Honduras: Risk Assessment
Country Risk Rating
Business Climate Rating
- Privileged relations with the United States (preferential trade agreements)
- Agricultural, mining and tourism resources
- Under IMF programme up to 2021
- Dependence on the US economy (exports, FDI and expatriate remittances)
- Dependence on imported fuels and cereals (maize is the staple food)
- High crime and corruption in the context of poverty and drug trafficking
- Significant economic informality: 70% of the working population is affected
External factors weigh on growth
In 2020, activity will be less dynamic, exposed to the American slowdown and coffee prices that are still too low. The agricultural sector, 14% of GDP in 2018, will continue to suffer from the impact of the drop in coffee prices in 2018 due to Brazil's production surpluses. The drop in Brazilian production in 2020 should allow for a raise in coffee prices at the end of the year, but it will not be enough to lead to a real recovery of the sector in the country as the leaf rust epidemic still heavily affects coffee plants. The Honduran industry, mainly oriented towards the production of intermediate goods in maquilas (export factories), should suffer from the decline in American demand. This will mainly affect textile products, the country's first export, as well as capital goods. Activity will be lower in construction, following the postponement of various public infrastructure projects due to the difficulties of the national electricity company that is weighing on public finances. The high potential for tourism will continue to be under-exploited due to the high level of drug-related violence.
Private consumption, which accounts for more than 90% of GDP, should be affected by the reduced dynamism of remittances from expatriate workers as the revocation of the Temporary Protected Status decided by the Trump administration comes into force on January 1, 2020. Although this measure affects only a small proportion of Honduran migrants living in the United States (8.7%), combined with the tightening of US migration policy and the slowdown in the US economy, it should limit the growth of these foreign exchange flows of which the United States is the main source. However, consumption should continue to be supported by strong credit growth (+14.3% at the end of 2018), particularly in US dollars. The risk of dollarization of the economy will be one of the elements monitored by the central bank for its monetary policy decisions, in parallel with the monitoring of inflation that should remain within the window targeted by the central bank (4% +/-1%). The weaker economic activity should lead to an easing of monetary policy with an initial cut of 0.25 basis points in the key rate to 5.50% in December 2019.
Fiscal health supported by the IMF but more vulnerable external accounts
Since obtaining the IMF's first Extended Fund Credit Facility in 2014, for three years, many efforts have been made to clean up the public accounts, allowing a second agreement to be signed in July 2019 to continue reforms. The Fiscal Responsibility Act sets the non-financial public deficit at 1%, a target that was met again in 2019, despite the financial difficulties of the national electricity company (ENEE) which weigh on the State budget. The USD 311.3 million in IMF assistance over two years will therefore be mainly dedicated to implementing the reforms needed to make this company viable. In this context, the risk on debt, at 60% concessional, remains low and below the levels observed among peers.
The current account deficit should increase in 2020, in line with the decline in exports that will widen the trade deficit. The remittances of expatriates, which will be less dynamic in 2020, will not make it possible to compensate for this deficit, or the one of the income balance that is in deficit due to the repatriation of dividends from foreign companies. The balance of payments will be balanced by FDI directed towards the financial sector, insurance and business services, and maquilas, as well as by foreign exchange reserves that remain at a comfortable level, equivalent to 5.7 months of imports.
A weakened president to face social and diplomatic challenges
Following a controversial election and major drug trafficking cases in his entourage, President Juan Orlando Hernandez (Partido Nacional) enjoys a very low level of popularity. The division in the opposition maintains his power. Plans to reform the health and education systems have triggered large waves of protests against an “attempt to privatize education and health”, raising the risk of new social tensions in 2020. To this can be added the challenges of fighting poverty (39% of households live in extreme poverty and only 25% benefit from social security), the endemic violence associated with drug trafficking and the reintegration of candidates who failed to emigrate to the United States.
The migration issue will be at the center of discussions with regional partners, as well as with the United States. Indeed, the migration policy adopted by Donald Trump aims to place greater responsibility on the countries of origin and transit of migrants, and is reflected in increased diplomatic pressure to sign agreements with safe third countries to return migrants and force them to seek asylum. Despite too limited means to ensure the security of migrants, the government could not resist pressure from its main trading partner and signed an agreement in September 2019, which allows for the repatriation of migrants who transited via the country on their way to the US.