Nicaragua canal to improve flow of economy

By:
Rob Dwyer
Published on:

No start date for project; canal would turbocharge GDP.

Wang Jing canal Nicaragua-R-600
HK Nicaragua Canal Development Investment chairman Wang Jing during the launch the Interoceanic Grand Canal in Brito, Nicaragua, in December


The Nicaraguan economy is one of the fastest growing in central America, with GDP up 4.7% in 2014, but that rate could double if the proposed Nicaraguan canal is built. 

However, despite the government granting Wang Jing, a Chinese telecoms-driven billionaire, a 50-year concession (with the option to renew for 100 years) amid much publicity, locals in Managua say there is little evidence of a start to the project.

The route of the proposed canal would join the Atlantic and Pacific oceans in a waterway that would be large enough to transport ships bigger than the largest that will be able to use the upgraded Panama Canal. 

Growth

Economists say the country’s GDP growth rate would jump to double-digit figures and the economy would double within a decade if the canal were built. The 170-kilometre long and 280-metre wide structure would cost an estimated $50 billion (although some private sector estimates say more) and would require a small army of labourers and engineers. 

It would also cause great environmental harm and has already attracted protests. However, despite the government granting the concession, which provides revenues of just $10 million a year for the first 10 years, followed by a profit-sharing arrangement, local financiers are muted in their expectations about the possible construction. 

It would require huge investment – how long would it take?
Is it even going to be possible to build?

Raul Aleman, Banco General

"As a financial organization we are very prepared for both scenarios – if [the canal] happens or if it doesn’t," says Rodrigo Zamora, head of corporate finance at Lafise in Nicaragua. 

"All the information is public but it is still premature to know [for certain] if it will go ahead. But a project of that magnitude would definitely bring a lot of economic activity – not just for Nicaragua but for the whole region – and as a leading financial organization we are prepared for any opportunity."

However, Zamora says Lafise has not included the project in its base-case medium-term economic outlook. Luis Rivas, CEO of Banpro in Nicaragua, also says his projection of long-term trend growth for the country does not include the construction of a canal. "We think Nicaragua will continue to see trend growth of between 4.5% and 5% and those figures do not include projects like [the canal]," he says. 

Instead, the bank is looking at projects such as the proposed hydroelectric power station of Tumarin as more bankable opportunities in the near-term.

"Tumarin has been approved and the investors will go along with it but the bulk of this investment has not yet come in and had an effect on the economy. It’s the same with the canal – that’s even further down the road. But until then you will still see solid growth based on fundamentals that are relatively good. We have enjoyed good export growth – with good export prices."

Deficit

Nicaragua’s current account deficit has averaged 10% of GDP for the past five years, mainly due to oil imports – 90% of which came from Venezuela. However, with the falling price of oil the country is better able to fund itself and has attracted increased FDI

The Tumarin project is an example of both energy diversification and FDI. However, Tumarin also demonstrates the practical difficultly in executing projects in the region. It was agreed in 2009 and the contract was awarded to Brazilian construction company Queiroz Galvao but delays meant that cost projections rose from an initial $800 million to $1.1 billion. 

The Brazilian company has also been named in the 'Lava Jato’ corruption investigations (causing the construction company to walk away from a Brazilian contract to build a nuclear power station) and BNDES-agreed financing might be difficult to secure, given increased fiscal pressures and political risk in Brazil. However, Banpro’s Rivas believes the project is still viable and will proceed.

As Panama readies for next year’s reopening of its canal – which has been enlarged to double its capacity – there is a sanguine perspective about competition from the construction of a canal in Nicaragua.

"I have heard from the Panama Canal Authority that they are looking at the [Nicaragua canal] as a real possibility of competition but there are generally mixed reviews," says Raul Aleman, CEO at Banco General in Panama. "It would require huge investment and would need to be much longer than the canal here – how long would it take? Is it even going to be possible to build?"