A shortened version of this article was previously published on NuWireInvestor.com and will also appear in a forthcoming book on Living & Investing in Nicaragua. This is the original draft.
How
To Hedge Against -- and Profit from – President Ortega
How
to navigate Nicaragua's current political storm...and be positioned
to profit
An 2007 economic analysis performed for Agora Financial found that real estate prices in Nicaragua were 68% below the average price of real estate in countries with similar economic policy conditions. Put another way, Nicaragua was available at 32% of the average price of its peer group. Put yet another way, prices here would have to at least triple to reach the average of Nicaragua's peers.
The analysis looked at two variables:
1) The 2007 Wall Street Journal/Heritage Foundation Index of Economic Freedom, which ranks countries based on the extent to which they offer what investors seek: secure property rights;
a low tax burden; price stability; freer trade; flexible labor laws; reasonable regulation; low corruption and a positive business climate overall.
2) per capita income (in U.S. dollars) as a general gauge of a country's "price" level (including its real estate prices).
The analysis collected both series of data for 140 countries, displayed them on a simple scatterplot chart and generated a trend line. The Economic Freedom Index rankings run left to right, along the x-axis, and per capita income runs bottom to top, along the y-axis.
Countries above the line are generally “overvalued” on the whole. Countries below the line are “undervalued.” In other words, countries below the trend line offer more economic and business
freedom for the buck than countries above the trend line.
Nicaragua, 68% below the trend line, is circled, along with Panama and Costa Rica. By this simple measure, Nicaragua in 2007 was the best value in Central America. For all of Latin America, it was
second only to Chile, which is a lot farther away from the U.S. (a 8-hour direct flight from Miami versus 2 1/2 hours for Nicaragua).
Mind you, this is a preliminary filter that does not control for all country characteristics that can affect property values, but it's a compelling initial filter.
These results jibe with other assessments that find Nicaragua to be less than 1/5th the price of nearby beachfront in southern neighbor Costa Rica. According to the Global Property Guide, the best one
can hope to get for a prime beachfront lot with a house on it these days, in the Caribbean, is currently $1,300 to $1,500 per square meter in places like Jamaica, Aruba and the Dominican Republic.
But Nicaragua's Caribbean Corn Islands offer the same white sand beaches and clear, blue and turquoise waters for less than $20 per square meter, not far from the island airport.
In other words, Nicaragua's “price” was already heavily discounted for political risk even before Ortega returned.
Second:
Get Informed on Politics
Ortega relishes
incendiary diatribes his far-left supporters enjoy gobbling up, his
far-right opponents love to hate and business people bemoan. But what
forward-looking investors should focus on are his actions, not words,
as well as facts on the ground that greatly constrain both Ortega's
desires and his actions.
You
can establish this by reading Wikipedia entries on Nicaragua
and her politics
and by following expat English publications such as the NicaTimes
and local dailies such as La
Prensa
and Nuevo
Dario,
which can be computer translated through Google
Translate.
For those on a busy schedule, order up comprehensive automated weekly
e-mail update of all mentions of Nicaragua with Google
News alerts.
In doing this over the
past year, you would have known or learned that Ortega has been a
minority president since he returned to the presidency in January
2007, and that he didn't win the 2007 presidential election... the
opposition lost it by splitting the vote among multiple candidates.
That allowed Ortega to eke past constitutional minimums and “win”
with only 38% of the vote.
You'd
also learn that Ortega has even less support now then he did after
the election: La Prensa reported last month that Ortega's ratings
sank to an all-time low of 21% this summer. He faces a
growing opposition on a number of significant issues, emboldened by
more than 15 years of democratic institution building.
By visiting sources such
as Nica Times as well as the World
Bank, you'd also learn how much Nicaragua's financial dependence
limits the president's freedom of action. The Nica Times reported
last month that the European Union alone ponies up a whopping 30% of
the federal budget. This is the latest statistic to cement the
reality that Nicaragua will never receive as much support as it does
from the U.S. and E.U. – in trade, aid and private investment –
over such a prolonged period from countries such as Venezuela or
Iran, whose dysfunctional, third-world economies are struggling, at
best (which you can also see with a simple Google search).
Ortega
talks trash to appease his base (the dirt poor), but has not made
radical economic policy moves. The World Bank, International Monetary
Fund and U.S. Millennial Challenge Account continue to maintain
condition-based financial support based on their rigid reform-minded
policy criteria (update: the Millenial Challenge Account recently suspended support pending resolution of the disputed municipal elections). This is a virtual seal of approval you can monitor
on an ongoing basis by setting up Google Alerts with keywords for
“IMF and Nicaragua”, “World Bank and Nicaragua”, etc. One of
my Google Alerts picked up the following with my IMF alert a few
weeks ago:
"There
has also been significant progress in the implementation of the
structural reform agenda,” said the IMF's mission director Luis
Cubeddu in his latest report. “The government has continued working
on an action plan to strengthen public financial management.”
Investors
generally react quickly – and violently – to an adverse change or
even the risk of a possible adverse change in the future, so that's
also a helpful indicator to watch. You can check on this
site
to monitor the country's exchange rate for any violent shakes. It
hasn't shown many since Ortega took office. The managed devaluation of
the Nicaraguan cordoba against the dollar has been continuous and
steady for the most part.
