How to Evaluate and Manage Risk in Nicaragua’s Political Environment

Nicaragua has tremendous upside potential in beachfront real estate, but there is also the risk of losses due to adverse political conditions. Some of the favorable aspects of …

Nicaragua has tremendous upside potential in beachfront real estate, but there is also the risk of losses due to adverse political conditions. Some of the favorable aspects of Nicaragua include virgin Caribbean beachfront, splendid colonial architecture, gorgeous and varied landscapes, vast tracks of fertile farmland and some of the most under-priced property in Central America. Additionally Nicaragua has massive untapped supplies of alternative energy (solar, wind, geothermal and hydrological) and abundant freshwater. However with great potential often comes great risk. Nicaragua’s President Daniel Ortega has been busy bad-mouthing foreign donors, capitalism, the U.S. and Europe while associating himself with Venezuela’s Hugo Chavez and Iran’s President Ahmadinejab. In the meantime, two small opposition parties have lost their accreditation and agents of Ortega’s administration have, in the view of some, unjustly harassed top corporations like hotel chain Barcelo and energy giant Exxon with accusations of tax evasion. The situation has created a window of opportunity. If you can accurately evaluate how political volatility will impact Nicaragua real estate, you will have the upper hand on other investors who don’t fully understand the situation. This article will explain how to gauge Nicaragua’s political environment so that you can take appropriate actions to reduce your risk.

Create a preliminary filter
Every year the Wall Street Journal and Heritage Foundation release an “Index of Economic Freedom”, a ranking of each country’s business climate based on factors including property rights, taxes, economic stability, trade regulation, labor laws and corruption. Each country’s ranking is a composite of its rankings for these and other sub-categories, ten in all.

Create a spreadsheet to compare nations on the Economic Index of Freedom and per capita income. Per capita income is a good general gauge of a country’s price level. The higher a country’s per capita income, the more expensive real estate tends to be. There are various sources for this data, including the IMF and the World Bank. Just be consistent by collecting all data from one source.

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Stay current on political conditions
Follow English expat publications such as the NicaTimes and local dailies such as La Prensa and Nuevo Dario, which can be translated to English with Google Translate. Acquire comprehensive weekly digests of all mentions of Nicaragua with Google News alerts. Visiting the World Bank website can tell you how much Nicaragua’s financial dependence limits the president’s freedom of action. For example, the European Union alone ponies up a whopping 30 percent of the federal budget, according to NicaTimes. You can monitor actions by the IMF and World Bank by setting up Google Alerts with keywords for “IMF and Nicaragua”, “World Bank and Nicaragua”, etc.

Watch the political calendar
In November, the country has its municipal elections—most equivalent politically to the mid-year elections in the U.S. The municipal elections will provide an early hard indicator of Ortega’s political fortunes. Ortega’s five-year term ends in 2011 when the next presidential elections take place. Few expect him to win in a fair democratic election. The potential implications of a new president in 2011 from the majority party will likely have a strong effect on the real estate market.

Hedge against political risk
Property purchase agreements (promesa de ventas) can be drafted to include conditions mutually acceptable to the buyer and seller such as due-diligence periods of up to 6 months. You could theoretically include conditions tied to the outcome of the upcoming November elections. Besides banks, many sellers are open to seller financing or installment payments that can stretch out your commitment and minimize your risk. First American Title insurance can be obtained to ensure your title and bolster your legal claim to the property in the event of a legal challenge. It also helps to use a full-service agency that offers before and after-market services extending beyond conventional realty, including title research, orientation and settlement services, project monitoring and assistance with accessing government tax incentives.

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