Postwar Revolution

By JUANITA DARLING

Oct. 26, 1997 12 AM PT

TIMES STAFF WRITER

MANAGUA, Nicaragua —

Nicaraguans driving along their capital’s main boulevard in recent months have passed a novel sight: For the first time in the quarter-century since a killer earthquake shattered this city’s lakefront downtown, new construction is underway.

The silhouette of peasant hero Augusto Cesar Sandino--a sculpture erected by a past Marxist government--now overlooks the site where Taiwanese investors are building a $6-million shopping center, part of a $33-million expansion of the renovated Intercontinental Hotel.

Farther south, on the highway to Masaya, investors from neighboring El Salvador are laying the foundation for a $12.7-million hotel-shopping center complex. Out by the airport, the Las Mercedes Industrial Park--a free-trade zone converted to a prison under socialism has leased all its manufacturing sites, 90% of them to Taiwanese-owned export factories.

After 25 years of natural disaster, civil war and socialism, foreign investors are rediscovering Nicaragua. Foreign companies have put more than $100 million into Nicaraguan mines, telephone service, hotels and other industries over the last few years. The Foreign Investment Committee has approved twice that amount for future investments. Those figures exclude investments in land--for agriculture and tourism--and other projects that don’t require government approval.

“In the perspective of the Nicaraguan economy, this is a lot of money,” said Alejandro J. Carrion, general director of investments and export promotion.

Economists note that Nicaragua, the second-poorest country in the Americas after Haiti, still has many serious problems. But belt-tightening and fiscal discipline have cut yearly inflation from the 33,000% that the Marxist National Sandinista Liberation Front racked up in 1988 to a single digit last year. After a few years of modest growth, the country now appears stable enough to attract investors.

Reinforcing this view was January’s peaceful transition of power from conciliatory former President Violeta Barrios de Chamorro to unabashed free-market advocate Arnoldo Aleman.

The changeover has given added impetus to investments that had begun to trickle in shortly after Chamorro became president in 1990, because investors “perceive that Aleman will defend the interests of the private sector and assure respect for private property,” economist Raul Lacayo said.

After the U.S.-backed 1980s civil wars ended, other Central American economies also began to recover. Export factories have opened to the north in El Salvador, Honduras and, most recently, Guatemala.

Those countries are currently working to develop a three-country bloc for negotiating entry to international trade accords, such as the North American Free Trade Agreement. In the south, Costa Rica has preferred to go it alone.

Thus, in one sense, the rest of Central America is leaving Nicaragua behind. Nicaragua has been held back by the strikes and economic instability created by Sandinista unions in the cities and the security threat from roving armed bands in the countryside.

Yet its location in the middle of the isthmus and its relatively large size--rivaled only by Guatemala--mean that it impedes regional economic integration efforts. A Nicaraguan strike earlier this year, for example, closed the Pan-American highway, cutting off overland traffic to Panama and Costa Rica for a week.

But ironically, Nicaraguan’s economic backwardness has given it a comparative advantage in attracting foreign investment.

With unemployment estimated at 50%, it is inexpensive. Labor and land are cheap even by Central American standards. Prime agricultural land in Nicaragua’s Chinandega province costs less than $1,000 an acre, about a quarter what comparable farmland goes for in El Salvador and Guatemala.

“Nicaragua is like an island surrounded by countries that are growing,” Lacayo said.

For most of this century, Nicaraguan land was prized. The country was Central America’s breadbasket during the four-decade Somoza family dynasty, which began in 1937. Four years before, a withdrawal of U.S. troops ended two decades of intermittent civil war and occupation. In the 1970s, when then-President Anastasio Somoza Debayle stole half the aid sent after the ’72 earthquake, he added momentum to the revolutionary movement that overthrew him in 1979.

The Sandinista guerrilla commanders who took power nationalized private industry, throwing out most foreign investors. A U.S. embargo combined with socialist policies and an ongoing civil war drove the country deeply into debt, destroying the economy. Chamorro’s administration renegotiated debt and privatized government-owned companies, laying the foundations for restoring investor confidence.

Nicaragua remains primarily a farming country, relying on coffee, tobacco, sugar cane and other crops--along with ranching--for 60% of its exports. Foreign investors are helping to modernize agriculture and diversify the economy.

Canadian firms Greenstone Resources and Triton Mining, based in Vancouver, have revived the gold mining that flourished in the 1940s and ‘50s, reopening mines and exploring for new deposits.

Motorola, meanwhile, started a cellular telephone system and BellSouth has installed a digital telephone system and fiber optics to modernize the formerly government-owned phone company. U.S. companies, including Unocal, are also involved in badly needed power-generation projects to improve the reliability and availability of electricity. (Forty percent of the country has no power.)

