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Honduras

Honduras

Population 10.1 million
GDP 2,816 US$
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (f)
GDP growth (%) -9.0 12.5 4.0 3.7
Inflation (yearly average, %) 3.5 4.5 9.1 6.9
Budget balance (% GDP) -4.6 -2.7 -4.3 -4.2
Current account balance (% GDP) 2.7 -4.9 -3.2 -4.0
Public debt (% GDP) 50.9 48.1 51.3 44.0

(e): Estimate (f): Forecast *Including all non-finance public sector

STRENGTHS

  • Privileged relationship with the United States (preferential trade agreement under DR-CAFTA, military presence)
  • Agricultural resources
  • Support from multilateral donors

WEAKNESSES

  • Dependence on the US economy (exports, FDI and expatriate remittances)
  • Dependence on fuel and grain imports
  • High crime and corruption against a background of poverty, food insecurity and drug trafficking
  • High informality of the economy: 70% of the working population is concerned
  • High emigration fuelled by insecurity
  • Fiscal resources still too low (17% of GDP in 2021)
  • Unemployment rate still above its pre-pandemic level
  • Vulnerable to climatic events such as hurricanes and tropical storms

Risk assessment

Resilient growth despite the continental economic slowdown

Rising prices for imported commodities and intermediates significantly slowed activity in 2022. In 2023, growth will be relatively resilient to the US slowdown. First, on the domestic consumption side (81% of GDP in 2020), the renewal of subsidies to households for electricity and fuel will cushion the marked deceleration in expatriate remittances (20% of GDP, more than 90% of which came from the United States in 2022) and the rise in unemployment (7.6% of the active population in 2022). Second, concerning exports (18% of GDP in 2021), world demand will drive the production of coffee (26% of total exports in 2021), vegetable oil (6%) and gold. In fact, only the Maquinadoras' production of computer equipment (18%), farmed shrimp (12%), bananas and melons (8%) will fall due to less favourable conditions in the United States (49% of exports in 2021) and Central America (18%). Third, public spending should increase as a result of the reconstruction work attributed to Hurricane Julia, which caused USD 409 million in damage to the country at the end of 2022, and the new government's education and health infrastructure projects. Last, private investment is expected to increase only slightly given the durably high level of insecurity.

 

Deterioration of the current account and continued deleveraging

The country's external position improved in 2022 due to a large influx of expatriate remittances. The current account deficit is expected to widen in 2023. First, the regional slowdown will reduce exports of goods, thereby deepening the trade deficit. Second, the services balance will remain in deficit. Insecurity is dragging on the tourism benefits unlocked by the 2021 opening of Comayagua airport. Third, the balance of transfers will see its surplus eroded by the fall in expatriate remittances. However, the flow of FDI which accounted for at least 3.5% of GDP in 2022, particularly in the mining sector, and multilateral financing would balance the deficit. The central bank's reserves that covered at least 6 months of imports at the end of 2022 will be sufficient to maintain the sliding parity of the Lempira to the USD: 1 Lempira was equivalent to 0.41 USD at the end of January 2023  .

The increase in current expenditure (10% of GDP in 2022) to contain inflation will increase the public deficit in 2022. In 2023, the fiscal effort will be limited. The objectives of the Fiscal Responsibility Act, which provide for a return to a primary deficit of 1%, will not be achieved. On the one hand, the slowdown in activity and new tax exemptions will reduce the already low tax revenue. On the other hand, public spending will increase as household subsidies are renewed (50% subsidy on fuel and electricity). Capital expenditure would increase to benefit the education sector and social programmes. It could extend to the reconstruction of telecommunication and road equipment in the event of another cyclone. The need for public financing will be covered by multilateral loans (IMF, World Bank, CABEI) and domestic bond issues. For example, on 25 November 2022, CABEI granted the country a loan (0.7% of GDP in 2022) to finance household support measures. Last, the country’s mainly external debt, representing 51% of the public debt stock in 2022, will remain mostly concessional and sustainable in the short term. Resolved to restructuring the public debt, the Castro administration has been negotiating with the IMF since 2022. Any new agreement would include a restructuring of the state-owned electricity company (ENEE), which was already recommended in 2019 at the time of the last Fund programme (USD 773 million credit facility). In addition, debt service will remain stable (over 3% of GDP expected in 2023).

 

Disagreements between the executive and Congress, a state of exception

The comfortable victory (51% of the votes in the first round) of Xiomara Castro of the Libre party (the left-wing party) in the November 2021 presidential elections marked the end of four decades of power for the Partido Nacional (the centre-right party). Elected for a four-year term, she has set out to fight drug trafficking and her administration obtained the extradition of former president Juan Orlando Hernandez to the United States in April 2022 to face drug and arms trafficking charges. In February 2022, President Castro also asked the UN to set up an international commission against impunity in Honduras. Furthermore, in view of the intensification of the gang war (the maras), a state of emergency and the suspension of certain fundamental freedoms were decreed on 6 December 2022 until at least 20 February 2023. However, without a majority in Congress (the presidential party has 51 seats out of 1228), the executive's fiscal and social reforms could be blocked or weakened, perpetuating public under-investment. This tense political and social context is exacerbating the flow of migrants to the US. The Biden administration could grant fresh aid relief in exchange for better emigration controls.

 

Last updated: June 2023

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