credit rating honduras

7/29/2019 Credit Rating Honduras

1/13

1

Sovereign Credit Rating:Honduras

Country Risk Analysis

Professor Anouar HassouneRUZZANTE LauraSAMOGGIA DilettaSHEN YiqiSTANESCU Ioana Raluca

VANDEWIELE KarelVINCENSINI JulienVISLOUS VaclavWANG WenluYAO YingjiaZHANG Wenjie


2/13

2

Honduras (Republic of)

Major Rating Factors

Strengths:

Low levels of debt and interest payments following several debt relief packages

Improving external liquidity and increasing foreign investors confidence

International oversight speeds up key reform initiatives

Weaknesses:

Low economic basis does not allow for a large buffer for extra income

Political situation has still not fully stabilized after the constitutional crisis of 2009, institutionalgovernance remains weak

High susceptibility to global conditions, natural disasters and high volatility of output given concentrationin agriculture

Prevailing rigidities in the fiscal and monetary policies

Rationale

Our rating of the Republic of Honduras reflects our views on its moderate economic prospects, as well as currentlyrelatively positive external liquidity. Primarily because of its dependence on the major markets, such as the USAand remittances, which have been severely affected by the recent economic downturn, the fiscal position ofHonduras is extremely rigid with a general budget deficit of 4% in 2011. Our belief is that despite recently enactedand planned tax reforms, the government will have to run budget deficits of about 3% in 2012-2014, but this willlargely depend on the global climate.

Honduras has somehow recovered from the effect of the economic downturn and its GDP growth is expected toreturn to 4% in 2012. Future performance, however, is highly uncertain given the countrys high dependence onthe agricultural exports, which bring about high volatility, extremely short economic cycle (which depends largelyon weather) and its performance is thus also highly susceptible to negative weather anomalies frequent in theCaribbean region.

The country is also still recovering from the coup dtat from 2009, when president Zelaya was forcibly expelledfrom the country. Thereafter, the government suspended many constitutional rights. Although, the newgovernment led by president Lobo tries to contain the situation, corrupted police and army forces, as well associal unrest from the agricultural reform are significant causes for caution. The government attempts to counterthis by financing social programs, however, world-wide food and energy price inflation, as well as the lack ofoversight over police forces can prevent these programs from having a significant effect.

Moreover, even if government reform can boost investors confidence, significant improvements in the ease of

doing business are necessary, as the country lacks in comparison with its peers. Similarly, investments intoinfrastructure are still below our expectations, especially after the setback of the 2008 floods, although there is apromising $225 ml. investment announced in the expansion of Puerto Corts, the most important seaport inCentral America.

The main target of monetary policy will be to curb inflation, an effort which could be helped by the talks withrejoining Petrocaribe, which could help containing oil prices. On the other hand, strengthening ties with theChvez rgime in Venezuela has been one of the reasons for criticism of former president Zelaya. Furthermore,the global spikes of food and oil prices could prove to be a challenge for the poor country nonetheless. Theinflation differential is also putting pressure on the rigid exchange rate pegged to the US dollar, which hassurfaced in the form of many (albeit small) adjustments in the last six months.

The structure and liquidity of the banking sector has been improving and despite recent setbacks remains

relatively strong. The same can be also said about the Honduran external liquidity, whose main indicators are in

Sovereign Credit Rating

Foreign CurrencyB/Stable/BLocal CurrencyB/Stable/B


3/13

3

better shape than most of its peer group, although the widening current account deficit could pose some problems,especially in light of the countrys low global competitiveness levels.

Outlook

The stable outlook reflects our belief that recent reforms can tackle the problems of fiscal and monetary rigiditiesand that the interest of investors in the country will remain strong. On the other hand, the growth potential ishighly dependent on managing the risks of high inflationary pressures, short business cycle, as well as the lowbuffer of the weak economic base in case of any setbacks.

Moreover, it is paramount for Honduras to settle its political crisis, as well as tackle the challenges of corruption,infrastructure and business environment to be able to see any positive change in its credit rating. Given the recentdebt reliefs, the administration has some room to improve the situation in the country, even if their job will not bean easy one.

