a new, three-year PRGF arrangement with the IMF in May for a medium-term economic plan, whose overriding objective is poverty reduction.

The plan focuses on creating jobs and growth in nine productive (and mainly export-oriented) sectors: coffee, sugar, manufacturing, fisheries and agriculture, meat and dairy, agribusiness, tourism, peanuts and Atlantic coast products (palm oil, pineapples and bananas). At the same time, the plan envisages increases in social spending and investments in renewable energy, water, housing, education and health.

Mr Ferrey says: “We need to develop productive, mainly agricultural areas. But this won’t work if these sectors don’t have access to credit. There is therefore an important role for banks in the plan and especially for micro-finance institutions.”

The latter now comprises more than 450 entities (including banks, non-governmental organisations and multilateral development agencies) with about 300,000 clients, but only about 40% of their loans are targeted for agricultural/productive activities, Mr Ferrey says.

Left to their own devices, Nicaragua’s commercial banks, which are quite sophisticated, offer a variety of services (private banking, remittances transactions and trade finance), but tend to specialise in certain areas. For instance, about 70% of lending by Bancentro and 80% by Banpro is in local companies – which are predominantly export-oriented – to avoid the exchange rate risks of lending to earners in cordobas. Similarly, BAC and Banco Uno specialise in credit card and consumer loans; BDF in mortgages and Procredit in microfinance.No bank has exclusivity in a market segment, however, and there is plenty of potential for growth.

Mortgage immaturity

Consider the housing market, where the country has a shortage of more than 500,000 homes and mortgage lending is scarce. At the moment, BCF, the leading bank in the sector, had a loan portfolio of $76.4m at end-September 2006. However, in May the Overseas Private Investment Corporation, a US government agency, reached a $10m loan agreement with Bancentro to allow the bank to expand mortgage lending and make it the first institution in Nicaragua to provide long-term, fixed rate mortgages.

Meanwhile, in the year to March the segment where private credits increased most was consumer banking (credit cards, mortgages, car and household loans) and Banpro increased its retail and credit card bank activities 70% in 2006, “breaking a monopoly of BAC on credit cards”, Mr Rivas says.

Banpro’s consumer lending, however, still only represented about 15%-20% of the bank’s total loans in 2006, while 80% of its lending is to small and medium-sized companies, which account for more than 70% of the country’s employment.

Both the head of SIBOIF and the central bank’s new president say Nicaragua’s private banks are currently “in good shape”. Mr Urcuyo, who has been the banking superintendent for two years and previously worked at Bankers Trust and Wells Fargo in the US, says: “The banks have very high levels of solvency, liquidity and capital; great profitability [average return on assets and return on equity rates at end-2006 were 2.35% and 25.12% respectively]; better management [average non-performing loan ratios were just 2.04% at end-2006, down from 2.08% at end-2005]; and above all superior supervision.”

However, he added: “We keep a tight hold on the situation.”

Need for oversight

One reason for strict oversight is because although the banks are not as weak as they were, all of them except for Procredit now form part of regional networks – and banks have also tended to serve as the centre points of economic groups by their owners – posing serious challenges to regulators.

However, with the revision of a general banking law in November 2005, bank regulators’ powers have been strengthened; bank reporting requirements have been increased; and stricter rules have been introduced about who is eligible to be a bank shareholder or owner and sit on a bank board (to ensure owners are solvent and to establish more independence between the boards of banks and companies related to them, to reduce inter-party lending).

At the same time, to reinforce consolidated supervision, regional financial groups are now obliged to choose a host country in which to base the holding, and to differentiate this from guest countries. As a result, Bancentro in the Lafise group, BAC in the BAC-Credomatic group and Banco Uno have all consolidated in Panama, Mr Urcuyo says.

In addition, related party lending, which was one of the causes of a banking crisis in Nicaragua in 2000 and 2001, is now restricted to 30% of loans.

The crisis started with massive fraud at Banco Intercontinental, which was subject to intervention by the superintendency in August 2000 on the grounds the bank had broken rules on loan concentration, risking its solvency. Between November 2000 and August 2001, the superintendency intervened and closed Primer Banco Inmobiliario, Banco del Café, Banco Mercantil and Banco Nicaraguense de Industria y Comercio.

However, six years later, investigations are under way in parliament into the causes of the crisis, the way it was resolved, and especially the way in which the failed banks’ loans were reclassified and revalued, and distributed to Banpro, Bancentro and BDF, three healthy banks.

The issue is sensitive because in the rescue operation, to bridge the gap between the assets and liabilities of the failed banks, the government issued bonds to the acquiring banks. Because of the circumstances, however, these bonds had very high terms for the government.

In 2003, the bonds were renegotiated on more favourable terms for the government. However, their face value cost to the government is still about $500m, Mr Urcuyo says.

Debt liabilities

Despite the controversy, the new government’s budget for 2007 includes a $43m allocation for payments owing on the bank bonds; and it includes a $100m allocation for compensation payment bonds, issued to people whose properties were confiscated during the rule of the first Sandinista government in the 1980s.

The latter will help to remove uncertainty over property ownership, which is one of the obstacles hindering mortgage lending and which has also affected the development of tourism – now dominated by foreign investment.

Against this background, another reason for the banking system’s recent consolidation is entry into DR-Cafta and the prospect of more US companies moving to Central America, requiring more bank services.

For instance, in the local market, Banpro recently bought a smaller rival, Caley Dagnell. Then Panamanian-based banks-insurance-television and airlines group ASSA raised its shareholding in BDF from 21% to 55.2% in December 2006. Third, reflecting international interest, BAC announced it was selling a 49.99% stake to the consumer finance division of the US’s General Electric in May 2005.

In July 2006, the UK’s HSBC acquired Primer Banco del Istmo of Panama, a banking group that includes Nicaragua’s sixth bank, for $1.8bn. Later, in October 2006, Citi of the US bought Grupo Financiero Uno, the biggest credit card issuer in Central America with a presence in several Central American countries, including Nicaragua’s Banco Uno.

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