BUSINESS:
The Bolsa de Valores
Taking stock in Nicaragua

by Ben Schnayerson and Ernesto Boza, originally published in Nica News 21 (March 1999)

	Silvio Conrado in front of the offices of INVESTA, the newest brokerage firm to enter the fray in Nicaragua's rapidly expanding economy. Photo: Tomas Stargardter

Primary markets, option markets, compensation bonds, CENIs, commercial paper: what does all this mean? At first glance, the Bolsa de Valores de Nicaragua (or the Nicaraguan Stock Exchange) seems very confusing. However, with a few definitions and a little knowledge of the Bolsa's system, one can begin to use it for financial gain.

In the early 1990s, the Chamorro administration wanted to liberalize and privatize the economy. One way the government decided to do this was to create a stock market where more people could participate in the economy and businesses could grow and prosper.

Representatives from the Ministry of Finance, several large coffee and sugar companies, and some major Nicaraguan banks had been meeting since 1990 to discuss the formation of the stock market. In June 1993, plans were finalized, and trading opened on January 31, 1994. Eleven banks are the owners of the Bolsa and also own the various brokerage houses that operate in it.

How does it work?

Unlike the New York Stock Exchange, company shares are not bought and sold on the Nicaraguan exchange. Shares of private companies may be sold, but no companies have taken this step yet. All securities traded on the Bolsa are bonds.

A bond in Nicaragua, as in other countries, is a promise of payment made by a financial institution, private company, or government that has a definite period for reaching maturity and a fixed rate of interest. For instance, one can buy a 15-year government bond with an interest rate of 10%. Each year, the bond compounds at 10% and at the end of the 15 years, the buyer may convert it into cash.

The bonds can be traded in four different markets. The first market, naturally, is known as the Primary market where the bonds are first introduced. They are issued by seven different private institutions: Bancentro, Corporación Credomatic, Nicaragua Sugar Estates, Financiera Delta, Casa Pellas, Café Soluble, and Inmuebles Diano Marina. Some are financial institutions and others are large companies looking to expand and make investments with the money obtained from the sale of these bonds.

Bonds are also issued by public institutions like the Central Bank of Nicaragua and the Ministry of Finance, now called the Ministry of the Treasury and Public Credit. The bonds are then auctioned off at the request of their clients to brokerage houses such as: Investa, Lafise Valores, BAC Valores, Finval S.A., Interbolsa S.A., Invercasa, Invercentro, Inverexpo, Inbursa, Invercapital, Provalores, Valca, and Vamersa.

Nicaraguan investors are the only ones involved in the market. All brokerage houses are first registered in the Bolsa and then given the go-ahead by the Superintendency of Banks. Brokers have to pass a two-week course on the stock market to be eligible for a test. If they pass the test, they will be given the right to trade on the market under any of the legally-registered brokerage houses. Brokers are also registered in the Superintendency.

Once purchased, the bonds then go to the Secondary market. Here, and once again through a brokerage house, the bonds may be traded before reaching maturity. This market is the one that gives liquidity to the bonds.

Bonds can also be traded through Reportos, or Repos (Re-purchase Order Agreements) market. A Repo is a way to obtain short-term financing, usually for less than a year, without having to sell a portion of your securities. It is much like a loan with the bond being used as collateral. After the allotted period of time, the bond must be repurchased and the interest paid. This has been one of the most actively used instruments in the market, representing 49% of total trading in 1997.

The Opciones Sobre Títulos, or Options market is much the same as the Repo market except that you have the option at the end of the time period to repurchase the bond or not. These are very active in the Bolsa due to liquidation activities by private banks.

Different kinds of bonds

The most common bond traded on the market is the BPI (Bond of Payment of Compensation). These were issued by the former Ministry of Finance to compensate those who had lost property of some sort in the 1980s. Most people immediately sold these 15-year bonds, and now over one million córdobas worth are traded daily on the Bolsa. Though they are traded at less than their face value, they can be used in some cases for making purchases at customs warehouse auctions or paying taxes at their full nominal value.