Honduras - Outlook Indicators Year ended Dec. 31 unless otherwise noted

2007 2008 2009 2010 2011 2012f

GDP per capita (US$ m) 1727 1901 1903 2026 - -Real GDP (% change) 6.2 4.2 -2.1 2.8 3.7 4.0

General government balance/GDP (%) -3.1 -2.5 -6.2 -4.8 -4 -3.5

General government interest/revenue (%) 2.87 2.67 3.75 5.04 - -

Total public debt/GDP (%) 18.39 19.24 23.06 25.58 - -

CPI (average % change) 6.9 11.4 5.5 4.7 - -

Current account balance/GDP (%) -9.03 -12.83 -3.64 -6.2 -7.00 -

Gross financing needs/useable reserves plus current

account receipts (%)

104.7 102.1 90.23 90.58 90.3 -

Data: IADB, World Bank, IMF

Comparative Analysis

In peer-wise comparison, Honduras is economically much weaker that its peers and therefore has a lowerpossibility of broadening its revenue base if necessary. Although it has been trying to catch up with the othercountries, it has not been outgrowing them to narrow the gap. Its further growth potential is also very muchdependent on developments in the region and the global economy. This is, however, a common feature in its peergroup.

The countrys real GDP growth outlook is comparable to that of its peers, but will be stabilizing at 4% in the

coming year. In these terms, the best growth prospects are expected of Dominican Republic (12%), Guatemala(9%) and El Salvador (6%). On the other hand, a slow recovery is expected for Belize (0%) and Jamaica (3%).

0

1000

2000

3000

4000

5000

6000

Belize Dominican

Republic

El Salvador Guatemala Honduras Jamaica

Data: World Bank

GDP per capita (US$ ml.)

2006

2007

2008

2009

2010


4/13

4

Amongst its peers, Honduras stands as a country facing increased political difficulties, despite a reasonableeconomic perspective. Moreover, even as the Caribbean and the Central America have enjoyed a long history ofdrug trafficking, rising violence level and corruption, Honduras has topped its rated peers in homicide rate with82 homicides per 100,000 population.1 The natural location as a corridor for trafficking drugs, high portion ofgang structures and a legacy of violence has dimmed the light for a democratic and stable society for the country.

Monetary and fiscal policies are aimed at fostering and sustaining a stable environment. The monetary policy inHonduras has maintained a stable exchange rate in recent years, which is also the case in El Salvador and Belize.In terms of inflation, Hondurass 2005-2009 average inflation is around 7.6%, relatively higher than El Salvador,Guatemala, Belize and Dominican Republic. Inflation went down a little in Honduras in 2010 but still not verygood.

Honduras total public debt to GDP position is strong within the region, and can be compared to the highest rated

peers such as the Dominican Republic and Guatemala. However, It should be noted that without the two turns ofdebt forgiveness that happened in the last decade, Honduras total public debt to GDP would be considerablyhigher, at around 63% (thus below the B+ and BB-/+ rated peers).

1 Source: UNODC Homicide Statistics 2011

0%

20%

40%

60%

80%

100%

120%

Honduras Belize (B-) Jamaica (B-) Dominican

Republic (B+)

El Salvador (BB-) Guatemala (BB+)

Data: IADB

Total Public Debt To GDP (end of period)

2010

0

2

4

6

8

1012

14

16

Honduras El Salvador Guatemala Belize Jamaica Dominican

RepublicData: IMF, f - forecast

Average Inflation

Five-year average(2005-2009) 2010 2011f


5/13

5

Source: IADB

Honduras fiscal flexibility remains low, and the countrys rigidity is due primarily to the high wage bill. Despitethe conservative Lobo governments commitment to fiscal consolidation, issues such as tax revenue collectionneed to improve in order to allow the country flexibility for much needed social and capital expenditures.

Interest payments as a percentage of revenues remain low, yet may be misleading. Despite the overall level beinglow compared to its peers, the domestic bond issuances of 2008-2010 put fiscal pressure on Honduras (due to the

short maturity of the bonds and relatively high interest rates). The government is now pursuing a policy of debtmaturity restructuring that is expected to alleviate pressure.

Honduras overall fiscal position is amongst the worst of its peers, yet it is forecasted to improve significantly overthe next few years, conditional on a tight control on spending, improved revenue collections, and no unexpectedcontinent liabilities (the banking system appears to be well capitalized, but the threat of natural disaster exists

and its impact may be severe).

Foreign position characterized by a large current account deficit. Honduras faces a large current account deficitcompared to its peers, placing the country in a rather weak foreign position. The large current account deficit ishowever not as problematic, as it reflects good trading relationships and high inflows of capital from abroad.However, Honduras large dependency on its relationship with the United States means the country is again highlyinflexible.

