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Country Report Honduras

Country Report


honduras flag

Although former president Lobo has taken some positive steps to improve the political landscape, Honduras still faces multiple challenges, among others: reducing its large current account deficit and improving its institutional framework. 

Strengths (+) and weaknesses (-)

(+) Increased political stability 

Although we should keep in mind that Honduras was confronted with a military coup five years ago, former president Lobo has stabilised Honduras' political landscape. In addition, external relations have improved.

(-) Poor business environment

Corruption, human rights violations, high crime rates and a weak rule of law, are all negatively impacting the business environment.

(-) Lack of monetary flexibility

The local currency of Honduras (the lempira) floats within an exchange rate band with the US dollar. But, an overvalued lempira, according to the IMF, stimulates both a current account deficit and a fall in FX reserves, which are already at a low level.

(-) Public finances

Despite some debt forgiveness in 2006 under the Multilateral Debt Relief Initiative (MDRI), Honduras’ public finances are still a cause for concern. First, Honduras was not able to issue debt in 2012, which directly led to internal arrears. Second, the budget deficit remains large, which undermines the sustainability of public finances.

Key developments

1. Elections went rather well

In November last year, both general and presidential elections were held for the second time after a military-backed coup in 2009 against then president Zelaya. Mid-December, the Supreme Court (TSE) reaffirmed the victory of Juan Orlando Hernández of the ruling party Partido Nacional (PN), as he got 37.9% of the votes. Just after the elections two of his opponents, Xiomara Castro (who obtained 28.8% of the votes) and Salvador Nasralla (13.4%), refused to recognise Hernández as the winner and staged a protest. The relatively peaceful protest was led by Manuel Zelaya, Castro’s husband and former president (2006-2009). Finally, on January 27 2014 Hernández was inaugurated as new president.

On the same day new legislators took their seats. This was important, as the PN got only 48 out of the 128 seats in parliament and it still remains questionable whether the other parties will cooperate with the president. To give the new president a good position, former president Lobo (PN) submitted a tax reform to boost tax revenues in December 2013. The proposal was easily adopted (see next paragraph).

2. The will to improve fiscal policy

Honduras’ public finances have deteriorated in recent years, as public expenditures grew considerable faster than public revenues. The latter is mainly the result of Honduras’ weak tax base - characterised by continuing tax exemptions -, a weak revenue administration and an expiration of tax measures adopted in 2010. In addition, the Supreme Court ruled in 2011 against changes in the income tax, which were enacted in 2010. In the meantime, public expenditures became expansionary in 2012. As a result of these two trends, Honduras’ budget deficit widened from -4.6% of GDP in 2011 to -5.9% in 2012 and to an estimated -6.3% in 2013. Partly due to the deterioration of public finances, domestic demand for government bonds fell, while access to external financing was limited. In 2012, this led to an accumulation of arrears to both the private sector and the central bank.

In 2013 there were some bright spots however. Firstly, the government was able to issue two bonds of USD 500m each, at a yield of 7.5% (maturity date 2024) and 8.75% (2020). According to finance secretary, Wilfredo Cerrato, the inflow of money was used to pay outstanding wages and internal arrears. Secondly, a tax package to extend the revenue base was approved by congress in December 2013. Among others the package includes; an increase of the value added tax (VAT) rate from 12% to 15% and higher fuel import taxes. These tax measures will generate an estimated USD 217 million (equivalent to 1.2% of GDP) in revenues. In addition, the government will save USD 771 million (4.1% of GDP) due to expenditure cuts. These measures may also pave the way for a renewed stand-by agreement with the International Monetary Fund (IMF) in 2014, as among others differences between the IMF and Honduras on fiscal consolidation prevented a renewal of the agreement in 2012.

Figure 1: Public finances
Figure 1: Public financesSource: EIU
Figure 2: Current account balance remains a concern
Figure 2: Current account balance remains a concernSource: EIU

3. Current account widdens as a result of lower coffee exports

In the period January-September 2013, Honduras’ current account deficit amounted to USD 1.2 billion (6.2% of GDP), compared to USD 1.1 billion (5.7% of GDP) in the same period a year earlier. One of the main reasons of the deterioration of the current account was a fall in coffee prices, combined with a fall in production. The fall in production was a result of the roya fungus plague, which destroyed a considerable part of Honduras’ coffee production. On the other hand, Honduras’ offshore assembly production for re-exports showed an increase in exports of 15.8%. This could, however, not prevent a deterioration of the trade balance. The trade, service and income deficits are partly offset by remittances, which totalled USD 2.5 billion (13.3% of GDP) in the first nine months of 2013.

The current account was partly financed by the USD 736.5 million of FDI inflows and by a strong USD 500.6 million rise of portfolio inflows. The latter was mainly the result of the USD 500 million bond issue in March last year. Despite this additional inflows, Honduras’ FX reserves fell by USD 10.8 million to USD 2.5 billion at the end of September, equal to an import cover of less than three months. Although the balance of payment figures for the fourth quarter of 2013 have not been published yet, due to a second bond issue that was completed at the end of 2013, portfolio investment will show an additional inflow of USD 500 million. This inflow will (temporary) improve Honduras’ FX reserves position.

Factsheet of Honduras
Factsheet of HondurasSource: EIU,CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Honduras’ political institutions are weak, which was reflected by a military coup in 2009. The coup resulted in a deterioration of external relations and a further fragmentation of the political landscape. In this respect it is positive that, although institutions remain weak, former president Lobo has been able to achieve some political stability. First, political figures and society are participating within, instead of outside, the political system. Second, the presidential elections held in November 2013 went rather well, despite some demonstrations. Third, diplomatic relations with the international community were partly restored, which may result in a renewed standby-agreement with the IMF in 2014.  

In economic terms, Honduras is a small country with a nominal GDP of USD 19 billion. With a population of 7.9 million, GDP per capita amounts to USD 2,322, this makes Honduras one of the poorest countries in the region. This is related to the lack of high value-added sectors, which is, in turn, strongly related to Honduras’ weak investment climate; limited availability of educated people, poor infrastructure, weak rule of law and violence. Important sectors are agriculture, and the production of coffee in particular, and light manufacturing. However, since the export of these products does not generate enough revenue, Honduras is coping with a structural and large trade deficit. This also makes the inflow of remittances – that amount to 17% of GDP - indispensable.

Economic indicators of Honduras
Economic indicators of HondurasSource: EIU
Maarten van der Molen
Rabobank KEO
+31 30 21 62666

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