Caribbean & Central America - November 2023

While local think tank Foro Social de la Deuda Externa de Honduras (Fosdeh) has said that the Honduran economy is still being negatively impacted by the effects of the coronavirus (Covid-19) pandemic, international credit ratings agency Standard & Poor’s (S&P) has published a more optimistic assessment, citing lower than expected fiscal deficits.

The Honduran economy still hasn’t recovered from the shock of the pandemic, Fosdeh director Mauricio Díaz Burnett told EFE news agency in an article published 11 October. GDP growth plummeted from 2.7% in 2019 to -9% in 2020, before spiking to 12.5% in 2021 and falling back to 4% in 2022, on figures from the International Monetary Fund (IMF). Díaz highlighted as cause for concern the fact that the Honduran economy is heavily reliant on remittances sent home by migrants living abroad. Their share of national GDP has increased rapidly since the turn of the century, from 6.1% of GDP in 2000 to 25.3% in 2021, according to figures from the central bank (BCH). In 2022 remittances were worth US$8.68bn, a 17.8% increase compared to 2021, said the BCH. While this situation is common among Central American countries, it means national economies are vulnerable to fluctuations in exchange rates, as well as raising concerns over a lack of growth driven by economic activity in Honduras.

Díaz was speaking at a forum in Tegucigalpa alongside Leana Corea of international NGO Oxfam, who called for increased tax collection to enable more investment in healthcare and the fight against corruption. Improving education and healthcare is “a big challenge” and to face it those who “earn most have to pay taxes,” Cora told EFE. In recent decades Honduras has been known for offering generous tax exemptions, a situation which President Xiomara Castro is currently attempting to remedy via a proposed legislative bill, the ‘Ley de Justicia Tributaria’, which aims to phase out these exemptions.

• Ley de Justicia Tributaria

The proposed legislative bill, ‘Ley de Justicia Tributaria’ will phase out tax exemptions such as free trade zones, among other things. While the bill was sent to congress in May, there is currently no fixed date for it to be discussed by legislators. However, if it is approved it will boost tax collection and give the government more money to invest. The law is supported by the International Monetary Fund (IMF) but is facing significant opposition from business leaders who have benefited from generous tax exemptions under previous governments.

A more optimistic analysis of the country’s economic prospects came from Standard & Poor’s (S&P), which revised its outlook for Honduras to stable from negative on 29 September, citing contained fiscal deficits. “We think Honduras’ fiscal deficits are likely to be lower than we previously expected, which will help stabilise public finances and the government’s debt burden,” said S&P. “The stable outlook incorporates our expectation of moderate GDP growth, continued good access to official funding, and a fiscal policy that contributes to stable net general government debt in the next two years.”

The credit ratings agency predicts that GDP will grow by 3.0% in 2023 and 3.6% in 2024, while “bolstering GDP growth prospects remains key to achieving the administration's development objectives”. 

S&P adds that it expects to see a fiscal deficit of around 2.4% of GDP in 2023, below the 4.4% deficit approved in this year’s budget, and a gradual strengthening of public finances. Net government debt will sit at around 46.8% of GDP for 2023-2026, said S&P, which also predicts that the government will “maintain good relationships with multilateral institutions and keep access to credit lines,” citing a recent deal with the IMF. This refers to an agreement made in September for US$822m in funds for Honduras under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF). According to an IMF statement, these arrangements “provide support for the Honduran government’s economic and institutional reform agenda over the next three years”.

Challenges cited by S&P include political polarisation and divisions in congress, where President Castro only has some 50 votes in the 128-member unilateral legislature. The agency believes that this will make it difficult to pass reforms, although it does expect a new law to reduce tax exemptions (‘Ley de Justicia Tributaria’) to be passed by December this year.

S&P also cites progress in strengthening anti-corruption efforts, such as improving the anti-money laundering framework. Further progress could be made by establishing a long-promised International Commission against Corruption and Impunity in Honduras (CICIH), but progress in doing so has been slow, according to S&P. “In our view, a continued commitment to fighting corruption is key to strengthening the Honduran justice system and improving investor confidence,” it says. 

Another issue is the energy sector, in particular the state electricity company Empresa Nacional de Energía Eléctrica (ENEE), which posts losses equivalent to around 1% of GDP each year, according to S&P figures. President Castro has taken steps to try and address this drag on public finances by enacting significant reforms in the sector, including a May 2022 law which enabled the renegotiation of contacts with private generators to reduce costs [EB-23-07], but S&P expects transfers to ENEE to continue. The agency also raises concerns over the country’s exposure to extreme weather events and limited physical infrastructure as constraints on economic growth.

Looking ahead, President Castro has approved the 2024 state budget proposal for L406.58bn (US$16.58bn), up from L392.52bn in 2023. Finance Minister Rixi Moncada warned that the country remains burdened by the “onerous debt” inherited from the previous Partido Nacional (PN) government led by former president Juan Orlando Hernández (2014-2022) which she said exceeds US$20bn. The budget must now be approved by congress, but the draft version contains several interesting changes compared to the 2023 budget. For example, under the proposal, the energy ministry would receive 43% less funding compared to last year, while the infrastructure and transport ministry would receive an 87% increase and the president’s office would receive 93% more funding than last year, according to a Fosdeh analysis.