0%

5%

10%15%

20%

25%

30%

35%

40%

45%

Honduras Belize (B-) Jamaica (B-) Dominican

Republic (B+)

El Salvador (BB-) Guatemala (BB+)

Data: IADB

Interest Expense/Revenue

2010

Honduras

Belize (B-)

Jamaica (B-)

Dominican Republic

(B+)

El Salvador (BB-)

Guatemala (BB+)

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Data: IABD

Overall Balance (% GDP)

2010


6/13

6

-10.00-9.00-8.00-7.00-6.00-5.00-4.00-3.00-2.00-1.000.00 Honduras Jamaica(B-)

DominicanRepublic(B+) Belize(B-) Guatemala(BB+)ElSalvador(BB-)

CurrentAccountBalance(%GDP)

2010

Source: IADB

In terms of external liquidity, Honduras presents a positive outlook through the gross external financial needs toCAR and foreign exchange reserves ratio. Honduras is among the most liquid countries in the group and presentsa positive look over the coming years in what concerns external liquidity.

0

50

100

150

200

250

Honduras Jamaica (B-) Dominican

Republic (B+)

Belize(B-) Guatemala

(BB+)

El Salvador

(BB-)

Data: IADB

Gross External Financing Needs/CAR + Reserves (%)

2010


7/13

7

Another positive indication is that the external debt over Current account Receipts is very low compared to itspeers in the group. The external debt position has increased in all sectors, mainly due to structural improvementsthat have increased confidence.

Political Environment: Precarious Political Stability That Raises Society

Fears

Effective actions and deep reforms needed to be implemented to ensure public security.

Significant efforts remain to be made to counter corruption in the police force.

Public security remains a major concern and calls for organizational reforms

Despite the efforts of the Lobo administration to promote national reconciliation and restore democraticorder after the nations political turmoil in 2009 that ousted President Manuel Zelaya (central-left Liberal Party)for his attempt to extend his presidential term, the soaring rates of violent crimes, drug related murders andhuman rights abuses still reflect the institutional weakness of the governance. Serious concerns have been raisedtowards the act of violence against officials, experts and journalist who are involved in anti-drug movement,fighting against corruption and human rights. Government and army have reacted by authorizing the armedforces to serve in police capacity and geared up aggressive actions against drug cartels and gang violence.However, argument follows that sending drug-financed military only deteriorates the situation and even leads toabuse of forces without reforms in justice administration.

Police corruption continues to sweep the country with little hope for improvement

Corruption in Honduras is a deeply rooted problem. The national police are frequently involved in bribery, drugtrafficking, extrajudicial killings and intimidation of human rights groups. The killing of two students by the policereceived pressure from the US and the release of four policemen accused for the murder further stimulated publicoutrage. Measures have been taken by President Lobo to crack down corruption and clean up the institution sacking top police commanders, arresting 176 police officers and deploying military to take on policingresponsibilities. However, it remains questionable whether corrupt police can be systematically ruled out in theshort run and whether President Lobos commitment is more than lip service.

New coup plot poses threat to government stability before next presidential campaign in 2014

Rumors of coups against Lobo have struck several times since Zelaya was ousted in 2009. Vice President Ponce

claimed that powerful sectors are seeking to take advantage of Lobos efforts to deal with the police crisis toweaken Lobos administration politically. Besides, the legitimacy of Lobo government is still questionable formajor South American countries such as Brazil and Ecuador. In order to help the country rejoin the Organization

0

50

100

150

200

250

300

350

Honduras Jamaica Belize Dominican

Republic

Guatemala El Salvador

Data: IADB

External debt (% of exports of goods, services and income)


8/13

8

of American States and further integrate into the international community, president Lobo signed a reconciliationaccord that lets the exiled leader back. However we estimate that this will ease the occurrence of a new coup andthreaten the countrys political stability.

Economic Prospects: Looking for a way out

Activity is recovering from the 2009 recession with growth perspectives remaining in the bottom bracket

of Honduras peer group

Poverty reduction and discrepancies over macro objectives are major challenges for the upcoming years

High concentration in agriculture make the economic cycle extremely short and volatile. Threats from

weather anomalies are also present.

