Daniel Ortega’s Love Affair with Big Capital

Somewhere in southern Nicaragua, behind huge wooden sliding doors, is the site of Guacalito de la Isla, a mega touristic complex located in one of the most beautiful shores of the Nicaraguan Pacific coastline: Costa Esmeralda. Until recently, personalities such as American actor Morgan Freeman were frequent visitors.

A villa in the Guacalito complex has an estimated value of two million dollars, according to the company’s official information. The 675 hectares of this private beach house 600 terrains, with villas, condos and apartments ranging between 350,000 dollars and 3,5 million dollars. This billion dollar business is exempt of the IBI tax (tax on transmission of real property, for its Spanish acronym) as dictated by Law 306 of tourist incentives enforced by the government of Daniel Ortega, in other words, they are excused from paying taxes for selling and purchasing property.

As per the investment guide of ProNicaragua, the government’s official investment agency, these favors are described as “the most generous and competitive in the region”. This is part of a broader scheme of exemptions aimed at private parties in different areas of the economy, such as mining and textiles, sustained by the executive branch aligned with a model of “dialog and consensus”.

For Nicaragua, these exemptions in the 2010-2014 period implied privileges for around 1,1 billion dollars, equivalent to 9.3 percent of the wealth generated by the country in that period, according to the most recent figures of the Inter-American Development Bank, made public in 2015 in the book entitled Balance de la Ley de Concertacion Tributaria, written by Central American tax expert Julio Francisco Baez, member of the Academy of Sciences in Nicaragua and former visiting professor at Harvard.

"Exemptions must be short-lived. They cannot be eternal. The point is to stimulate, but not forever because then the incentive turns into a subsidy ", stated Baez, he believes this is what has happened in Nicaragua.

What does each group gain from the “dialog and consensus” agreement?

To stress his point, Baez alleges that the law of tourist incentives has been in place for 21 years, including the last 13 years of the Ortega administration, which between 2008-2018 promoted the need of an agreement with businesspeople to attain better economic growth indexes, despite frequent claims of its authoritarian nature by civil society.

In the years of the agreement, everything seemed to be fine from an economic perspective. Annual growth rates in Nicaragua amounted to 5 percent of the GDP until 2017, above the regional average, which guaranteed supporters for the model in the government and in the business sector; while part of the society denounced a type of complicity of businesspeople with Ortega, validated by the convenience of conducting large businesses in spite of frail institutionality.

Businesspeople in Nicaragua had direct influence over public policy; they became members of executive boards of 43 State institutions and jointly agreed with the pro-government National Parliament on 124 of the 326 rules passed between 2008 and 2018. They swayed almost four of each ten laws in that period, whilst the opposition became weaker.

This business incidence on the State’s decisions was a worthy of pride by the COSEP (superior council for private companies, for its Spanish acronym), the main employer in the Central American country; to the extent that its 2007-2020 President Jose Aden Aguerri stated on December 14th, 2017: “Nowadays, economic matters are agreed with the private sector, in some way, this is hugely significant and has enabled a more positive business climate since 2008, when we had a negative business climate”.

In return, throughout the decade, the State guaranteed the absence of strikes by controlling the unions, and through the multi-sectoral table, in charge of deciding the salary increase every two years –adjustments were below 10 percent–. Overall, the government generated other business opportunities based on the credit flow coming from Venezuelan cooperation: 3,7 billion between 2007 and 2016. A fortune that has been managed by the presidential family, part of which was injected to the economy through the financial system

In 2013, when Ortega and his wife, Vice President Rosario Murillo, required support to reform the constitution and remove the ban on re-election that had been in place since 1995, businesspeople provided their support. In these modifications, members of the Parliament cited Carlos Pellas, the owner of Guacalito de la Isla, to include the following passage in the Carta Magna “Nicaragua is the first country with the institutional mandate of a model of alliances, consultation and consensus” the businesspeople make decisions pertaining public policy.