Another common bond being traded is the CBT (Certificate of Tributary Benefit). These bonds are also issued by the Ministry of the Treasury and Public Credit as additional compensation to exporters of non-traditional Nicaraguan goods to help pay for tariffs. The government hopes that these bonds will be an incentive for businesses to export more Nicaraguan goods such as sesame, oils, minerals, tobacco (cigars), rum, and other products demanded on the international market. These bonds mature in less than two years.

A CENI (Negotiable Investment Certificate) bond is issued directly from the Central Bank as an instrument to control the amount of currency circulating in the economy. It is similar to the Treasury Bill, or T-Bill, used by the Federal Reserve of the United States. It is a zero coupon bond which does not give interest payments, but rather appreciates in value over a period of time. They are sold at a price lower than their face value so that a purchaser can make a profit.

These were very active in April and June 1998, but their issue has been postponed recently due to a reduced need for cash by the Central Bank.

A CI (Certificate of Investment), PC (Commercial Paper), and Certiagro are all bonds issued by private financial institutions. They have different names only because they are issued by different financial institutions. These are the ones most traded on the Primary market and have various maturation periods as well as interest rates.

Interest rates typically range from 8% to 21%, depending on the particular bond, currency and the period for maturity. The changes in interest rates can be found in Nicaragua's daily newspapers or by contacting a brokerage firm directly.

Daily, the average volume exchanged comes to over 20 million córdobas and over five million dollars. While this is nowhere close to the volume of some international markets, it does indicate that there has been significant economic growth in Nicaragua since 1994.

1999-Looking ahead to next century

Activity on the Bolsa in 1998 decreased by around 10% in relation to 1997, a big difference from the year before, which saw an increase of 106% over 1996. The postponing of CENI bonds has significantly reduced the total market volume.

Different opinions have been expressed about the recent activities of the Bolsa. All bonds have similar maturation periods and interest rates, giving potential buyers little to choose from. Speculation and competition is not like it is in the international markets, hence making it less attractive than those markets which deal enormous amounts of money, making it possible to earn larger profits.

Donald Herrera, a private consultant, states, "There are not enough private issuers. The bonds are short term and so they are not attractive to investors."

Herrera also noted, "The promotion of the market has not gone in the right direction since the Bolsa did not plan for the long term. The recent standstill is due to this decrease in attraction."

The private market share has to be increased with private company investment certificates (CI). This will be possible with more efficient marketing strategies. "Brokerage houses have done a poor job in marketing", remarked Silvio Conrado, General Manager of Inversiones Estrategicas (Investa).

Conrado states that the recent slide on the market was influenced by the brokerage houses and not by the Bolsa itself. It is up to the brokerage firms to offer more investment opportunities to possible investors.

Brokerage houses are now working with private companies in order to issue CIs. If more companies start issuing these certificates, we will see an increase of the activities on the Exchange and, therefore, increased economic wealth and prosperity in the country.

Private company stocks have not been seen yet in the Nicaraguan market; but the forthcoming sale of 49% (valued at C$490,000,000) of the total shares of the FNI, the Nicaraguan Investment Financier, could raise interest in private companies to do more business through the Exchange.

The Bolsa is a good example of the leadership role of private investors and of control of economic sectors passing from State to private hands. It is expected that the sale of the remaining 49% of the BANIC, one of the last State holdings in the banking sector, will be dealt on the Exchange, as well as an as yet undetermined portion of the shares of the State-run telecommunications utility, ENITEL.

An association called BOLCEN is working to join all the Exchanges in Central America and Panama so that anyone can buy Nicaraguan bonds or those issued through any other Bolsa in region and vice-versa. Nicaragua is the permanent headquarters of this association.

With a bit of basic information one can begin to think of starting an investment portfolio on the Bolsa de Valores de Nicaragua. Though still young, it can prove to be a very beneficial way to increase financial savings and to participate in the Nicaraguan economy.