Republic of Honduras - Growth Indicators2008 2009 2010 2011e 2012e

Growth %GDP (real terms)

4.0 -1.9 2.8 3.5 4.0

CPI growthIn $ (1980 basis)

10.8 3.0 6.5 8.0 6.5

Per capita GDPIn % of GDP

1,901.8 1,910.58 2,014.70 2,101.31 2,163.1

Credit to private sector 9.9 5.0 4.1 9.2 9.9

Honduras belongs among one of the poorest countries in the world measured on per capita GDP basis andtherefore has a very low tax basis, on which to create revenue if necessary. Moreover, several key aspects of theHonduran economy threaten its future growth.

First, the Honduran economy is highly concentrated with agriculture being the most dominant sector. This leadsto high output volatility, which makes the Honduran economic cycle extremely short and unpredictable.Moreover, the fact that the country is constantly exposed to rare, but severe natural disasters could severelyimpact the countrys fundamentals and its ability to honor its obligations. Hurricanes Fifi (1974) and Mitch (1998)

are just the latest to severely impact the country.

Another major issue of concern is the high levels of inflation. With the world food prices increasing, Honduras canbenefit somehow on its agricultural exports, however, for the majority of population this would increase theirliving costs, threatening the social climate. Commodities markets have been historically volatile and they directlythreaten the purchasing power of the wide low income class in Honduras and thus absorb a large part of nominalGDP growth. This is after the global downturn has already affected the level of remittances, on which a largeproportion of the population depends.

Furthermore, given the fact that the Honduran Lempira is pegged to the dollar, the inflation differential will createtensions on devaluation of the currency. This has already translated into a high instability of the official exchangerate in the last six months after a long time of relative calmness. To this effect, the Central Bank has worked on

improving its capacity to implement efficient programs through open market interventions over the past months,which enhance its credibility and sterilization capacity.

At the same time the government is committed to build on the progress to date to further strengthenmacroeconomic stability and reduce public sector and external vulnerabilities. Policy makers will then have tostrike a balance when tightening monetary policy and limiting public expenses. They will have to manage hotmoney inflows and its effects on inflation through credit while backing growth through structural reforms andcredit to the private sector.

The government is also trying to set up anti-poverty measures by investing 1.5% of the GDP each year into socialprograms. However the situation may not change in the short run. Furthermore it is investing in infrastructure,which is really necessary. The highly problematic agrarian reform, which has resulted in many clashes betweenlocal land-owners and their forceful collectivization through illegal and forceful evictions, has shattered many

communities and its crimes remain largely unresolved.


9/13

9

According to the Global Competitiveness Report, Honduras belongs amongst countries transitioning from factordriven to efficiency driven production, with some weaknesses in labor market efficiency and higher educationcompared to its peers. Moreover, local business owners name crime & theft, corruption and inefficientgovernment bureaucracy as the most problematic factors.

Since output gaps have been negative over the last two years the current increase in imported inflation is

perturbing job creation. Reaching objectives for both growth and inflation may then be contradictory, as fightinginflation and enhancing credibility and stability will generate more unemployment and increase the cost of debt.Unfortunately, markets have not been well oriented for Honduras recently, as according to the Inter-AmericanDevelopment Bank, the terms of trade have been deteriorating for Honduras from 115 to 100 over the pastdecade.

In the long-term view, the widely backed political initiative to establish several city-scale reform zones (REDs) canbring positive change to the climate. With its independent executive and judiciary powers and backed byprominent libertarian economists, it is an initiative worthy to keep an eye on.

Fiscal Flexibility: Improving Efforts, Yet Rigidity Persists

Despite fiscal consolidation efforts, Honduras fiscal position remains rigid, partly due to the high salary

expense.

Fiscal balance is anticipated at 4% for 2011, and is planned to fall gradually to 2% by 2016. This mayprove difficult, however, should the global situation further exacerbate.

Debt-to-GDP remains relatively low, contributing to low interest burden, yet restructuring of upcomingmaturity of short-term bonds may pose challenges.

Expenditure, Revenue and Balance Performance

As part of the IMF loan arrangement, Honduras has agreed to commit to fiscal consolidation via controlledspending (mainly to mitigate the effects of the low expected growth and relatively high wage bill).

The relatively high wage bill faced by the government makes it inflexible, but the fiscally conservative Lobo

government is likely to going to attempt to limit excessive spending on wages (and consumption), at least until therun-up to the next election (which will happen in 2013). Stringent control over current expenditure would allowfor much needed social and capital spending.