On January 13^th, 2013, on the inauguration of Guacalito, following an investment of 250 million dollars, Pellas said he was “giving an example, investing in Nicaragua for others to come and do the same”, he added that “it is one of the safest countries, not just in Central America, but in Latin America, and we must strive to communicate (those advantages) to the world”.

On September 4^th, 2013, Ortega and Murillo met with the biggest capitals in Nicaragua, among them were: Jose Antonio Baltodano, Juan Bautista Sacasa, Cesar Augusto Lacayo and major foreign investors. In the beginning, Ortega said that was their fourth working session since 2008. At par with the President were Pellas and Nicaraguan banker Ramiro Ortiz Mayorga, President of Grupo Promerica.

That night and after Ortega’s words, Ortiz affirmed that the dialog with the government was “a miracle” for Nicaragua. Minutes later, Pellas, whose family’s assets had been confiscated by the first Sandinista government back in the 80’s, declared he was a “believer in this process that has served enormously in the reconciliation of the Nicaraguan family”.

A breach of this agreement took place almost five years later, on April 16^th, 2018, when the executive branch failed to consult big capitals before passing a social security reform that entailed higher charges per employee for employers. However, two days later when repression against protesters of the reform started, per Aguerri, they left “the spaces in which they sat (public institutions)”.

On May 30^th, 2018, the cover of the local newspaper La Prensa featured an interview with Pellas, in which his point was made clear: the “country’s model has exhausted”.His statement came amidst one of the opposition’s largest rallies. He emphasized: “we have to find an orderly exit that implies reforms to undertake anticipated elections”. Coordinately, Ortiz stated: “the only way out of this crisis is through anticipated elections”.

The State intends to have the situation between the government and businesspeople as it was prior to the crisis. Ortega’s main economic advisor, Bayardo Arce, announcement on the VosTV channel–property of Pellas–, the State’s will to meet with the business sectors to review the tax reform that had led to complaints by presidents of chambers. While the private sector announced on January 20^th, 2020, that economic discussions would not be held unless they addressed institutional matters. In any case, the topic of large exemptions is still intact.

The human rights crisis caused by the State’s repression to the opposition brought upon a serious economic crisis. Tourism income dropped from 900 million dollars in 2017 to 515 million only two years later; in addition to tax tensions with dozens of small-sized companies and the occupation to the properties of Piero Coen, owner of the Western Union operation who had supported the opposition.

Despite these adverse situations, benefits of sectors such as tourism, mining and finance were sustained in the middle of the crisis, which meant good results.

The Properties at Guacalito

Guacalito is an example of the rise and fall of tourism. The website videos show streets lined with three-story houses and villas, with lounge rooms, outdoor dinning rooms, gardens, pools and terraces. Colonial architectural inspired its designs, surrounded by nature, which is visible from the inside through glass doors that open to a barbecue area.

These are the most expensive properties in Nicaragua. The project offers properties of up to 3,5 million dollars, but less expensive ones can be quoted online through the real estate agency Discover Real State, which lists three-bedroom apartment in Las Terrazas, in Guacalito, for 538,000 dollars. The website of another real estate agency, La Bolsanica, lists a villa of 435 square meters for 675,000 dollars.

The commercial effect on communities is one of the official justifications for exemptions on large developments such as this one. Others are direct and indirect jobs created, as well as the quality of the jobs.

Nevertheless, the tax issue points to a special treatment of the tourism sector. While a document by the DGI (general income directorate, for its Spanish acronym) dated March 13th, 2019, indicates that withholdings on purchasing and selling properties vary depending on its value, a closer look to the governing law of the sector shows that tax payment exemptions are generous in the case of real estate.

For instance, a house appraised at over 50,000 dollars pays 2 percent withholding on its value, while a property over 500,000 dollars pays 7 percent. The details of the Tourism Law allow understanding the generous extraordinary benefits given to the sector’s businesspeople, a topic they have frequently avoided when making public statements.