Still, for most Nicaraguans, the most visible proof of foreign investors’ interest in their country is the $117 million in new tourism projects under construction.

After buying the landmark pyramid-shaped Intercontinental Hotel in one of the early privatizations, Taipei-based Nica Eastern Development is expanding. When the 90-store shopping center is finished next year, the company plans to break ground on a 100-room, all-suites wing.

“We have to stay competitive to keep our customers,” said company representative Fred Kuo. In the four years that Nica has owned it, the Intercontinental has been the only first-class downtown hotel in Managua. The only competition was the Camino Real, near the airport.

But that is changing. The Guatemala-based Princess Hotel chain is building a $7.8-million, 100-room hotel almost across the street from the 150-room hotel that El Salvador’s Robles Group is constructing. Those two projects are part of a regional expansion by the two Central American companies.

Kuo predicted there won’t be enough customers to go around. “There are more business people arriving because the country is starting to change,” said Kuo, “but whether they continue to come will depend on purchasing power.”

He says his occupancy rate is less than 60% and that it fluctuates between 30% and 100% each week. On weekends, the hotel is deserted.

Montelimar, Nicaragua’s only first-class beach resort, is also about to get its first taste of competition. Spain’s Barcelo hotel chain paid $3 million for Somoza’s old beach mansion and spent another $3 million remodeling it into a 204-room resort of low-slung bungalows that opened in December 1993. The resort has about a two-thirds occupancy rate, said Administration Director Jose Rafael Campos. “For just three years, we are doing all right,” he said. “We have marketing plans that will also make an improvement.”

Those plans include reopening Somoza’s former private airstrip to whisk foreign tourists directly to the resort without passing through the congestion of Managua. That will help fill the $5-million, 82-room high-rise addition scheduled to be completed next year.

By then, Italian, German, Panamanian and U.S. investors also plan to have resorts operating in far-flung parts of Nicaragua, including the Corn Islands in the Caribbean.

All this construction has left some Nicaraguan economists skeptical. “There is a lot of money coming into the country” from unknown origin, said one source close to the government, pointing out that money laundering is legal here. It is probably no coincidence that Nicaragua’s second-biggest source of foreign investment comes from the Bahamas, notorious for offshore banks handling money of questionable origin.

Carrion doubts that money laundering is involved. “We have a deficit of a half-million houses. If money were being laundered through construction, we would not have that deficit.”

Economist Sergio Santamaria is more worried that investors are attracted by unrealistic government projections and will quickly pull out again. The government is counting on 15% growth in agriculture and 16% in construction to reach its targets of 5.9% growth this year and 7.4% in 1999.

With the current drought, the farm harvest will probably be smaller than last year, not bigger, Santamaria said. He is expecting 3% economic growth this year, and his most optimistic projections are for 5% in each of the next two years.

“No economic program of any kind exists in this country,” said economist Roberto Cerda, who recently resigned from the government. “We need quality investment that will bring jobs and increased value” to raw materials.

Current construction projects import even their nails, he said. Rather than importing everything, “we need to export,” Cerda said. Further, the government’s foot-dragging in reaching a new agreement with the International Monetary Fund over pending loans could bring problems, even a resurgence of inflation, he warned. In addition, Nicaragua has not met all of its economic targets, such as controlling the federal budget deficit, which threatens the IMF backing that is essential to obtaining foreign financing.

“The financial uncertainty will bring investors, but not the kind of investors that Nicaragua deserves,” he said, referring to short-term speculators.

Kuo said the business people who stay at his hotel are cautious. “Nicaragua has a lot of potential, but this may not be the time yet,” he said.

However, Carrion said Nicaragua is working--with foreign investors, in many cases--to overcome its problems, such as the electricity shortages that are causing blackouts during the current drought.

Government officials at the highest levels recognize that continued foreign investment is key to solving these problems. The Economics Ministry, which keeps track of statistics and makes projections, has been put in charge of promoting investment, said Vice President Enrique Bolanos. Bolanos himself is organizing a government/private-sector commission to visit other countries and invite businesses to consider investing in the country.

“After all the political events, Nicaragua is de-capitalized,” he said. “Nicaragua does not have enough domestic savings to meet our investment needs. Foreign investment makes up the difference.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Sandinistas Out, Capital In

Foreign investment has grown steadily in Nicaragua since the Marxist Sandinistas were turned out of power in 1990. Foreign companies, led by those from Canada, have focused on the mining and energy sectors.

Reported annual new foreign investment in Nicaragua

(In millions of U.S. dollars)

1996: $85.1

Government-approved foreign investment in Nicaragua, by sector and country.

Agribusiness

Agriculture

Banking

Communications

Energy

Fishing

Mining

Services