Latin American Economy & Business - June 2014 (ISSN 1741-7430)

The economic imbalances in Honduras remain large, particularly for a country where institutions are weak and where the rule of law is absent.

Alarming statistics about Honduras are easy to find. According to the US State State Department’s 2014 International Narcotics Control Strategy Report (INCSR), some 86% of all cocaine entering the US is believed to have come through the Mexico-Central America corridor. Not all the cocaine travels by air (and Caribbean Sea routes have recently been revived, according to the US military’s Southern Command). However, some three quarters of all planes smuggling cocaine out of South America first land in Honduras. “The Caribbean coastal region of Honduras is a primary landing zone for drug-carrying flights and maritime traffic. The region is vulnerable to narcotics trafficking due to its remoteness, limited infrastructure, lack of government presence and weak law enforcement institutions. Drug trans-shipment to points north from the Caribbean coastal region is facilitated by subsequent flights north as well as by maritime and riverine traffic and land movement on the Pan American Highway”, notes the INCSR.

Widespread poverty is a key element. According to the United Nation's Economic Commission for Latin America and the Caribbean (ECLAC), the overall population and the urban population are growing at 1.9% and 2.9% annually. For Honduras as a whole, the poverty rate was 67.4% in 2010 (the latest year for which ECLAC publishes the data). In the countryside, the figure was 76%. Some 42.8% of Hondurans, and 56.8% of rural Hondurans were living in extreme poverty, on the ECLAC 2010 data. Social public expenditure was only 12% of GDP. Since then, the situation has deteriorated to the point that on some estimates by local NGOs, for instance, the overall poverty rate has hit 70% or more.

As chart 1 indicates, crime and poverty have a profoundly negative impact on perceptions of Honduras as a place in which to do business. According to the World Economic Forum (WEF)’s 2013/14 Global Competitiveness Report, Honduras ranked well down at number 111 – of the 148 countries assessed – for overall competitiveness. It ranked last – 148/148 – for the business costs of crime and violence. The country had similarly bad rankings for the wastefulness of government spending (145/148) and the reliability of police services (142/148). Unsurprisingly then, inefficient government bureaucracy, corruption and crime & theft are the three factors that businesses operating in Honduras say they find most problematic.

Honduras is not the only country in the region in which bureaucracy, corruption and weak institutions are seen as major challenges. However, most of the other countries are characterised by macroeconomic environments that are, if not improving, then at least clearly stable. The final two problematic factors identified on chart 1 – access to financing and policy instability – are worrying indicators that this is not the case in Honduras.

In mid-June 2014, the International Monetary Fund (IMF) concluded its regular Article IV consultation with the government. The IMF's views of the country's prospects are summarised in chart 2. The IMF noted that many of the challenges facing policy-makers in Honduras through 2013 originated from outside the country. Economic growth slowed from around 4% in 2012 to 2.6% in 2013 “owing to lower private investment, a drop in coffee output due to leaf-rust disease, and weaker trade partner growth. Inflation declined to 5%...driven by softer commodity prices, weaker economic activity, and lower currency depreciation. On the external front, the current account deficit rose to about 9% of GDP in 2013, reflecting less favourable terms of trade and a drop in coffee exports”. International reserves rose to 3.7 months of imports, thanks to inflows of foreign direct investment (FDI) and the raising of US$1bn through two global bond issues.

The current account deficit is sufficiently small in absolute terms that it should usually be financed. The main problems stem from public finances. In spite of some moves to improve the tax administration and to control public spending, it appears likely that the government will be running a deficit of around 5%-6% of GDP in calendar 2014 and over each of the next four years. On its own, this would not normally be a problem. However, the lack of competitiveness of the economy means that it is only likely to grow at around 3% annually: further, gross government debt already amounts to around 40% of GDP. According to the IMF's forecasts, the debt/GDP ratio will probably grow steadily through the forecast period to reach 59% by the end of 2018.

Newsflow over the last three months or so has been positive, but has generally alluded to particular initiatives to increase the competitiveness of the economy – and not to wholesale reforms of Honduras' unbalanced public finances. Hondutel, the state owned telecoms operator, has eliminated over half of its management positions as a part of a restructuring process. The company suffered net losses in 2013 of around US$30mn. It only has 146,000 subscribers, while Claro and Tigo – its main private sector competitors – serve a combined 7m. For its part, the government announced that it had received 790m lempiras (US$41.4mn) from Tigo in consideration for a seven-year extension to that company's concession. At the beginning of June, the port authority ENP announced that it is looking for an external consultant to undertake an environmental audit of the expansion of the port of Cortés. The audit will be a part of a wider project to modernise the port, which is being funded by the Inter-American Development Bank (IDB).

In short, our view is that Honduras remains trapped in a vicious cycle of poverty, poor governance, low competitiveness and low growth. Although a financial crisis is not imminent, the risks are growing steadily. The absence of the rule of law and the weakness of Honduras' institutions are exacerbating the economic problems, and vice versa. Over recent years, this has been the challenge in Jamaica too, but in few other countries in the region.

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