For this story, neither the real estate manager for Guacalito de la Isla responded to a request for an interview sent through Celina Guzman, in charge of communications, nor Ariel Granera, spokesman for Grupo Pellas

Aside from the real estate business exemptions, tourist businesspeople also have exemptions on income tax ranging between 80 and 100 percent for ten years; VAT exemptions on design and construction services, and procurement of construction materials and fixtures for buildings; if they choose to reinvest 35 percent of the approved investment value, all of the benefits can be renovated for ten more years.

Upon arrival to the touristic complex, its facilities seem closed; moreover, the offices at Costa Esmeralda’s airport, located five miles away from Guacalito de la Isla and partially owned by Pellas –80 percent – and by the State –20 percent–, are clearly abandoned, although military and police presence is common. A group of them photographed our journalists’ team vehicle at the end of September.

The Rise of Banking

Official media have covered meetings between important businesspeople and Daniel Ortega. The photograph depicts Ortega and Ramiro Ortiz, owner of Banco de la Produccion; it was published by 19 digital.

Since Ortega took office, banks have had increased deposits ranging between 26 and 167 percent and some increased their assets over 300 percent. Moreover, the sector collects over 30 percent of the annual VAT of the State’s budget, the item of the economy that contributes the most.

In 2010, the Pellas family sold Banco de America Central (BAC) for 1,9 billion dollars to Colombian businessman Luis Carlos Sarmiento, founder of Grupo Aval in Colombia. Both businessmen’s relationships with political power were considered an asset in this negotiation.

In an article in Confidencial, sources close to the deal informed that in the selling process of BAC, Pellas intended to keep 10 percent of the shares as a means to offer a “direct line” with Ortega to his prospective buyer. However, “the Colombian magnate set up a direct line with Ortega himself, and in the end, bought the entirety of the shares, evincing that Pellas was expendable for the operation”.

Although BAC switched owners, the bank managed to sustain the best numbers at national level. According to SIBOIF (the banks’ superintendence), the bank’s deposits increased from 474 million dollars in 2007 to 1,270 million dollars in 2017. A surge of 167 percent in a ten-year period in which its total assets increased by 396 percent.

In 2018, the Pellas family made its way back to the financial business with Banco Avanz, while other bankers sought consolidation. The second financial institution with the best figures was Banco de la Produccion (Banpro), owned by Ramiro Ortiz Mayorga, its deposits grew 113 percent and its total assets rose by 320 percent.

Though the sector’s executives are used to allocating their success to adequate decisions in loan placement, regional expansion and human talent, banks’ growth in Nicaragua is mostly related to high interest rates compared with the region’s.

According to the executive secretary of Consejo Monetario Centroamericano, back in January 2018, the active interest rate –charged by banks for their loans– was of 8.76 percent monthly, the second highest in the region after Costa Rica’s (10.13 percent). After two years rates have rose further, in June of this year, the rate went up to 9.68 percent, becoming the highest in Central America, followed by Panama’s (8.30 percent). This fact has driven Nicaraguan banks’ profitability; consequently, its percentages are the highest in Central America and the Dominican Republic.

When Ortega rose to power in 2007, annual profitability indexes were of 15.4 percent, while in 2016 –at the peak of the consensus agreement with big capital– it took an upturn to 27.8 percent. None of the region’s countries have seen this type of throughput in the last thirteen years. The country that came closest was Guatemala with 20.6 percent in 2016. Despite the crisis of 2018, Nicaraguan banks’ profitability was among the top three, per statistics of Consejo Monetario.

In the period between 2008 and 2012, Banpro’s total assets went from one billion dollars to 1,5 billion dollars, becoming the most powerful bank in Nicaragua. Per reports of the bank, its initial assets were of 8 million dollars in 1991, and by 2017 its assets were of 2,2 billion dollars. In a message addressed to its shareholders, the businessman claimed his success came from “cautious risk management”. Luis Rivas, the Group’s Manager, failed to address the main issue regarding the increase in deposits between 2007 and 2017; he received a request to comment for this investigation.