Third:
Watch the Political Calendar
Ortega
opened a window of opportunity for smart, forward-looking investors
with a five- to ten-year time horizon to get in “before the herd”,
before the end of his term potentially unleashes pent-up demand and a
resumption of the boom that preceded him.
In
that sense, Nicaragua may now represent the kind of business
opportunity Ireland did when it was an economic basket case in the
1980's; that Argentina did during its peso crisis in 2001; that
Eastern Europe, reeling from the end of Communism, represented in the
early 1990's and that Nicaragua itself represented in the early
1990's after the end of the Sandinista's communist rule. Each of
these periods eventually gave way to fantastic booms. The current
situation is nowhere near as dire as those pre-boom case studies [and unlike the many Wall Street gurus who pretended to be fortune tellers, we are not] but
the past is instructive, providing perspective on the possibility of
a significant rebound.
That's
why it's important to keep an eye on the political calendar through
the news sources and Google Alert functions mentioned above. In
November, the country has its municipal elections – most equivalent
politically to the midyear elections in the U.S. They will provide an
early hard indicator of Ortega and the Sandinistas political
fortunes. Later come the
presidential elections in 2011, when Ortega's current five-year term
ends. Few expect him to win. The big question rather is whether the
opposition will get its act together and unify to prevent a repeat of
its self-inflicted loss in 2006.
Fourth:
Aim Low, Think Trojan Horse
When balancing whether or
not to go into the water, stick a few toes in first. In the case of
Nicaragua, where investors face the question of whether or not to get
in, hedge. Consider getting your foot in the door with modest, low-hassle
investments that you can build upon later. There
are many ways to limit an ambitious investment in Nicaragua to below
$200,000 – well below.
That can mean buying raw
land that can be improved upon later as opposed to buying
property with constructions on it (like a home or other building), or
buying fixer-uppers that can be renovated later as opposed to buying
a perfect move-in Spanish colonial, or focusing on high-value areas
off most people's radar screens on the path of progress (such as
Leon, Matagalpa and The Corn Islands) rather than today's relatively
high-priced hotspots such as Granada and San Juan Del Sur.
The unrelenting focus
should be on location – on well located, high-value properties not
yet fully discovered, but solidly on the path of progress, including
new roads. Consider that it's often land,
not what sits upon it, that is usually the part of a property that
appreciates the most during a property
boom. Once you have the land, you've already got a lock on the part
of a real estate investment that appreciates the most in a boom.
This way, you can keep
your financial commitment low, but be in a position to expand that
investment if and when the political climate improves, without being
exposed to future appreciation. In other words, see your investment
as a Trojan horse and insulate yourself from future property price
increases.
Small
investments are less likely to be affected by a downturn. From this
perspective, it can be big developments and big investments that face
the biggest risks. You should only be paying so
much for property here. You shouldn't be paying more than, say,
$250,000 for any residential property here, just because it's pretty,
unless it is exceptional in size, quality, material or some mix of
these and other amenities.
Fifth:
Buy An Umbrella
There are numerous ways
to hedge and minimize your financial exposure to a political or
economic rainy day.
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 such as Serenity
of Nicaragua that offers before- and after-market services
extending beyond conventional realty, including services such as
title research, orientation and settlement services, project
monitoring and assistance with accessing government tax incentives.
By taking this approach
and these and other steps, you can substantially reduce -- if not
eliminate – your financial exposure to any downside political risk
and put yourself in a more secure position to profit from any
potential post-Ortega takeoff in the market.
Conclusion
Recent developments in
Nicaragua and beyond Nicaragua remind us that the norms of equal
rights, free markets, due process, the rule of law and a sober
judiciary -- things Americans may even be no longer able to take for granted in the U.S. -- are a long way
from being fully entrenched abroad at the very time they might be
needed most.
But mitigating against this is the fact that, over the long
run at least, human beings tend to do what's in their best interests
so the incentives to reform and progress are everywhere, including
Nicaragua.
The
fact is, Nicaragua was being heralded widely -- globally -- as the
“next Costa Rica” and the “next Panama” in the world press
before Daniel Ortega's presidential victory earlier this year. It's
still getting praised in tourism articles across the U.S. and across
the world. As
real estate prices have escalated in both Costa Rica and Panama, as
baby boomers continue to seek warmer, cheaper, "old world"
locales outside North America and Western Europe and as Ortega
approaches the end of his five-year presidential term, there's a
serious possibility this will happen again.
Again, we are not fortune tellers and have no idea what will happen next. We can only say that time and time again,
with real estate and other investments, it's been proven that the
real money isn't made in a safe and already discovered bet,
but in an uncertain and undiscovered bet before it becomes a solid bet and gets the
attention of the herd. It's that thought that should be foremost on
investors minds as they consider any kind of investment anywhere.
Accordingly,
Nicaragua
offers a window of opportunity, unique in today's Central America, to
get in at or very close to the ground floor, and by taking the steps
mentioned above you can insulate yourself to some extent from the possibilit that the ground floor may turn out to be a trap door.
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