Title: Nicaragua’s Foreign Direct Investment Cools Down in Q1 2023, while Tourism Shows Signs of Recovery
Introduction:
The Central Bank of Nicaragua (BCN) recently reported a decrease in Foreign Direct Investment (FDI) in the first quarter of 2023, following a historic high in 2022. Meanwhile, the country’s tourism industry continues to recover despite lingering effects from the socio-political crisis and the ongoing pandemic.
FDI Decline in Q1 2023:
According to the BCN’s Balance of Payments report for the first quarter of 2023, Nicaragua received $379.9 million in FDI between January and March. This amount represents a significant 34% drop compared to the $581.3 million recorded in the same period of the previous year. The decline was mainly attributed to a decrease in debt with non-resident related companies and a reduction in capital contributions.
Investment Softens in Gross Terms:
Analysts note that while the net flow of FDI decreased, the investment’s fall was softened when analyzed in gross terms. The total balance of FDI amounted to $596.5 million, representing a modest 4% decrease compared to the $621.5 million received in the first quarter of 2022.
Ortega Regime’s Economic Engine Wanes:
With the decline in FDI and the risk of total exports nearing negative territory, foreign investment has become the first economic engine that the Ortega regime is starting to switch off. In recent years, the government had relied on remittances, exports, and foreign investment to support economic recovery, particularly through reinvestment of capital from existing investors in Nicaragua.
FDI Performance in Recent Years:
In 2022, Nicaragua captured $1,842.3 million in gross FDI income, marking a significant 25.3% increase compared to the previous year. The net flow of FDI amounted to $1,293.8 million, positioning FDI as the country’s third-largest source of foreign currency income, behind exports and remittances.
Reinvestment of Profits Slows Down:
The BCN attributes the strong FDI performance in 2022 to companies reinvesting higher profits. While the trend of reinvesting profits continues in 2023, it is happening at a slower rate. Such reinvestment refers to income generated by investments that partners choose to capitalize and not withdraw from the country.
Tourism’s Recovery:
Despite ongoing challenges, the tourism sector is showing signs of recovery. The BCN report highlights that income from inbound tourism increased by 23.4% in the first quarter of 2023 compared to the previous year. However, the average per capita spending of tourists decreased slightly to $38.7 per day, reflecting a 6.5% decline from the previous quarter.
Outlook for Nicaragua’s Economic Growth:
According to forecasts by The Economist Intelligence Unit (EIU), Nicaragua’s economic growth prospects remain limited due to political conflicts, low confidence in the rule of law, and a poor business environment. The EIU predicts years of “mediocre” economic growth, with persistent political conflicts hindering long-term growth prospects.
Conclusion:
Nicaragua experienced a decline in FDI in the first quarter of 2023, reversing the historic high achieved in 2022. However, the tourism industry is showing signs of recovery, with increased income from inbound tourism. As the country faces ongoing challenges, the poor business environment and political conflicts may continue to impede long-term growth prospects.