Stock exchange operations are used to measure financial stability. The Manager of Nicaragua’s stock market, Gerardo Argüello, stated that 1,5 billion dollars were traded in 2017. However, as a result of the crisis of 2018 and despite having the highest throughput in the Central American region, transactions plummeted to 250 million dollars. “Money is wimpish, is spite of the high throughput offered by the stock market, people withdrew their money from banks and stocks based on fear”, he added.

The leak of deposits between April 2018 and July 2019 was estimated in 1,6 billion dollars. Nonetheless, it started stabilizing in August of this year, although it has yet to go back to normal. The country is facing crisis after crisis.

Profitability of Mining Companies

Regardless of Nicaragua’s economic crisis, gold mining achieved exports of 408 million dollars until August 2020, a record figure in the sector’s last ten years, rising to the top of the other areas of local economy, which are currently sustaining downturns. However, the sector’s contributions for mining concession rights this year will amount to 15,8 million dollars, less than one percent of the entire budget, according to the execution report by the Ministry of Treasury.

According to Baez, mining’s profitability is a result of the tax advantages received by companies. The exemption of property tax within the perimeter of the concession and the zero percent rate applicable exports in general, makes their tax contribution “laughable”.

Per data of the CETREX (exports procedure center, for its Spanish acronym), gold exports amounted to two billion dollars in the last five years; in this period, the budget confirmed that the State received 62,3 million dollars for this item, meaning a contribution of 3.1 percent, one of the lowest of the economy’s sectors.

In the industry’s defense, engineer Omar Vega, Country Manager at the Calibre Mining transnational corporation, which owns the concession at Mina El Limon, located in the west, responded in a written interview with CONNECTAS that the employment generated is a positive thing, he also stated that he is unaware of their contribution to the budget.

“Calibre generates over 3,000 dignified direct and indirect jobs. Our operation impacts the dynamics of local economies in the municipalities we work in, and provides investment in projects pertaining education, health and means of life. The aforementioned takes the company’s contribution beyond taxes”, Vega responded in writing; he also asserts that, based on a study by economist Nestor Avendaño, for each 100 dollars generated, 73 remain in the country by means of salaries, electricity consumption, fuel, among others.

Paradoxically, the labor benefits that executives were trying to brag about had few beneficiaries up to August of this year. The sector had 4,802 employees registered in the INSS (Nicaraguan institute of social security, for its Spanish acronym), the least amount of formal jobs among all of the sectors registered by B BCN (Banco Central de Nicaragua)

The spotlight on labor is far from the media’s attention. According to documents of the mining company, they project to expand production from 12,871 Troy ounces in 2018 to 62,500 Troy ounces in 2020, despite the crisis. To do so, they need to maintain stability. This task is in the hands of Ortega’s government.

Three members of the union at Calibre Mining affirmed that the executive branch is the mediating party between them and the company. In 2015, there were clashes at Mina El Limon between police officers and company employees that resulted in the death of an officer, it all happened because miners asked for more benefits that the company had refused to provide.

“Now we have the government’s support: to keep personnel from striking, they (operators from the Sandinista Front) solve things for us”, said Luis Ramos, Secretary of the Pedro Roque Blandon union, the largest union, which has 350 members out of the company’s 550 employees.

Sitting in front of the Nicaraguan and the Sandinista Front flags, Carlos Urrutia Vega, Secretary of SITRAM (independent union of mining workers, for its Spanish acronym), affirmed that the government’s officials appointed to mediate conflicts between employees and companies are Gustavo Porras, President of the National Assembly and one of the closest to the presidential couple, and Roberto Gonzalez, leader of the CST (Sandinista worker central, for its Spanish acronym) and former member of Parliament. “The government is always solving conflicts”, he mentions.

