Economic studies
Honduras

Honduras

Population 9.9 million
GDP per capita 2,397 US$
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 2.7 -9.0 9.0 4.4
Inflation (yearly average, %) 4.4 3.5 4.0 3.7
Budget balance (% GDP) -0.9 -5.5 -6.0 -3.0
Current account balance (% GDP) -1.4 3.0 -3.2 -3.6
Public debt (% GDP)* 46.5 54.9 58.7 59.7

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

STRENGTHS

  • Privileged relationship with the United States (preferential trade agreement, military presence)
  • Agricultural resources
  • Support from international donors

WEAKNESSES

  • Dependence on the U.S. economy (exports, FDI and expatriate remittances)
  • Dependence on imported fuel and grain
  • High levels of crime and corruption against a backdrop of poverty, food insecurity and drug trafficking
  • Large informal economy, involving 70% of the working population
  • Fiscal resources still too weak (16.9% of GDP in 2020)

Risk assessment

Growth dependent on the US

Growth will be driven by activity in the United States and reconstruction work in the country following the two storms at the end of 2020. As the United States is the main place of residence for expatriates, the vibrant American economy will once again support remittance flows (23.7% of GDP in 2020) and, by extension, household consumption (81% of GDP in 2020). The fall in unemployment to below 10%, in connection with the recovery in activity, will support this consumption, as will inflation, which should be contained in the middle of the central bank's target window (4 +/-1%). This should allow the central bank to maintain its accommodative monetary policy, with the key rate set at 3% since the end of November 2020. However, effective transmission from the central bank rate to bank interest rates remains dependent on strengthening the local financial market. Public demand will remain strong owing to the numerous reconstruction projects initiated in response to the storm damage and also due to the extension of the exemption from the Fiscal Responsibility Law until 2023. Investment should benefit from improvements in the business environment brought about, in particular by efforts to clean up the accounts of the state-owned electricity utility (ENEE) and pay associated arrears. In addition, external demand from the United States should support manufacturing production of protective medical equipment and textile & clothing products, particularly in the maquilas, which are set to benefit from a base effect, after their production in the early months of 2021 was impacted by the destruction caused by the storms. This same base effect will play a role in the increase in agricultural production, accompanied by higher coffee prices, as well as sugar prices due to the drought in Brazil, the world's main producer. The tourism sector, which is still largely underdeveloped, could benefit from the opening of the new Palmerola international airport in Tegucigalpa. It will replace the Toncontín airport, which is reputed to be one of the most dangerous in the world.

 

Resumption of efforts to consolidate the public accounts, but a rising current account deficit

Honduras, which has been under an IMF programme since 2019, obtained a second extension of the programme in September 2021, after an initial one in June 2020, plus a two-month extension until January 2022 to increase reconstruction efforts. In total, the country will have received USD 773 million in aid from the Fund and should continue to benefit from a variety of funding from multilateral (World Bank, Inter-American Development Bank, Central American Development Bank) and bilateral (notably U.S.) agencies. Some of these funds will be used to continue reforming the public sector, notably through efforts to overhaul the state-owned electricity utility and stop technical losses and fraud among some large consumers. Already in a complicated financial situation before the crisis, the power utility was forced to cope with a decline in cash as consumers found it increasingly difficult to pay their bills. On the revenue side, recent developments in terms of digitalising tax collection should improve returns. Likewise, a large number of tax exemptions for special tourist and rural areas as well as renewable energy have been phased out (worth an estimated 1.5% of GDP in total). However, this increase in revenue will not be sufficient to compensate for reconstruction-related expenditure, which explains why the exemption from the Fiscal Responsibility Law that sets the deficit level at 1% of GDP has been extended until 2023.

 

In terms of the external accounts, the current account deficit will swell, increasing the country's financing needs. Strong agricultural (sugar, coffee, bananas, melon, watermelon) and manufacturing exports will not be enough to offset the increase in imported capital goods for reconstruction and an oil bill driven by high crude prices. In addition to the goods deficit, there will be deficits for services (commercial services, tourism) and primary income, owing to the repatriation of dividends by foreign investors, which will be only partially compensated by remittance flows from expatriates. The remainder of the financing will come from foreign investments, multilateral and bilateral loans (U.S. aid under plans to fight illegal immigration) and potentially by drawing on the substantial foreign exchange reserves (seven months of imports at the end of 2021 with the last IMF payment).

 

Renewal at the top 

The November 2021 presidential elections gave a large victory to the left-wing opposition candidate Xiomara Castro (Libre), with 51% of the vote, over the incumbent Nasry Asfura (Partido Nacional), who received 37%. Her victory ends a decade of power for the Partido Nacional after three presidential mandates. However, without a majority in parliament following the simultaneous legislative elections, the Libre party will have to negotiate with the other parties to achieve its social reform agenda and tensions are to be expected. The situation will be widely observed by the United States, which fears a worsening of the social situation that could encourage an increase in migratory flows towards the large northern neighbour.

 

Last updated: February 2022

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