Economic Analysis
Honduras

Honduras

Population 8,082 million
GDP 2 530 US$
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Country risk assessment
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Synthesis

major macro economic indicators

   2014 2015  2016 2017 (p)
GDP growth (%) 3.1 3.6 3.6 3.4
Inflation (yearly average) (%) 6.0 3.1 3.1 4.1
Budget balance(1) (% GDP) -4.2 -1.4 -1.9 -1.9
Current account balance (% GDP) -7.4 -6.3 -5.7 -5.6
Public debt (% GDP) 46.4 46.8 48.6 49.3

 

(e) Estimate (f) Forecast

(1) excluding pension funds and aid

STRENGTHS

  • Privileged relationship with the United States
  • Agricultural, mineral and tourism resources
  • Agreement with the IMF

WEAKNESSES

  • Dependence on American economic cycle (exports, FDIs, expatriate remittances)
  • Dependence on imports of fuel and cereal (maize is the staple)
  • High crime levels

Risk assessment

Resilient growth in 2017

In 2016, growth Honduras was mainly on the back of the recovery in private consumption, boosted by low energy prices and the robustness of remittances by expatriate workers. In 2017, activity is expected to continue to be sustained by investment and higher household consumption. Apart from remittances of funds, the jobs market recovery (specifically in the manufacturing industry) is likely to contribute to rising internal demand for food products, fuel, pharmaceutical products and, in particular, electricity and water supply. Public investment in construction and the improvement of the road network are expected to continue, as is private investment mainly in residential construction. Primary exports (coffee, iron, and shrimps) and manufacturing exports (especially textiles) are expected to benefit from the gradual depreciation of the local currency, the lempira, against the dollar. Finally, inflation is likely to rise in 2017 driven by higher domestic demand, but will remain below the central bank target (5-7%).

 

The government is expected to pursue its fiscal consolidation drive

The government is expected to continue its fiscal consolidation policy in order to guarantee the extension of the IMF's credit facility. Thanks to the consensus within the political class, Honduras has succeeded in obtaining approval for the reform of VAT (rising from 12% to 15%), cut in civil service wages and the optimisation of tax collection thanks to the widening of the tax base and a reduction in tax evasion. Moreover, the budget responsibility law, approved in 2016, sets a ceiling on the non-financial public sector deficit of 1% of GDP by 2019. The local authorities have also implemented institutional improvements, such as setting up a committee to examine all ministerial requests so as to better control spending growth and achieve the medium-term objectives. These efforts are specifically aimed at reducing the public debt, the amount of which has risen constantly in recent years. Despite this, the public debt as a share of GDP is unlikely to stabilise before 2018 given, to some extent, the increase in public spending on infrastructure, health, education and social programmes. Although such spending contributed to an increase in the public deficit in 2016, it paves the way for more inclusive growth in a country where the poverty rate amounts to almost 40% of the population.

 

Improving external accounts

In 2016, the current account deficit improved due to robust exports of goods to the United States, which receives almost 60% of Honduran exports, to the increase in funds remitted by migrants and weak imported energy prices. This trend is expected to continue in 2017, despite the expected increase in oil imports driven by rising internal activity. The country is a leading producer of textiles and is expected to continue to benefit from preferential agreements wit the United States during the year. The balance of services deficit will remain low given the relatively weak prices for the transport of goods, but the high crime rates will continue to impact tourism income. Continued reinvestment by foreign companies of their local profits will help to stabilise the income deficit and remittances by migrants, living for the most part in the United States, are expected to remain robust.

 

A government recognised for its good performance on the budget, but hampered by the scourge of corruption

In power since January 2014, President Juan Orlando Hernandez of the centre-right National Party (PN) could well stand for a second term in the forthcoming November 2017 elections. The success of his policy, focused on fiscal restructuring, supported by involvement in the three-year agreement with the IMF (December 2014), has been recognised by international creditors and the rating agencies. In contrast, the government's inability to tackle the issue of corruption, which affects the whole of the public sphere (politics, justice, and the police), is a major handicap for the country's credibility and that government's potential re-election. After the drug money laundering scandal at Banco Continental (Rosenthal family) in 2015, allegations of drug trafficking against those close to the president (his brother and his defence minister) are affecting his government's popularity. Socially, Honduras is still one of the poorest countries in Latin America and remains among the most violent in the world. Violence, corruption, drugs trafficking and insecurity are, moreover, the main obstacles to the country's economic development.

 

Last update: January 2017

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