Despite Reagan's Aid Curoff, Bankers Play Ball With the Sandinistas

Negotiations on a $170 million segment of the $1.6 billion foreign debt that the Sandinista government inherited from the late dictator Anastasio Somoza Debayle are extremely close to being concluded, according to Nicaraguan ambassador Arturo Cruz and officials at major U.S. banks. These negotiations are widely viewed as the last hurdle to be cleared before international commercial bank lending to Nicaragua can resume. ,

Alfredo Cesar, president of the Nicaraguan government's Financial Corporation, met in Managua on May 4 with Samuel Costanzo, vice president of Wells Fargo Bank and head of the steering committee representing the 60 commercial banks involved in the negotiations. Subsequent meetings are understood to have been held in New York. Terms of the forthcoming agreement, which will reschedule Nicaragua's nationalized private bank debt, are said to be favorable to Nicaragua and are expected to be in keeping with those set by the S582 million debt renegotiation signed with more than 100 international banks last December.[1]

For Ambassador Cruz, the amicable quality of the negotiations presents "yet another signal that the revolutionary government is not necessarily anti-Wall Street even if political relations between the U.S. and Nicaragua have their ups and downs." Similarly, one official at a major New York bank termed the negotiations a "hard bargaining situation," but noted that "the banks are heartened." He described the Sandinista government as "serious and sincere," and added that "few banks doubt this anymore."

If this agreement is concluded as expected, it will represent a major victory for Nicaragua at a time when its relations with the U.S. government have reached their lowest ebb since the revolutionary triumph in July, 1979. The Reagan administration's cut-off of aid to the Sandinista government has been viewed by many Nicaraguans as only the opening sally of a campaign to isolate Nicaragua and to destabilize the country politically and economically. They U.S. moves are particularly worrisome, since reconstruction aid to the new regime from other international sources has levelled off. For Nicaraguan officials, the progress on the debt accord thus provides welcome evidence that the Reagan administration has not hardened the attitudes of the major banks. Indeed, several banks have termed the Reagan policy "foolish" and "inappropriate" and remarked that their banks have quietly lobbied for a resumption of aid. Their motive is clear: should the Reagan policy succeed in isolating or economically crippling Nicaragua, the Sandinista government may find itself unable to meet loan commitments, or may feel that it has little left to lose and repudiate the Somoza-era debts entirely.

Bank pressure, expressions. of dismay from Western European governments, and protests from prominent Nicaraguan businessmen who feel that the aid cut-off has weakened the interests of the Nicaraguan private sector, may be causing the Reagan administration to rethink its position. Sources at the U.S. Agency for International Development (AID) report that a phased resumption of support is being seriously considered by U.S. policy makers. Even more telling is the fact, confirmed by insiders at the World Bank and the IMF, that the Reagan administration has not attempted to exert its considerable influence to block loans to Nicaragua from the Washington-based multi-lateral lending agencies. This possibility had been of major concern to the credit-short nation.

Nicaragua is currently seeking approximately S200 million in short-term trade -financing and expects a $350 million current account balance of payments deficit this year. Richard Weinert, of Leslie, Weinert and Co., the New York investment banking firm advising the Nicaraguan government, comments that although some commercial banks may .maintain a negative attitude toward Nicaragua, many have already begun to express "mild to great interest" in lending to the Nicaraguan Government of National Reconstruction once the present negotiations are completed.

The response of U.S. multinational investors to the Nicaraguan revolution has been more complex and generally less optimistic than that of the international banks. In contrast to many Latin American nations, Nicaragua has never been a primary focus for the investment activities of American corporations. A number of historic and economic facts explain this. Throughout the Somoza family's 43-year tenure, its immense wealth was drawn from a highly-developed system of corruption and from the family's direct ownership of over one-third of the national land area. Little concerned with raising national living standards, the Somoza dictatorship made relatively few efforts to develop industry and tended to monopolize the investment opportunities that did exist. Internal markets consequently remained small and unattractive to foreign investors.

With the establishment of the Central American Common Market, however, multinationals began to look to Nicaragua as a base from which to gain access to the entire Central American basin. Nicaragua's lack of controls on profit repatriation and investment-except for the often-obligatory "cut" or "commission" to Somoza-provided a lure. Though small relative to their investments elsewhere in Central America, nearly '10 major U.S. corporations invested over $130 million in Nicaraguan manufacturing and processing operations during the 1960s and early 70s.

The large majority of these corporations have stayed on in one form or another since the 1979 revolution brought the Sandinistas to power. With no other foreign investors interested in buying them out, and the Nicaraguan government in most instances unable or unwilling to do so, most companies have preferred to remain in Nicaragua rather than to abandon their investments entirely. This continued presence has taken forms ranging from the maintenance of "skeleton crews" or watchmen to the full or partial reactivation of plants damaged in the civil war. One corporation restricting itself to a "holding operation," American Cyanamid, has shifted most of its plastic laminate sales activities to Costa Rica but maintains watchmen and some inventory at its plant in Managua.

