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 assistance program until 2021
- Dependent on the U.S. economy (exports, FDI and expatriate remittances)
- Dependent on imported fuels and cereals (maize is the staple food)
- High levels of crime and corruption amidst poverty and drug trafficking
- Large informal economy: 70% of the working population is concerned
- Weak fiscal resources
A rebound limited by weather conditions
Economic activity will recover in 2021, but not enough to make up for the drop due to the Covid crisis. Household consumption, the main driver of domestic demand (80% of GDP in 2019), will be hurt by the population displacement following the two storms in November 2020, as well as by the rise in unemployment both in the country (12% at the end of 2020), as well as among expatriates in the United States. Standing at 10.3% in October 2020, the unemployment rate among the U.S. Latino population is expected to decline more slowly than in other groups, reflecting Latinos’ over-representation in the jobs hardest hit by the crisis. The catch-up effect observed on remittance flows in the second half of 2020 should fade away. Expatriate remittances, which accounted for 21.5% of GDP in 2019, should therefore be less dynamic than before the crisis, limiting the growth of one of the main financial windfalls for Honduran households. Public demand is expected to increase as part of the plan to support the economy and the reconstruction program following the two storms of November 2020. External demand will be constrained by the recovery of demand in the United States, the main destination for the free zones' manufacturing industry. In this context, the central bank is expected to continue with an accommodative monetary policy, with inflation at the bottom end of its target window (4% +/- 1%). the policy rate is expected to be held at 30% following the last cut at the end of 2020.
On the supply side, construction is expected to benefit from the reconstruction work on infrastructure destroyed by the storms. Restaurant and hotel services, on the other hand, will remain impacted for a prolonged period, ,in a country where tourism is struggling to develop. The manufacturing industry will be driven mainly by the production of protective medical equipment, which is still in high demand worldwide. Conversely, textile production will remain hamstrung by weak growth in global consumption. Agricultural production, which accounted for 15% of GDP in 2019, is set to suffer from the bad weather conditions at the end of 2020, which destroyed part of the agricultural land as well as the roads used to transport goods from the main coffee-growing areas.
Public and current account deficits are largely financed by multilateral organizations
Public accounts deteriorated as the pandemic pushed up spending and narrowed the tax base. Support measures include tax breaks for businesses maintaining employment at pre-epidemic levels and for those that had to close because of the government's health measures. In 2021, revenues are expected to remain below pre-crisis levels as the economy continues to recover, preventing the government from meeting the 1% deficit target that is included in the Fiscal Responsibility Law and one of the key points of the Credit Facility signed in 2019 with the IMF. As a result, the country's debt is expected to continue to increase, although remaining moderate compared to other countries in the region, with debt service swelling (25% of the central government’s budget for the year 2021). Financing is largely provided by international lenders. The World Bank, the Inter-American Development Bank, and the Central American Bank for Economic Integration have provided nearly USD 400 million in total loans. The IMF provided an emergency loan of USD 143 million in addition to a USD 311 million extension of the Credit Facility of which 88 million dedicated to reconstruction work since the end of 2020. However, financing needs also required the issuance of USD 600 million of 10-year bonds on the international markets in May 2020.
The economic rebound is expected to result in a deepening of the current account deficit, which was reduced in 2020 by the downturn in domestic demand. Imports will be driven by the revival of manufacturing production, reconstruction works, and household consumption, while exports will expand at a sluggish pace, pulled down by lackluster textile and capital goods sales in the United States, and despite a vibrant performance by agricultural exports (coffee, sugar, pineapple). The balance of services will also remain in deficit as the tourism sector struggles. Weaker expatriate remittances will mean that the current account will not return to balance. Sagging FDI will only partially meet the financing requirement, with the remainder covered by loans from multilateral donors. Reserves should remain at a comfortable level, equivalent to five months of imports, making it possible to maintain the lempira.
A high-stakes election year
Following the deeply controversial presidential elections of 2017, the November 2021 elections are a high-stakes case. Calls for calm and consultation have already been heard from the private sector, which fears unrest that could slow economic recovery. The lack of agreement among the parties in Congress to reform the electoral code ahead of the elections points to high tensions ahead. Economic recovery, health, education, and security in a country plagued by drug trafficking will be the top issues during the campaign. Internationally, migration will be the central theme in exchanges with the United States. The repatriation of migrants who transit through the country on their way to the United States is continuing following the disputed agreement signed in September 2019 with the Trump administration.