Honduras: Risk Assessment
Country Risk Rating
Business Climate Rating
- Privileged relations with the United States (preferential trade agreements)
- Agricultural, mining and tourism resources
- IMF agreement
- Reliance on the US economy (exports, FDI and expatriate remittances)
- Dependency on imports of fuels and cereals (corn is the staple food)
- Strong crime and corruption against a background of poverty; drug trafficking
- High informality of the economy, affecting 70% of active workers
Activity Remains Resilient
Growth posted a good performance in 2017, supported mainly by private consumption and exports (sustained demand for tropical agricultural products). Growth drivers are expected to be the same in 2018. In particular, domestic demand is set to remain vigorous in a rather expansive budgetary context, as the budget provides for a 9% increase in spending (health, education, road infrastructure, electricity, etc.) in real terms. Household consumption should once again benefit from the dynamism of expatriate worker transfers. These transfers would likely be reduced in the event of a non-renewal of the TPS (Temporary Protected Status, implemented in 1998 in the aftermath of Hurricane Mitch to allow for Hondurans to legally stay in the US) by the US government in 2018 (six-month renewal in October 2017). Consumption is unlikely to be significantly affected by the moderate inflation accompanying the regular depreciation of the lempira (the national currency), the upward trend of oil prices, and recurring distribution problems. Public investment should continue to grow, notably in road infrastructure and with the construction of the new Palmerola International Airport. Exports from the agricultural and manufacturing sectors are likely to remain relatively strong thanks to continued growth in the United States and development of the productive system. The Honduras 2020 plan, while slow to implement, is stimulating investment in the manufacturing sector (textiles, agri-food), tourism, industry, and real estate and call centers.
Healthy Budget Situation and Balanced Trade Deficit with Expatriate Remittances
Since 2014, in the framework of the financial agreement with the IMF, the state has made significant efforts (efficiency of taxation and control of expenditure), without sacrificing social development and infrastructure. The tax liability law approved in 2016 sets a ceiling for the non-financial public sector deficit: 1% of the GDP by 2020. The government should achieve the 2017 target of a 1.4% deficit. An extension of the agreement with the IMF after its deadline of December 2017 could be envisaged, and would guarantee the maintenance of budgetary rigor. Restructuration of the struggling national electric company ENEE is ongoing, including the issuance of a USD 700 million bond in March 2017 to bail out the company, as well as the reduction of the wage bill and tariffs adjustments. This will weigh on public external debt service.
The current account deficit will slightly increase in 2018, as a result of the large trade deficit, due to significant imports of capital goods and food products (cereals), the repatriation of dividends by foreign investors, and payments to overseas service providers. Transfers of emigrated Hondurans, the main source of foreign exchange (20% of the GDP), and tourist revenues – limited by a high crime rate that makes the country less attractive – make it possible to limit the deficit considerably. This is comfortably financed by the reinvestment of profits made by foreign companies, as well as by the use of indebtedness with international donors and markets, facilitating the increase of foreign exchange reserves, which represent five months of imports. In 2018, the increase in agricultural exports (coffee, tropical fruits) and textiles (from maquila companies, manufacturers in special economic zones) – particularly to the United States, which is by far the largest market –, as well as that of funds sent by expatriates, should offset the increase in the oil debt.
Return of Political Tensions
The November 2017 presidential election was followed by violent protests, making the security situation more uncertain, despite the progress made (homicide rate lowered from 75 to 37 cases per 100,000 inhabitants since 2014). The two finalists, Juan Orlando Hernandez (National Party, whose candidature to the election was highly disputed) and Salvador Nasralla (Opposition Alliance against Dictatorship), both announced their victory. The Electoral Tribunal officially announced Mr Hernandez’s victory after several unofficial proclamations, which had been highly criticized by international observers, with the OAS denouncing the lack of guarantees and transparency in the process. Mr Nasralla has refused to accept the results despite US pressures, calling for protests, while the violence has already claimed several victims. In this context, Honduras remains characterized by high poverty (39% of households living in extreme poverty; 25% with access to social security), significant violence associated with drug trafficking (the maras), as well as corruption (e.g. the Rosenthal family scandal in 2015 for narcotic money laundering) – all of which limit the country’s development. The improvement of the business environment (strengthening of the PPP legal framework, public arrears auditing) is nonetheless recognized by international creditors.