Some years ago, this man was an underground shovel operator at Mina El Limon. Now, from his office, he argues that workers have the best paid collective agreement in Nicaragua, with salaries averaging 1,400 dollars, broken down in base salaries ranging between 12,000 and 19,000 Cordobas (542 dollars); every 15th of the month, employees get an additional production payment, which was of 23.000 Cordobas (657 dollars) last September. Also, on the 24th of each month they get a food bonus for 225 dollars and subsidies in household repairs, because mine explosions affect floors and crack walls. In this mine, Calibre Mining subsidizes water and electricity services. “These benefits have been granted to us because the government has given us conditions to work”, says Urrutia.

Just as Somoza

The alliance between the public and private sectors is similar to the one that businesspeople had with Anastasio Somoza Garcia, who ruled the country between 1937 and 1956. Many years later, Ortega, a member of the guerrilla who helped overthrow the last of the Somoza dynasty in 1979, imitates the model.

Sociologist and historian Oscar Rene Vargas explained that the agreement between Somoza Garcia and businesspeople was one of the elements that perpetuated him in power. In January 1937, the Pellas family, owners of Ingenio San Antonio, paid a full page in a newspaper to congratulate and acknowledge the founder of the dynasty as the President of Nicaragua.

In return, the head of State issued an executive decree in which he granted a series of concessions for a term of twelve years, including tax exemptions, freedom to use foreign currency in imports and exports, and discounts in railway and dockage freight charges.

Vargas adds that Somoza Garcia’s strategy is the same as Ortega’s: “Money for my allies, cudgels for the indecisive and bullets for my enemies. This is the only way to consolidate political, economic and social supremacy”.

Not for nothing, the public breakdown of the alliance with big capital took place in 2018, when the population manifested in a series of protests requesting Ortega’s resignation; but also when the executive branch announced a social security reform that would increase the private sector’s share to the INSS.

Small business owners have reported tax pressures and on October 31st, 2020, the Presidents of the business chambers, Carmen Hilleprandt, of the Chamber of Commerce, and Marcos Pierson, of the Chamber of Industry, sent a letter to the President asking for a meeting to revert the tax reform, given that multiple businesses are about to go bankrupt.

Businesspeople have complained about the elimination of lists to exempt different taxes in national or imported consumables because their production costs are on the rise.

Although COSEP’s new President, Michael Healy, a businessman from the opposition party ACDJ (Alianza Civica por la Justicia y la Democracia), mentioned that the letter was not endorsed by the entire business guild, last October 14th, he asked Ortega to “solve the problems of Nicaraguans”. Before, in August, he begged to “be ready for a possible political and economic agreement”; and now, in January 2020, he said they would not address economic issues without looking into institutional matters.

Seven members of the executive council of ACJD are businesspeople, the second sector with the most representatives, only followed by the students, with twelve –facing a recent crisis since they voted to part with Coalicion Nacional, which gathered social, intellectual and university movements until recently–.

The tax expert Baez said that “currently, businesspeople are keen to rekindle their interest in Daniel Ortega’s government, which is flat lining or about to die after the crisis in 2018”.

It cannot be stated that the agreement between Ortega and big capitals is the direct cause of repression, but the private sector has paid a hefty price with the population in terms of sustaining the dialog and consensus model. There are sectors questioning their indifference.

In a neighborhood in Managua’s northern area, Nelson Lorio, father of a 14-month-old boy killed by paramilitaries in the crisis of 2018, has his own opinion about the role of businesspeople and asserts that “the economy can be recovered, but a son’s life can’t”. “They wanted to wash their faces with our children’s blood. They failed because in the end they showed their true face: economic interest”.

Since 2018, businesspeople have organized strikes in four occasions. A study of FUNIDES (Fundacióon para el Desarrollo Economico y Social) estimated that each strike implied losses of eighteen million dollars for the economy.

Economist Alejandro Arauz believes that a new strike should take place and that it could have an effect. Although it is impossible to determine if it will happen or not, the demand is testing a sector that has tried to take distance from its responsibility concerning the country’s current state, shielded by its businesses.