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���������ֳ� - New York - 11 Jun 2021: ���������ֳ� has affirmed Nicaragua's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'B-', and revised the Rating Outlook to Stable from Negative.

Key Rating Drivers

The stabilization of the Outlook reflects greater than expected fiscal resilience, early signs of economic recovery from a lengthy period of economic contraction, and pandemic-related multilateral disbursements that have eased near-term financing constraints. Nicaragua's ratings are constrained by the lowest World Bank Governance Indicators average score in ���������ֳ�-rated Americas, low income per capita, political stability risks and international sanctions that limit future external financing.

Greater availability of multilateral funding has eased constraints on government spending and financing. In 2020 the general government deficit increased to 1.8% of GDP from 0.3% a year prior; the deficit compares favorably with the 2020 'B' median of 7.2%. The deficit was driven by an 8% increase in central government expenditure while revenues were remarkably resilient, resulting in a central government deficit of 1% of GDP. The deficit of the social security institute (INSS), which has been a driver of general government deficits, reached 0.8% of GDP, an expansion of 0.2pp compared to 2019. ���������ֳ� projects that the INSS deficit will gradually grow to 1.4% of GDP by 2023 unless there is a structural reform that improves its actuarial position.

���������ֳ� expects that the general government deficit will widen to 3.2% of GDP in 2021 and narrow to 2.7% by 2022. The wider deficit in 2021 is driven by an increase in expenditure of 16% at the central government level, the largest increase since 2015. Capital expenditure is expected to increase by 36% to 5.9% of GDP. ���������ֳ� expects that in 2021 revenues will grow by 10%, a rate not seen since 2017. Central government revenue grew by 20.8% year-on-year in 1Q21, pushed by stronger economic activity.

In 2020, multilateral and bilateral financial institutions disbursed USD829 million (6.7% of GDP) to the Nicaraguan public sector, a 52% increase with respect to the USD546 million average annual disbursement between 2017 and 2019. International multilateral institutions eased their lending requirements in response to the pandemic and to hurricanes Eta and Iota in November 2020. The biggest creditors were CABEI (USD321.6 million), IMF (USD186.8 million), IDB (USD150.2 million) and the World Bank (USD67.7 million).

Many of the loans signed by the government in 2020 are for multiyear programs. ���������ֳ� assumes that contracted loans will be disbursed and such disbursements will gradually fall to pre-pandemic levels by 2023. The 2018 NICA Act and other international sanctions may limit new external financing in the coming years, particularly from institutions where the U.S. has a large voting power.

Domestic borrowing continues to play a smaller role in financing, with the government borrowing domestically at high interest rates and maturities under five years. The cost of debt service increased to 3.8% of GDP in 2020 from 3.0% in 2017. High liquidity and subdued demand for corporate credit has supported demand for government bonds. In 2020 the central government sold a record USD195 million (1.5% of GDP) in local bonds. Of these bonds, 56% were payable in USD with a weighted average yield of 10.6% and maturity of 3.3 years; the remaining were in bonds payable in NIO with a weighted average yield of 9.9% and maturity of 4.0 years. Between January and May 2021 the government sold USD170 million in local bonds.

Central government increased deposits by 53% to NIO24.2 billion (5.6% of GDP) due to the record external disbursements and local issuance of debt in 2020. ���������ֳ� expects that central government deposits will decline in 2021 to finance the fiscal expansion.

The current account surplus grew to an all-time high of 7.6% of GDP driven by robust exports despite the pandemic, import contraction and resilient remittances. This surplus combined with the influx of multilateral financing allowed the central bank to increase international reserves in 2020 by 34% to USD3.2 billion or 6.1 months of current external payments, this level of reserves compares favorably with the 'B' median of 3.9 months.

In 2020 the economy contracted by 2% making it the third year in a row of recession. In 1Q21 real GDP grew by 3.4% year-on-year, and ���������ֳ� projects that the economy will grow 3.8% this year supported by higher exports and fiscal expansion. Growth projections for 2022 and 2023 are capped by credit contraction, political uncertainty stemming from the upcoming elections and the expected fiscal consolidation after the election. In April 2021 net credit of the banking sector contracted by 0.4% year-on-year marking the 32nd month of contraction, while deposits grew by 20.8%.

Events leading to the presidential elections in November could deteriorate relations with the U.S. and EU, potentially increasing risks for widening or tightening of sanctions. Daniel Ortega, president since 2007, is expected to run for a fourth consecutive term. Between June 3-8 four presidential hopefuls were arrested by the government on various charges including money laundering and plotting against Nicaragua's sovereignty and independence. On June 9 the U.S. Department of the Treasury added four names to the list of sanctioned individuals bringing the total number to 30 including the vice-president, finance minister, head of the central bank and four of Daniel Ortega's children. In October 2020 the European Council renewed for one year the sanctions against six members of the government.

ESG - Governance: Nicaragua has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Nicaragua has a low WBGI percentile ranking of 16.9%, reflecting episodes of political violence, weak political participation rights and uneven application of the law.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Public Finances: An inability to access external or local sources of financing or evidence of heightened risks in meeting debt-service payments caused, for example, by the tightening of international sanctions.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Public Finances: Fiscal consolidation that alleviates the overall financing needs, for example, by improving the actuarial position of the INSS.

--Public Finances: Easing of financing constraints, for example due to diversification of financing sources and/or easing of international sanctions.

--Macro: Strong and sustained economic recovery, for example, owing to lower political uncertainty and easing of external financing constraints.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

���������ֳ�'s proprietary SRM assigns Nicaragua a score equivalent to a rating of 'CCC+' on the Long-Term Foreign-Currency (LT FC) IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

--Macroeconomic policy and performance: +1 notch, to reflect Nicaragua's consistent monetary and fiscal policy response that has supported macroeconomic stability through political shocks and the pandemic in recent years.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.

Key Assumptions

���������ֳ� assumes the global economy and international oil prices perform in line with our latest Global Economic Outlook published in March 2021.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Nicaragua has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

Nicaragua has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.

Nicaragua has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.

Nicaragua has an ESG Relevance Score of '4' for Creditor Rights as willingness to service and repay debt is relevant to the rating and a rating driver, as for all sovereigns.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Country Ceiling Model, v1.7.1 (1)
• Debt Dynamics Model, v1.2.1 (1)
• Macro-Prudential Indicator Model, v1.5.0 (1)
• Sovereign Rating Model, v3.12.2 (1)

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