RaboResearch - Economic Research

Country Report Honduras

Country Report


Honduras is a country with a weak institutional structure and poor public finances. While the government seems to have reduced its deficit, fiscal challenges remain sizeable. 

Strengths (+) and weaknesses (-)

(+)      Increased political stability 

Former president Lobo stabilised Honduras' political landscape after a military coup had taken place five years ago. His successor, Hernández has continued Lobo’s policy in this respect. In addition, Hernández has improved Honduras external relations. The overall quality of governance remains low though.

(-)       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. According to the IMF, overvaluation of the currency fuels 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. Although its public debt level is moderate, Honduras has been running a considerable fiscal deficit in recent years.

Key developments

1. Deficit reaches new high

In 2013, Honduras recorded a fiscal deficit of 7.7% of GDP. The deficit was slightly higher than earlier anticipated and the highest recorded since 1995. While budget revenues increased by 6.4%, especially due to higher income taxes, expenditure rose by 14.4% year-on-year. The rise in expenditure could mainly be attributed to a rise in transfers of 29.2% and interest payments of 38.9%. The latter is primarily the result of the issuance of two government bonds in 2013. In 2013, interest payments made up 2.2% of GDP, which is, given the government’s small revenue base (almost 25% of GDP), considerable.

The deterioration of public finances and relatively high refinancing needs were also part of the reason why Moody’s downgraded Honduras’ government bond rating from B2 to B3 and changed the outlook from negative to stable on 27 February 2014. In addition, Moody’s did not foresee a substantial improvement of the fiscal situation in the coming years. One of the main structural issues for government finances are the large deficits that the state-owned electricity company (ENEE) is running. Although the previous government signed a law that will allow private investment in the state owned electric and telecom companies, Moody’s foresaw considerable implementation risks. Finally, refinancing needs are relatively high in the coming years. In the years 2014-2017 the government faces debt amortisations of 3% of GDP per year. When fiscal deficits are included as well, Honduras faces financing needs equivalent to 9% to 10% of GDP in both 2014 and 2015.

This year, there has been some progress. For 2014, the government intends to reduce the deficit to 4.7% of GDP. Although this target was met with some scepticism at the beginning, as the required adjustment would be very substantial, the government seems to have booked some progress. In the first half year of 2014 the accumulated deficit reached 0.7% of GDP compared to 2.8% in the same period a year ago. The fiscal outlook could improve somewhat further, especially as an IMF deal is likely to be signed later this year, which may allow current president Juan Orlando Hernández to use IMF demands to implement unpopular measures. However, the situation may deteriorate again in the run up to the elections scheduled for 2017. President Hernández has already shown to be sensitive to pressure from the opposition, as he shortly after his inauguration reversed an increase of the VAT rate on key goods in the consumption basket. 

2.  A IMF deal seems likely

A press release from the IMF on 12 September indicates that Honduras is likely to sign a three-year financial arrangement with the IMF at the end of this year. The deal is expected to be worth between USD 170m and 220m (about 1% of GDP). According to the statement, the IMF and the government mainly discussed macroeconomic policies, structural reforms and public finances. The fact that the government is likely to get support from the IMF, shows that its external relations have improved after the 2009 military coup. That fact that the government seems to be willing to reform the economy is also positive, but since the government has not always lived up to its promises when it comes to reforms, some caution seems to be justified.  

Figure 1: Public finances
Figure 1: Public financesSource: EIU
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, as the 2009 military coup illustrates. 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 was able to achieve some political stability. First, most 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 have been 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 18 billion. With a population of 8.1 million, GDP per capita amounts to USD 2,275, which 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. Important structural challenges are the 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, Honduras has a structural and large trade deficit. This also makes the inflow of remittances – that amount to almost 19% 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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