Caribbean & Central America - August 2015 (ISSN 1741-4458)

The Honduran economy is getting out of the doldrums, pulled up by stronger US demand for its main exports. Local private sector confidence in the business-friendly government led by President Juan Orlando Hernández is spurring renewed investment, while consumers are benefitting from stronger remittance inflows. The improving security situation is also helping the rebound in economic activity.

On 23 July, the deputy managing director of the International Monetary Fund (IMF), Mitsuhiro Furusawa, gave an upbeat assessment of current prospects for Central America, saying they had become “more favorable”. This assessment was based on the fact that unlike Latin America as a whole, Central American countries are particularly benefitting from cheaper international oil prices, helping to reduce import bills and keep inflation low, thereby boosting domestic purchasing power.

Furusawa noted that the economic recovery in the US, by far the sub-region’s most important trade partner, was also providing countries with the opportunity to strengthen their economies against future volatility. He urged governments to implement policies of “financial sustainability”, and to channel the budgetary gains from lower oil prices and faster US growth into reducing “fiscal vulnerabilities”.

Furusawa went as far as to say that in some countries the positive effects from the favourable external environment “are expected to outweigh the possible loss of subsidised financing from Venezuela under the Petrocaribe program”. But he stressed the importance of taking advantage of this opportunity to implement reforms to boost the low tax take across the sub-region, which he stressed was “vital to support higher public investments and education spending that can help overcome existing supply bottlenecks, enhance human capital, and achieve higher sustainable growth”. “There is no better time to tackle some hard policy challenges”, he emphasised.

In Honduras, first quarter real GDP growth was 4% year on year, according to the central bank (BCH). Domestic investment and consumption have rebounded and like its regional counterparts, Honduras is benefitting also from recovering export demand. First quarter exports rose by a healthy 4.7%, thanks largely to stronger US demand. Import growth was double that pace at 11.8%, reflecting rising domestic investment and export demand, and while fuel import costs have fallen, fuel import volumes have grown in response to strengthening domestic demand. Meanwhile, private consumption rose by 3.1%, with households benefitting from higher remittance and reduced transport costs. Gross fixed investment rebounded by a strong 36% year on year, boosted by one-off large investments in the country’s new solar plants.

On the expenditure side meanwhile, first quarter growth was led by financial services (11.7%); communications, electricity & water (4.2% each); transport (4%); manufacturing (3.7%) and agriculture & fisheries (3.3%). On the back of this improving performance, the BCH has lifted its 2015 GDP growth forecast to 3.5%, up from 3% previously.

To date moreover, the Hernández administration has exceeded its fiscal and structural benchmark targets under its new (December 2014) US$188m stand-by agreement with the IMF, winning strong IMF praise. The fiscal deficit fell to just 0.1% of GDP in the first half, on preliminary estimates, the lowest in eight ears and well in excess of a targeted 1.5% agreed with the IMF.

• Asia tour

President Hernández’s inaugural tour of Asia in mid July took him to South Korea, Japan and Taiwan. Hernández was in search of development cooperation, financing and investment, including for the government’s proposed new Zones for Employment and Economic Development (Zedes), the first of which is slated for development with the help of the Korean International Cooperation Agency (KOICA) at the Pacific Honduran port of Ampala (located on El Tigre Island, in the Gulf of Fonseca). He also touted Honduras as a gateway for Asian trade with the Americas.