Honduras: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Growth sustained by the US recovery and private consumption
In 2016, growth is expected to remain resilient, upheld by rising US demand and private consumption. The United States is the country's leading export client (44% of exports are destined for the US) and the top provider of funds linked to the diaspora (over 80% of emigrants' remittances stem from the USA). Agricultural and manufacturing exports are expected to become more competitive due to the depreciation of the local currency, the lempira. Moreover, coffee production (9% of exports), which was attacked by coffee rust disease between 2012 and 2013, has picked up and is expected to help sustain export sales. Private investment in telecommunications, the export processing zones (maquilas) and renewable energy is expected to remain firm. The austerity policy conducted by the government under the agreement signed with the IMF is, however, likely to slow down public investment. Household consumption is expected to remain lively, thanks to increased remittances from expatriates who are benefitting from the recovery of the US labor market, as well as from the expected growth in employment (especially in the manufacturing industry) in response to external demand. Inflation - below the target fixed by the central bank (5-7%) in 2015 - is expected to rise in 2016, in particular because of increased private consumption. The oil price moderation is, however, expected to contain overall price rises.
Continuation of austerity policy under agreement with the IMF
In 2016, the government is expected to continue with its fiscal consolidation policy, the main thrust of which was laid down by the IMF. The adjustment measures adopted from 2014 (higher fuel taxes and VAT raised from 12 to 15%, abolition of certain fiscal niches and freeze on civil service salaries) remain in force and are helping to substantially reduce the deficit in the public accounts. The squeeze on public spending, especially current spending linked to civil service salaries and wages is set to continue during the year. The partial or total privatization of State-owned enterprises could also be envisaged. These efforts are particularly aimed at reducing the debt, the amount of which has continued to climb in recent years.
External accounts again expected to benefit from low oil price
The gradual improvement in the current account deficit is linked, in particular, to the lower energy bill helped by the oil price collapse observed since mid-2014. In 2016, the country should again benefit from low energy prices, despite fairly high levels of fuel imports driven by the recovery of internal activity sustained by the United States (principal export client and leading source of remittances linked to transfers from expatriates). However, trade is expected to remain in deficit, as imports of oil and intermediate products vastly exceed agricultural (coffee, bananas) and manufacturing (mainly textiles) exports. The high crime level will continue to affect the tourism sector and contributes to the structural deficit in the balance of services. The deficit in the revenue balance will continue to grow thanks to an increase in dividend repatriation and interest on the external debt. Foreign direct investments are likely to remain weak, because of the violence and insecurity, which significantly reduces the country's attractiveness. They are concentrated in the telecommunications sector and manufacturing industry directed towards exports (maquilas).
Criminality and corruption continues to plague Honduras, despite some progress
In power since January 2014, President Juan Orlando Hernandez of the National Party (PN) has made combatting criminality and drug trafficking one of his government's priorities. After a victory against organized crime, with the dismantling of one of the country's largest drug cartels, the Cartel de los Valles, and the extradition of the traffickers to the United States, the President can thus boast of success in reducing the homicide rate in his country (down from 79 to 66 per 100 000 inhabitants between entre 2013 and 2014). He is therefore expected to stand for another term during the parliamentary and presidential elections in November 2017. Despite the progress made, Honduras is still one of the most dangerous countries in the world. Violence and criminality are, moreover, one of the main curbs on investment. Corruption is still very widespread (police and judiciary included), as illustrated by the Banco Continental scandal - the bank's directors (Rosenthal family) are accused of laundering drug money via accounts in the United States between 2004 and 2015, while the public prosecutors, although alerted, have preferred not to investigate the matter. This damages the image both of the president and the country as it means the economy is still associated with drug trafficking.