S&P Downgrades Nicaragua

  • Monday, November 12, 2018
Arguing that the country’s fiscal and financial profiles have weakened, Standard & Poor´s downgraded from B to B- the negative outlook for Nicaragua’s foreign currency debt.

The negative outlook reflects a greater than one of every three probabilities of a downgrade in the next 12 months because of possible additional pressure on the balance of payments or the domestic financial system in dollar terms, given the government’s limited foreign exchange financing options.

From the statement of Standard & Poor’s:

Nicaragua Long-Term Ratings Lowered To ‘B-‘ On Deteriorating Fiscal And Financial Conditions; Outlook Is Negative

RATINGS 
Foreign Currency: B-/Negative/B
Local Currency: B-/Negative/B
For further details see Ratings List.

OVERVIEW 
Nicaragua’s fiscal and financial profiles have weakened further amid ongoing economic strain, limited financing options for the government, and declining foreign currency reserves.

We are therefore lowering our long-term foreign and local currency sovereign credit ratings on Nicaragua to ‘B-‘ from ‘B’.

The negative outlook reflects a greater than one-in-three chance of a downgrade over the next 12 months due to potentially further pressure on the balance of payments or dollarized domestic financial system, given the government’s limited foreign exchange financing options.

RATING ACTION 
On Nov. 9, 2018, S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings on Nicaragua to ‘B-‘ from ‘B’. The outlook is negative. At the same time, we affirmed our ‘B’ short-term sovereign credit ratings. We also lowered our transfer and convertibility (T&C) assessment to ‘B-‘ from ‘B+’.

OUTLOOK 
The negative outlook reflects the risk of further deterioration in Nicaragua’s fiscal and debt profiles and in its banking system due to persistent economic contraction and greater difficulties in obtaining foreign exchange financing.

The decline in Nicaragua’s foreign exchange reserves this year, combined with the country’s crawling peg currency regime, highlights its vulnerability to potential external liquidity pressures.

We could lower the ratings within the next 12 months if the government fails to stanch the loss of dollar liquidity in the economy. Failure to reverse the loss of foreign currency financing flows could lower the level of international reserves beyond our projections.

A decline in the availability of deficit financing–be it from official or private domestic creditors–would further damage economic activity and could pose challenges for the
crawling-peg exchange rate, which has anchored financial stability in the country.

Conversely, we could revise the outlook to stable within the next 12 months if we see stabilization of liquidity pressures in the economy, as well as stabilization in the local financial market and in the balance of payments.

Such an outcome would likely depend on policies that raise investor confidence in the economy and reduce fiscal imbalances. Improved access to financing from both local and external creditors could bolster the country’s international reserves and stabilize its financial profile.

 

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