Honduras: Risk Assessment

Country Rating1

Rating: C

Business Climate Rating1

Rating: C

Risk Assessment2

Moderate growth despite the constraints

Growth will remain moderate in 2014, though economic policy could become progressively tighter now that the presidential and legislative elections are over. Domestic demand will again be the major contributor to growth. Household spending will support trade and construction. Investment (25% of GDP), essentially private given the weak public resources, could benefit from the expansion of mining activity (gold, silver, zinc) with the adoption of a new mining law in 2013. The revival of the plan to create free trade zones in urban areas could encourage factories to set up. Although textiles, in the tax-free zones, or “maquilas”, account for a significant portion of industrial activity, the manufacture of car parts and electronic components is growing. Agriculture and aquaculture (15% of GDP), on which 45% of the population depend, with export products such as shrimps, bananas, pineapples and palm oil, are expected to profit from the resistance of world prices. Coffee revenues will continue to be hit by the fall in production caused by the parasitic rust attack. Supply bottlenecks will keep inflation high.

Deteriorating public accounts

The public deficit will remain high, even if fiscal consolidation starts in 2014. Numerous tax exemptions, inefficient collection and large-scale informal employment (70%) mean tax revenues are insufficient (15% of GDP), while energy subsidies push up spending. The deficit of ENEE, the national electricity company, is 0.6% of GDP due to illegal connections and non-payments. The annual surplus of public pension funds (1.4% of GDP) and international aid (1%), however, help reduce the deficit and contribute to the funding of investment programmes. The succession of deficits has led to an appreciable increase in public debt, the external portion of which accounts for 67% of the total. Given the saturation of the domestic market, essentially made up of pension funds and the banks and which has been favoured in recent years, the state has to turn to the international market. So, in 2013, it sold $500 million in ten-year bonds with a 7.5% coupon. Conditions were worse than expected because of the mistrust induced by the deterioration of the accounts and past institutional weakness. Despite this issue, the government still has to deal with a persistent lack of funding, which has resulted in an increase in arrears owed to local businesses.

External accounts dependent on remittances from expatriates

The current account deficit is expected to represent more of 9% of GDP in 2014 due to the serious trade imbalance (18% of GDP). Imports of intermediate products, oil and capital goods far exceed the exports, mainly to the United States, Germany and the Benelux countries, of clothing from the “maquilas” (36% of sales), coffee (18%), bananas and palm oil. Were it not for oil (20% of purchases) the current account actually reports a surplus of 3%. This underlines the benefits resulting from rejoining the Venezuelan PetroCaribe initiative, which provides for 60% of oil purchases to be paid for in cash or in agricultural products and 40% on credit over 25 years at an interest rate of 1%. Despite an average annual depreciation of 4.5% since pegging to the dollar was abandoned in 2011, the lempira is still overvalued because of inflation, reducing the competitiveness of manufactured goods. Moreover, the income balance deficit (1.3% of GDP) will grow with increased dividend repatriations and higher interest on external debt. The services balance is slightly in deficit, because tourism is marred by violence. Remittances from expatriates in the United Sates (17% of GDP) make up for a large share of the deficit but could ease. Foreign direct investment represents only 7% of GDP. Foreign exchange reserves, which represent only 3 months of imports, offer scant protection in an emergency.

Institutional, political and social weaknesses

The successful holding of presidential and legislative elections in November 2013 seems to have laid to rest the coup of 2009. With Juan Orlando Hernandez, the Partido Nacional (PN) retains the presidency. However, the bipartisan system consisting of the PN and the Partido Liberal, traditional parties supported by the elites, was shattered with the emergence of the reformist parties Libre and Anticorrupción in Congress, where no party has a majority. The new president and his majority will have to deal with criminality (the worst in the world with a murder rate of 90 per 100000 inhabitants) and with the gangs fighting over control of the drug trade. There is recurrent violence over land use and widespread corruption in the administration (including police and justice) and state-owned enterprises. The poor state of the public finances limits the government’s logistic and financial resources, so foreign aid, particularly American, will be welcome.

Strengths

  • 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

Weaknesses

  • Dependence on American and European economies (exports, foreign direct investments and expatriates’ remittances)
  • Geographic and sectoral concentration of exports
  • Dependence on fuel and cereal imports (maize is the staple food)
  • Fragility of public and external accounts
  • Poverty (60% of the population) and inequalities
  • Criminality and institutional fragility
  • Criminality and institutional fragility

1Country and Business Climate Ratings courtesy of Coface (10/2014)
2Risk Assessment and methodology courtesy of Coface (10/2014).

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