Honduras: Risk Assessment
Business Climate Rating1
Moderate growth maintained
Based on internal demand, construction, trade and transport will remain dynamic. Agriculture and aquaculture (15% of GDP), on which 45% of the population depends, with export products like coffee, shrimps, bananas, pineapples, palm oil or tilapia, are likely to benefit from the resilience of world prices. The development of mining activity (gold, silver, zinc) will continue, while industrial activity will remain subdued due to the importance of the United States as an outlet. Textiles, through the activities of assembly and re-export by the “maquiladoras”, accounts for much of this industrial activity, although the manufacture of car parts and electronic components is progressing.
Although rising, public and external debt is moderate and low in cost
Under pressure from the IMF, with whom negotiations are continuing regarding the renewal of its standby arrangement for a $200mn credit facility, which expired in March 2012, the authorities are expected to start cutting the public deficit. The cuts will be insufficient to stabilize the public debt which rose from 20 to 31% between 2008 and 2012. A little over half of this debt is contracted abroad, with three quarters borrowed from multilateral regional organizations and the remainder from individual countries. Its short term share is small, like its service, as interest rates are low.
Significant current account deficit covered by foreign investment
The current account deficit will remain substantial. The trade deficit represents 20% of GDP. Exports, mainly destined for the United States and Europe, of which two thirds are agricultural products with coffee and bananas making up the bulk of these, are insufficient to offset purchases of foodstuffs, fuel and capital goods, even though the reintegration of the country in the Venezuelan Petrocaribe program in early 2012 does enable cheaper energy supply. The textile products of the “maquiladoras” generate a surplus but are in competition with Asian countries. The income balance is also in deficit due to profit repatriation by foreign companies, as is the services balance despite the tourism income. Only the remittances (18% of GDP) from Honduran workers in the United States help plug the deficit. The remaining current account deficit is easily covered by foreign capital, chiefly investments in telecommunications, services, the maquilas and increasingly mines by the United States, Canada and Mexico. Since 2011 and the abandonment of the peg to the dollar which had been in place since 2005, the Central Bank is allowing the local currency, the lempira, to depreciate gradually. The substantial current account deficit and low foreign exchange reserves have led to the pursuit of this policy. However, if inflation is taken into account, the lempira has appreciated in real terms which have negative implications for the competitiveness of manufactured products exports.
Social, political and institutional instability
The (“maras”) gang warfare over the control of the traffic in drugs from South American destined for the United States is accompanied by high-level criminality. The severe inequalities and poverty affecting 60% of the population, mainly agricultural, are conductive factors. Violent conflicts frequently break out over land use, especially in the northeast. Corruption within the judicial and prisons administration is widespread, as it is within the state owned enterprises in charge of electricity, water, telecommunications and ports. These companies are also characterized by poor management and overstafing.
The government has limited means for dealing with these problems. Government revenues represent only 16% of GDP and are mainly directed to current spending. The fight against drug trafficking depends on the logistical and financial support of the United States, which is very concerned by the occasionally observed abuse of police power. President Porfirio Lobo, from the center right National Party and elected a few months after the coup d’état in June 2009 under contested conditions, does not have a solid majority in Congress. His plan to create special economic areas intended to attract investors was rejected by the Supreme Court. The forthcoming elections in November 2013, at which he is not able to stand, is not conducive to decision-making; his party and the opposition Liberal (center) party and the Liberation (radical left) party formed by former president Zelaya, ousted in 2009, are already positioning themselves.
- Privileged relations with the United States
- Party to CAFTA-DR-U.S. and Central America-EU Free Trade Agreements
- Agricultural, mining and tourism resources
- Qualified workforce
- Low public and external debt following debt relief in 2005
- Dependence on American economy
- Sectoral and geographic concentration of exports
- Dependence on fuel and cereal imports (maize=basic foodstuff)
- Poverty and inequalities
- Criminality and institutional fragility
- Exposure to natural disasters