Weaker Venezuela, wary US will test Nicaragua's re-elected leader

After clinching a third straight term by a landslide, Nicaragua's president faces headwinds from an economic crisis in financial ally Venezuela and increasingly rocky relations with top trading partner the United States (US).

Boosted by a robust economy, former Marxist guerrilla leader Daniel Ortega won over 72% of the vote in a final count, buoyed by robust growth and a sharp decline in poverty on his watch, neutralising critics who allege he is setting up a family dynasty. That bonanza for the second poorest nation in the Americas was in part the result of a thaw in ties with Cold War foe the United States that allowed trade and investment to blossom, and billions of dollars that have flowed from socialist fellow traveller Venezuela.

Now both pillars of support are on shaky ground. Washington harshly criticised Ortega's "flawed" victory on Monday, and a law under discussion in the US Senate seeks to sanction Nicaragua unless it improves its record on human rights and democracy.   The outcome of Tuesday's US election is likely to further affect ties and trade. While Republican candidate Donald Trump is arguably the bigger threat to Nicaragua, with policies seen as isolationist and anti-Latino, Democratic rival Hillary Clinton is cooler on trade pacts than her predecessors.

In Venezuela, economic and political turmoil is jeopardising millions of dollars in annual loans. Venezuelan financial support to Nicaragua plunged 37 % in the first half of the year following a cut of almost 40 % to $300 million in 2015, central bank figures show.

"It's a perfect storm, because it affects growth and economic stability, two open flanks," said economist Nestor Avendano of the troubles with Nicaragua's leading partners. "President Ortega will need to seek political consensus." Thanks to close ties with late Venezuelan leader Hugo Chavez, an ideological ally, Ortega has negotiated more than $3.7 billion in cheap loans from Caracas since 2007, according to Nicaraguan central bank figures.

A deeper financial crunch in oil-rich Venezuela could drain more assistance, leaving Ortega on the hook for popular social programs and oil imports that have been backed by petrodollars. Nicaragua has a "moderate risk of external debt distress," the IMF said in a report this year, warning that "continued uncertainty around the Venezuela oil collaboration poses important downside risks to public finances."

'CLOUD ON THE HORIZON'

Ortega, whose wife Rosario Murillo ran as his vice presidential candidate, kept a comfortable majority in Congress, results showed. His mandate runs through 2021. Emerging as a leader of the Sandinista movement that toppled Anastasio Somoza in 1979, Ortega has undergone a dramatic shift from revolutionary Marxism to careful pragmatism, keeping relatively cordial relations with US President Barack Obama.

Anastasio Somoza in 1979, Ortega has undergone a dramatic shift from revolutionary Marxism to careful pragmatism, keeping relatively cordial relations with US President Barack Obama. Solid growth and falling poverty have helped Ortega weather attacks by opponents over alleged electoral fraud, constitutional changes that ended presidential term limits and the posting of family members in key government jobs.

But there are signs patience is wearing thin, at least in Washington. State Department spokesman Mark Toner on Monday said the election was not free and fair. Meanwhile, a bill, known as the Nica Act, which conditions financial aid to Nicaragua on improvements in democracy, human rights, and battling anti-corruption, passed the US House of Representatives in September. It still needs to pass the Senate. 

"We just flagged this as sort of a cloud on the horizon, but it's not a storm. It is not raining," said Joydeep Mukherji, a Standard & Poor's analyst, noting that passage was uncertain and that it was unclear how it would be implemented.

Perhaps most worrying for Ortega is the protectionist rhetoric that has dominated the U.S. election campaign. Despite his leftist roots, Ortega has embraced free trade and annual commerce with the United States has grown to $4.4 billion. Apparel, gold, coffee and appliances are top exports.

Working with entrepreneurs, Ortega won plaudits from the International Monetary Fund (IMF) for sound fiscal policies. Growth was buttressed by high prices for meat, coffee and gold exports, as well as remittances and foreign investment. But Nicaragua faces a tough trading environment in the future. Trump has threatened to totally rewrite US trade ties, and Clinton, who is favoured to win, has taken a harder stance on free trade deals than Obama.

Clinton voted against the Central American Free Trade Agreement (CAFTA), which has helped Nicaraguan exports to the U.S. jump by 170 % from 2005, US data show. She and Trump both oppose the 12-nation Trans-Pacific Partnership (TPP), which Ortega has expressed interest in joining.

"Any country that has important trade links to the US could be impacted by a surge in protectionist policies regardless of who is in the administration," said Moody's analyst Ariane Ortiz-Bollin.