Caribbean & Central America - March 2024

Goods exports were worth a total US$11.35bn in 2023, US$898.7m or 7.3% less than the previous year, according to figures from the country’s central bank (BCH).

This was driven mainly by a 12% fall in the value of exported manufactured textile products. which the BCH says is linked to reduced demand for textile products on the global market. The bank says that the US received 64.7% of textile product exports in 2023, the majority of which were pieces of clothing, and cites figures which reveal that total US imports of clothing fell by 22.4% last year. These products, known as maquila, were worth US$5.40bn in 2023, almost half of the country’s total exports. 

Overall, the value of exports of manufactured goods saw a 4.4% year-on-year decrease in 2023, despite the fact that export volumes increased. This is due to the fact that prices of coffee, palm oil, and prawns were lower than in 2022. For example, coffee exports were worth US$1.39bn, which is US$12.4m less than the previous year, due to the fact that the average coffee price was 16.6% lower year-on-year. It’s a similar story with palm oil. Total exports were worth US$506.9m, which is US$145.7m less than in 2022, due to the fact that average prices fell 27.2% after reaching levels higher than the historical average in 2022.

On the other hand, electrical parts, particularly those used in vehicle manufacturing, increased in value by US$190.5m to US$1.38bn for the year. This is due to strong auto sales in the US, which saw a record US$578m spent on new vehicles last year, according to the BCH. In addition, exports of agricultural products were worth US$992.9m, 3.9% more than in 2022. This is largely explained by a 7% increase in the value of banana exports, which reached US$684.9m last year.

As for the destination of exports, the US is the largest trading partner. Honduras exported US$5.82bn in products to the US in 2023, primarily clothing, automotive wiring components, bananas, coffee, and precious metals, according to the BCH. In the other direction, Honduras imported goods worth US$6.68bn from the US, with products including fuel, textiles, machinery, and electrical equipment standing out. Overall, Honduras imported goods worth US$19.33bn in 2023, a 6.6% decrease year-on-year, making for a trade deficit of US$7.98bn.

A fall in the value of exports will be a concern for President Xiomara Castro, who faces a complicated economic outlook. Despite the fact that the BCH recently revealed that economic growth reached 3.8% in 2023, exceeding forecasts, this represents a slowdown from the 4.2% growth recorded in 2022.

The 2024 budget, which was approved in mid-January, is up from the L392.52bn budget approved for 2023, but it does not provide for increased taxation. This means that extra spending will have to be financed using debt, worsening an already precarious fiscal position. Castro argues that this could be fixed by approving the Ley de Justicia Tributaria tax reform, which would remove tax exemptions and increase collection, but the prospects of it passing congress are dim as her leftist Partido Libertad y Refundación (Libre) party does not hold a majority. 

Castro will hope that a free trade agreement with China, which officials say will be completed by June, will provide a boost to the export sector, but similar deals signed by other Central American nations have had a limited impact on the value of exports to Beijing. Castro will also have to deal with heightened uncertainty in the run up to elections in November 2025, which will likely discourage foreign investment. All of this leaves Honduras concerningly reliant on remittances, which made up 26.8% of GDP in 2022 according to the World Bank, and Castro is short on options to improve the situation.

Minimum wage increases

Last month the Castro government announced an agreement with the private sector and unions to increase the minimum wage between 5.50% and 7% for 2024 and 2025 – an agreement retroactive as of the start of the year. The extent of the increase depends on the size of the company: those with 50 employees or less will see increases of 5.50% in 2024 and 2025; those of 51-150 workers will see increases of 6.50%; and those with 151 workers or more will see increases of 7.00% in 2024 and 2025. As regards the maquila (export processing) sector, the increase will be of 6.5% in 2024, 7.5% in 2025, and 8% in 2026. The same agreement stipulates that if the inflation rate for 2024 is higher than the increase for the minimum wage earmarked for 2025, the latter should be adjusted accordingly.

Exiting the ICSID

Last month the Honduran government announced it was leaving the World Bank (WB)’s International Centre for Settlement of Investment Disputes (ICSID). The government’s decision follows an ICSID dispute with Honduras Próspera, one of the so-called employment and economic development zones (Zedes), the legislative framework for which was revoked by the Castro government in 2022. Citing legal uncertainty over the zone, Honduras Próspera alleged that President Castro’s partial repeal of the Zede framework law was a barrier to past investments and future prospects – filing a claim against the government for US$10.8bn in damages in December 2022. Honduras’s exit from the ICSID will take effect six months after the receipt of the written notice, falling on 25 August 2024.

Regulator bans cryptocurrency trading

Last month the national commission of banks and insurance (CNBS) published a resolution which bans the financial system from trading cryptocurrencies or other virtual assets with “immediate effect”.

The CNBS resolution cites the risk of fraud and money laundering and prohibits those institutions under its authority to “maintain, invest, intermediate or trade in cyptocurrencies, crypto-assets, virtual currencies, tokens, or any similar virtual assets not issued or authorized by the central bank”.

Crypto trading platforms do operate in Honduras, although crypto assets are not regulated by Honduran law.

The regulator highlights that these platforms cannot be controlled by Honduran law because they operate in multiple jurisdictions. This means they are at risk of “lending themselves to activities of fraud, money laundering and terrorist financing”, and that users invest using these platforms at their own risk.

While Honduras is taking a stricter approach to crypto assets than neighbouring El Salvador, which adopted bitcoin as legal tender, there have been isolated attempts to encourage the use of cryptocurrency. For example, 60 local businesses in the self-declared Bitcoin Valley, an initiative which launched in Santa Lucia, a tourist town near the capital Tegucigalpa, started accepting payments in bitcoin in August 2022.