Honduras: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: C
Risk Assessment2
Tentative resumption of growth
The economy has struggled to recover from the battering it took in 2009 during the global financial crisis and a domestic political crisis, which brought on a recession. The election of President Lobo facilitated normalizing relations with financial backers (especially the IMF) and thereby restoring investor confidence. In 2010 economic growth was driven by a rebound in foreign direct investment and a better trend in household consumption buoyed by a slight increase in wages, the growth of farm production, and the rise of banana and coffee prices. Public-sector consumption, bridled by budget restrictions, contributed little to economic growth. A moderate acceleration of growth is expected in 2011 thanks to the steadiness of foreign direct investment and the recovery of public-sector investment. Private consumption will in all likelihood benefit from an expansion of credit and the discharge of public-sector arrears. It would be unreasonable, however, to count on a significant increase in remittances from expatriate labor. In this context, services (commerce, transport, communications, tourism) are expected to remain buoyant. Manufacturing, which depends on demand from North America, will likely achieve moderate growth. The farm sector is also expected to make a positive contribution to the economy.
Financial weaknesses
Measures taken early 2010 to increase revenues and reduce spending began to produce results in the second half of the year making it possible to reduce the budget deficit, which had increased sharply in 2009. End 2010, the IMF granted $202 million in financial support to Honduras to be drawn down within a year from February 2011 subject to conditions intended to consolidate public-sector finances and keep growth of the debt under control. The fiscal deficit will thus be likely to continue to narrow in 2011. Covering the country's financing needs will continue to be very dependent on financing from abroad and the support of multilateral organizations.
In view of the relative stability of hydrocarbon prices, a new phase of deterioration in the current account deficit appears unlikely in 2011. Foreign direct investment and multilateral loans from abroad are expected to enable Honduras to cover its foreign-exchange needs. Foreign debt ratios have remained at manageable levels thanks to relief granted by creditor countries and financial backers.
With limited foreign-exchange reserves, the country has little room for maneuver in supporting its dollar-pegged currency. The possible adoption of a flexible exchange-rate system could result in a moderate depreciation of the lempira and improve export competitiveness in consequence.
Precarious political stability
After the Army removed President Manuel Zelaya (center-left Liberal Party) from office in June 2009, the country returned to relative political stability early 2010 with the election of President Porfirio Lobo (center-right National Party). Re-establishment of the democratic process enabled Honduras to gradually restore relations with financial backers, interrupted in the wake of the coup. But recognition of the new Honduran president's legitimacy has been withheld by several countries (Brazil, Bolivia, Ecuador and Venezuela). Domestically, the government benefits from a large legislative majority. It nonetheless has to contend with an opposition that refuses to recognize its legitimacy and is opposed to reforms. The country moreover suffers from a homicide rate among the highest in the world and its governance weaknesses are critical.
Strengths
- Agricultural resources and tourism
- Partial cancellation of external debt in 2006, a facility reserved to heavily-indebted poor countries
- Free trade agreement with Central America and the US (CAFTA-DR)
- Privileged trading partner and financial-support beneficiary of the United States
Weaknesses
- Small size of country, vulnerable to natural disasters
- Extreme dependence on the US for exports, investment and expatriates’ remittances
- Deficiencies in education, healthcare and infrastructures
- Significant inequalities with poverty affecting the population
- Energy dependence and structural trade deficit
- Insecurity and precarious political stability