The majority of foreign companies in Nicaragua, however, have resumed some level of production. The Exxon refinery in Managua is operating at pre-revolutionary levels, and managers there describe relations with the government as "good." Exxon generally feels that its agreement to refine the Mexican and Venezuelan oil that the Sandinistas have obtained on concessionary terms has been successful. Managers report that although the oil' company has not made any significant new investment in plant facilities, all necessary maintenance and repair activities have continued. This is reflective of a general pattern. Investment and production have resumed in Nicaragua to the degree that corporate subsidiaries there are "self-financing." As one executive remarked. "to do otherwise, to increase investment, would be to gamble with stockholders' money."

American corporations involved in Nicaragua are apprehensive about the heightened level of anti-American rhetoric which has accompanied the U.S., aid cut-off. They also question whether the concept of a mixed economy will survive in Nicaragua despite government reassurance, and exhibit some anxiety that their properties may ultimately be nationalized.

Thus far, the nationalization of foreign concerns in Nicaragua has been limited and centered primarily in the natural resource sector. Contrary to a report in the April 20th issue of Business Week, the Nicaraguan government has not yet reached a settlement with the Rosario Resources Corporation providing compensation for internationalized gold mines. The discussions have been described as "friendly and conciliatory" by Rosario and as having "advanced greatly" by the Nicaraguans. There has, however. reportedly been some dissension within the government on the matter due to anger over the poor quality of working conditions in the mines, and to allegations that large amounts of gold had been secretly shipped out of the country during the Somoza period.

Government spokesmen nonetheless emphasize that all compensation claims will be negotiated, and report that future takeovers are unlikely.

Of greatest concern, say American businessmen involved in Nicaragua, is Nicaragua's general economic climate. They note that internal demand has contracted substantially since 1978, they complain of high inflation, of problems throughout the Central American Common Market, of shortages, and of difficulties in procuring adequate foreign exchange to buy necessary parts and equipment. They point out that the Nicaraguan government has not yet worked out a clear modus vivendi with the Nicaraguan private sector and that this same problem is evident in their own dealings with the government.

The Nicaraguan junta has said that it views direct foreign investment as vital to the recovery of the economy and consequently to the attainment of the government's ambitious social goals. A major priority, thus, is the promulgation of a new foreign investment law to establish clear regulations; guidelines and incentives for investment. Originally expected to be announced at the end of 'March, this law has been the object of considerable debate and discussion within the Nicaraguan government. The Nicaraguans have called on the services of both a team of corporate lawyers from New York City and a group of experts from the United Nations. The laws and investment experiences of other developing nations have also been reviewed.

Though Nicaraguan officials stress that no final decisions have yet been made, an important consideration in designing the foreign investment law will De to encourage the use of local raw materials, to develop local natural and human resources, to bring in needed technology, and to guide foreign investment away from the production of luxury items toward that of basic consumer necessities and industrial inputs. Specifically, this might involve training programs for Nicaraguan managerial and technical personnel, a careful eye on the employment effects of imported technology, and the paced, long-term development of both renewable and non-renewable resources.

Foreign companies are likely to be barred from entering certain industries, limited to a 49 percent minority ownership of all projects, and generally not allowed access to local investment capital. It is probable that Nicaragua's income tax and profit repatriation laws will be made more favorable to outside investors than they now are, and that arbitration and adjudication procedures will be set up for the resolution of any disputes that might occur once investment is in place,

The Reagan administration's ultimate stance toward Nicaragua will be an important variable affecting the inflow of new investment. As one executive put it, "the U.S. government sets the tone that American companies follow. If the government says 'stay out,' in most cases this becomes the cardinal rule." Many American multinationals will probablyo also want to wait until they see signs of an independent upturn in Nicaragua's economy before making any commitments. Turmoil in El Salvador and the possibility of similar upheaval in Guatemala have made some businessmen question the wisdom of investment in the entire region. A recent study conducted by an organization representing American business groups in Latin America found that of 60 major corporations polled, only one was considering new investment in Nicaragua and only two were contemplating any new investment in all of Central America. Most of these corporations indicated that they did not view additional investment as desirable in the region for at least a few years.

Nicaragua has a rich endowment of natural resources, abundant land and an able, dedicated leadership. At present, however, the nation's economy is extremely fragile and foreign capital in the form of loans, grants or direct investment is crucial to any kind of recovery. With large-scale direct foreign investment possibly years down the road, a hostile administration in Washington, and the inflow of aid slowing, the urgent question the Sandinistas are now facing is how long Nicaragua's long-suffering population can be induced to wait to enjoy the fruits of their revolution. Having come this far, however, the Sandinistas are not about to give up. As one remarked, "We will find a way-we have to!"

FOOTNOTE:
1 This accord extended the term on the debt by twelve years and included a five-year grace period during which Nicaragua's interest payments were limited to seven percent. During earlier debt renegotiations such as those involving Chile and Jamaica, the private banks took a harder line.

J.A. Cuadrado is a free-lance writer based in Princeton, New Jersey.