Why and how we continue to support our clients during the political and economic turmoil in Nicaragua.
Nicaragua is experiencing a severe political crisis that is affecting the country’s economy. This situation did not leave our clients unaffected nor the many families who depend on these companies for their livelihood. Our clients saw their profit and prospects shrink during the economic downturn. Despite these circumstances, we continued to financially support our clients. We were even able to close five new deals.
Especially the microfinance industry was affected, as micro-entrepreneurs are hit hardest by the drying up of tourism,
In April 2018, protests against proposed pension reform evolved into general protest against the regime of President Daniel Ortega. These protests were met with violence by the government, resulting in hundreds of deaths, thousands of wounded and many protesters imprisoned. Dialogues have been initiated between the Ortega government and representatives of the private sector, the church and civil society. To date, limited progress has been made through this process. Elections are scheduled for 2021 and the outlook for the near to medium term remains uncertain. Sanctions have been imposed by the US on key figures of the Ortega government and the EU is expected to announce sanctions in due course.
Nicaragua maintained a strong economic growth rate of 4.6 percent and 4.7 percent GDP in 2016 and 2017. This changed in 2018. Due to the social and political unrest the economy suffered a contraction in of 3.8 percent. For 2019 growth is expected to fall to -5.0 percent.[1] This economic downfall has also affected our clients. Especially the microfinance industry has been particularly affected, as micro-entrepreneurs are hit hardest by the drying up of tourism, the sharp increase in unemployment and political uncertainty. Nicaragua’s agribusiness sector was able to weather the crisis given its export orientation; however increases in taxes on agribusiness inputs are weakening the competitiveness of the sector.
Showing support and trust for the private sector is of vital importance for continued economic development.
Despite the dire situation in the country, we continue to support our clients. As a development bank, we support micro-entrepreneurs and private sector development even in difficult times. The private sector is the engine of the local economy and can help to prevent further downturn.
This year, we continued to support our existing clients Financiera FAMA and Financiera FDL with additional financing as a number of funders have pulled out of the microfinance space. We also supported the country’s coffee sector through a second loan to Mercapital de Nicaragua, member of Mercon Coffee Group.
The crisis also opened opportunities for us to finance new clients on the agribusiness front: in August we invested in a key export sector of the country – peanuts – through a loan to COMASA. In November, we applied our dedicated Building Prospects government fund to MLR, a teak and cacao agroforestry project.
At FMO, we believe that “doing makes the difference”. Showing support and trust for the private sector of a country during a political crisis might not be the easiest thing to do, but it is of vital importance for continued economic development. Let’s zoom in to see how our investments and clients are benefitting the people and economy of Nicaragua:
FDL is a microfinance institution primarily focused on the rural areas of Nicaragua. It is the largest microfinance institution in the country (Total Assets: USD 80 mln). FDL is a for-profit institution which provides financial and non-financial services tailored to microentrepreneurs and small and medium-sized enterprises in the commercial, agricultural and industrial segments. Having 61% of its exposure in areas with severe poverty. Around 60% of FDL’s clients are exclusive clients and in view of the current situation, would very unlikely receive a loan from another institution.
FDL successfully transitioned from an NGO to a regulated 'financiera' in 2017 and is a longstanding client of FMO. As a result of the current crisis, FDL is seeing strong contraction of its loan book and is also experiencing the effect of the low coffee price which is heavily affecting part of its client base. Liquidity constraints in the banking sector has reduced the availability of local financing options. Whereas FDL benefits from strong shareholders (i.e. Norfund, Oikocredit), renewing its financing lines with existing international lenders is crucial for the institution to make it through the crisis. Our financial support is a clear sign to the market and other lenders of our commitment and trust in the management capacity of FDL. Therefore, we are providing an USD 4.5 mln loan from our MASSIF fund to support FDL in these turbulent times.
FAMA is a microfinance institution focused on the urban areas of Nicaragua. It is the second largest regulated microfinance institution in Nicaragua (Total Assets: USD 55 mln). FAMA mainly funds entrepreneurs at 'the base of the pyramid', with nearly 100% of these microentrepreneurs running informal sales outlets and shops with informal employees in the street markets of Managua. About 70% of FAMA's clients are female entrepreneurs.
