A slowdown in the wake of the US

After its robust recovery in 2021, activity largely dependent on the United States should slow down in 2022. Demand from the US - the leading export destination (which accounts for 40% of GDP), although weakened, will continue to drive demand for textiles and agricultural products. Thanks to the low unemployment rate in the US, remittance flows will remain sustained (23.7% of GDP in 2020). They will support household consumption (81% of GDP in 2020), which will be one of the pillars of growth. However, more than these flows will be required to counteract the effects of inflation, which is well above the central bank’s target window. Faced with a rise in prices primarily due to imported products - including hydrocarbons, the central bank has, for the time being, decided to maintain its key rate at 3%, not to slow down the economy any further. This strategy, in contrast to that of the leading central banks in the region, could be undermined by the persistence of inflation at the global level. Public consumption is expected to increase because of the new government’s plans to increase spending on education and health. However, this spending will only be realized if parliamentary support is obtained, which is not yet assured. Government programs are expected to support housing construction, especially social housing, which will benefit the sector, which is already growing due to the post-storm reconstruction work in 2020. From an agricultural perspective, except for sugar, production has yet to return to pre-storms Eta and Iota (November 2020) levels. Coffee, sugar, and fruit production will remain the sector’s primary activity source. The tourism sector still needs to be developed. It remains to be seen what effect the new Palmerola International Airport opening in Tegucigalpa will have, replacing the one in Toncontín, reputed as one of the most dangerous in the world.

A weakening of the public and external accounts

While the country exited the IMF program in January 2022, after receiving USD 773 million in aid since 2019, the opening of new negotiations with the Fund by the Castro government is likely, as the new president wants to restructure the debt. Preliminary exchanges have occurred, with the Fund supporting the new government’s social agenda. Any new agreement would include measures relating to the state-owned electricity company (ENEE), already considered the weak link in public finances in the last program. These discussions allow the country to continue to benefit from multiple financing from other multilateral (World Bank, Inter-American Development Bank, Central American Development Bank) and bilateral (notably the United States) agencies. On the revenue side, recent developments in the digitalization of collection should improve yields. The same applies to the end of many tax exemptions for particular tourist or rural areas and renewable energy (the total estimated at 1.5% of GDP). However, the slowdown in activity will weigh on their growth. These additional revenues will not be enough to compensate for the expenses linked to the subsidies on petrol implemented to support households facing rising prices. This could delay the return to balance foreseen in the Fiscal Responsibility Act, which sets the deficit level at 1% of GDP from 2023 onwards.

Regarding the external accounts, the current version will again be in deficit. There needs to be more than the dynamism of agricultural exports (sugar, coffee, bananas, melon, watermelon) and manufacturing (textiles, clothing) to compensate for the increase in imports. Indeed, despite the slowdown in domestic demand and the end of reconstruction efforts, the import bill, particularly for oil, will increase with the rise in prices. In addition to the balance of goods, there are deficits in services (commercial services, tourism) and primary income with the repatriation of dividends from foreign investments. The flow of remittances from expatriates will only partially compensate for this. The rest of the financing will come from foreign investments, multilateral and bilateral loans (US aid in the framework of plans to fight illegal immigration), and potential drawings on the very comfortable foreign exchange reserves (seven months of imports at the end of 2021 after the last IMF payment).

A political landscape under tension following the elections

The November 2021 presidential election gave a significant victory to the left-wing opposition candidate Xiomara Castro (Libre), with 51% of the vote, against the incumbent Nasry Asfura (Partido Nacional), who received 37% of the vote. His victory marks the end of a decade of power for the Partido Nacional after three presidential terms. In addition, the extradition of former president Juan Orlando Hernandez to the United States in April 2022 for drug trafficking symbolized the end of an era. However, without a majority in parliament following the simultaneous legislative elections, the Libre party will have to negotiate with the other parties to carry out its social reform agenda. Tensions are to be expected. Measures that do not require congressional approval are more likely to succeed. In February 2022, President Castro asked the UN to set up an international commission against impunity in Honduras. The social and political situation will be widely observed by the United States, which fears a worsening of the problem that would favor an increase in the flow of migrants to the giant neighbor to the north.