Fitch Ratings revised Nicaragua's long-term foreign and local currency issuer default ratings to B- from B and said that the outlook is negative, citing increased risks of domestic and external financing constraints, weaker external liquidity and a rising fiscal deficit.

The rating agency projects Nicaragua's economy to shrink by 4% and 1% in 2018 and 2019, respectively, consistent with the International Monetary Fund's recent forecasts. The economy contracted by 4.4% year over year in the second quarter of 2018 owing to a fall in capital investment and consumption.

Fitch expects the country's revenue to GDP ratio to decline by 1.6 percentage points in 2018 because of weaker tax compliance and reduced activity. Nicaragua's government responded to declining revenue by revising the 2018 budget to trim expenses by 1.4% of GDP and widening the deficit target to 2.1% of GDP from a budgeted 0.6%. The debt watcher believes the deficit for 2018 will reach 1.1% of GDP from 2017's 0.6% and worsen in the absence of reforms.

The rating agency noted that borrowing is becoming more expensive and flexibility to finance greater deficits is relatively constrained. The government intends to issue bonds worth 2.9% of GDP locally, and a further 2.5% of GDP is planned in the 2019 budget.

External loan disbursements could be additionally reduced due to political pressure, especially if the Nicaragua Human Rights and Anticorruption Act passes the U.S. Congress. The bill would impose targeted sanctions on Nicaraguan government officials and would require the U.S. government to use its influence to limit multilateral lending to Managua.

Fitch said the rating or outlook could be further downgraded if external liquidity is reduced or the country cannot access external or local sources of financing.