FAMA is a longstanding client of FMO and has proven resilient to crises. The institution has a strong and experienced management team as well as a clear social mission. In 2010 at the time of the ‘No Pago’ crisis, we supported FAMA with rescue finance including warrants, which we later (2017) converted into equity. We are currently an 11% shareholder and have an excellent relationship with this client.
In light of our continued support through the current country crisis, we signed a new financing of USD 4.5 mln with FAMA. This financing helps FAMA to maintain adequate liquidity, but also – perhaps more importantly – provides a sign of confidence to the market, especially because the loan was a coordinated effort with commercial bank Triodos (another key lender and equity holder) which also provided a new debt facility in parallel.
Mercapital de Nicaragua is a microfinance institution targeting smallholder coffee farmers and a key element within the integration strategy of the Mercon Coffee Group. Mercon is one of the 10 largest integrated coffee suppliers in the world, with sourcing operations in Central America, Brazil and Vietnam. Mercapital provides pre-harvest and long-term finance to over 2,100 smallholder farmers in Nicaragua, who comprise over 75% of its client base.
| Mercon Coffee Group, September 2019 |
At a time when foreign investors have fled Nicaragua and local banks have reduced their exposure - especially to coffee - Mercapital has continued to support the sector. We signed a USD 5mln loan (through our MASSIF fund) in November this year. This way we help strengthen Mercapital’s financial profile so they can continue to support its smallholder base, and capitalize growth opportunities as other financial institutions retrench. Our financing will also stand out as one of the few foreign long-term transactions into Nicaragua this year given the on going political situation.
| Mercon Coffee Group, September 2019 |
Additionally, we provided a grant to the Seeds for Progress Foundation. The Foundation was initiated by the Mercon Coffee Group to support high-quality education in the rural communities of Nicaragua’s coffee-growing regions. The Foundation’s activities contribute to social development and sustainable economic growth by creating opportunities to advance the quality of life for students, teachers and their families in the rural communities of Nicaragua’s coffee-growing regions. The grant funds are being used to develop a coffee school program that will promote life skills for the youth in the communities and support the sustainability of the coffee industry.
COMASA is the biggest peanut processor and exporter in Nicaragua. It exports 75% of the country’s peanut production. It sources from about 180 farmers and its value chain provides approximately 18,000 jobs, of which 900 are direct jobs.
We partner with this company because of its commitment to support farmers, through among others its investments in research and development to provide seeds that are better adaptable to the climate conditions in the country. COMASA also has several environmental stewardships initiatives that have brought multiple benefits in terms of climate adaptation, biodiversity enhancement, hydrological recovery, soil conditions improvement and farmers livelihood improvement. The company provides trees to farmers to reforest the farms and gives trainings to farmers to improve their agricultural practices.
This year, we provided COMASA with a loan up to USD 15mln as part of a total syndicated amount of up to USD 65mln, led by IFC, a member of the World Bank.
MLR Forestal de Nicaragua, S.A. is developing a sustainable and traceable agroforestry business close to the towns of Siuna and Bonanza in the rural Caribbean region of Nicaragua. To date MLR has planted a total of 2,521 hectares of which 1,862 hectares are planted with teak and an additional 689 hectares are planted with cacao. MLR owns additional lands that have been set aside as conservation areas.
The cacao plantings use teak as the shade tree. MLR operates under the best practices and standards of the industry, having both the FSC certification of the teak plantations and the UTZ certification for the cacao plantations. The plantations are being developed on previously degraded lands. The company is the largest agroforestry project in the region, creating 350 direct jobs (23% female) and will provide approximately 600 jobs when at full capacity. The MLR plantations are located in one of the poorest regions of Nicaragua in an area badly affected by deforestation.
| Workers at the MLR teak plantation |
This month, we signed USD 10mln Mezzanine Facility (through our Building Prospects Fund). Forestry is one of our focus sectors and is a key driver of CO2 sequestration, contributing substantially to our goal of having a zero emissions portfolio by 2030.
The investment will allow MLR to build a cacao processing facility, maintain its existing plantations and at the same time expanding to the ultimate goal of 3,000 hectares of teak and 1,500 hectares of cacao while maintaining additional land as conservation areas. Planting cacao under teak creates two crops on the same lands with the maintenance / fertilizing of the cacao benefiting the teak. Cacao will provide an earlier cash flow as the teak continues to mature.
| MLR cocoa drying process |