Tax reforms introduced in 2010 are expected to raise revenues by about 2% of GDP, and improve the tax revenueperformance in Honduras (which has been deteriorating since 2007). Progress has been made in strengtheningtax collections to avoid evasion. However, the government's low revenue levels still remain the main challenge inorder to restore fiscal balance. In 2010 revenues amounted to 17.35% of GDP, and primary expenditures to21.28% of GDP. The gap may be seen as worrying because of the recent trend of rising expenditures anddiminishing revenues (although admittedly such trend only emerged with the crisis).

The anticipated budget deficit for 2011 is 4%, which is predicted to fall gradually to 2% by 2016. Such levels ofdeficit are necessary to restore health, yet are unlikely to give Honduras stimulus flexibility in the event of another

economic slowdown (or possibly recession). Therefore, albeit the progress made, Honduras fiscal positionremains rigid.

-4,5

-4

-3,5

-3

-2,5

-2

-1,5

-1

2011a 2012f 2013f 2014f 2015f 2016f

Source: EIU estimates

Fiscal Balance


10/13

10

Source: IADB Source: IADB

Debt and Interest Burden

While the arrangement with the IMF is in place, and give Honduras relatively low debt burden, concerns aboutdebt sustainability are low (despite the dependence on external financial support). During the last decade therehave been two turns of debt forgiveness by multilateral and bilateral creditors, which have brought the debt-to-GDP ratio from 63% to approximately 23% in 2011.

Starting from 2012 the public sector debt is expected to decline due to a general improvement both on the controlof current expenditure and on the public fiscal sector. The latter will ameliorate thanks to the tax measuresapproved in 2010, which are expected to increase the tax revenue of the government up to 15.4% of GDP (Itamounted to 14.8% of GDP in 2010). Concerning the public sector current spending, the government will manageto keep it within the ceiling set in the 2011 budget by favoring high-impact capital investment projects and well-targeted social spending. These actions, along with the public sector enterprises and public pension funds willhave a positive impact on the public sector.

The country is characterized by a high degree of foreign currency denominated debt, which is expected to reach18.9% of GDP in 2011 with an upward trend for the following years (the forecast for 2012 is 19.6% of GDP). Inaddition, the country has a conspicuous amount of external official financing due to the limitations of the local

market and it has a significant deficit in the external current account, which is approximately 7% of the GrossDomestic Product and with stable outlook.

During the 2008-2010 period, due to limited external financing, Honduras central government raised funding viathe issuance of short-term domestic debt (maturity 1-3 years), with coupon rates ranging from 8% to 13% (mainbuyers were commercial banks and pension funds). The issuance of such debt gave rise to a stringent repaymentschedule. Since 2010 the government has been working on a refinancing strategy to extend the maturity of thebonds and alleviate pressure, and is expected to continue pursuing such debt management strategy. For example,in early 2011 two voluntary bond conversions took place, allowing for refinancing of debt worth 1.2% of GDP

Due to the low debt burden, interest payments stay low at 1.3% of GDP in 2010, replicating the value of 2009 andimportantly interest payments remain at low percentages of revenue (although they are seeing a sharplyincreasing trend probably due to the domestic bond issuance).

Off-budget and Contingent Liabilities

One of the major contingent liabilities a government could face is represented by the financial sector yet withsluggish growth and an increase in deposits, banks have been increasing their net position with the Banco Centralde Honduras (BCH). Overall the banking sector appears to be well capitalized, with regulatory capital to risk-weighted assets having increased from 13.2% pre-crisis to 14.9% in 2010. Furthermore, since 2008, thepercentage of liquid assets to total assets held has been increasing, and had reached approx. 24.4% in 2010 (liquidassets to total short-term liabilities was 58.2%). In 2010 non-performing loans (NPL) to total loans fell from 4.7%in 2009 to 3.7%, and NPL coverage by provision is strong, reaching 118.9% in 2010. However, non-earning assets(net of provisions) still correspond to 47.8% of the banks regulatory capital, and banks profitability has not yetrecovered (with a 2010 ROE of 12.5%, just over half the level it was pre-crisis).

Another possible contingent liability that could significantly deter Honduras fiscal position is the possibility of anatural disaster. The rigidity of the fiscal position may cause problems in case such events were to materialize,and it is unclear whether government finances would be able to withstand the pressure.

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

2003 2004 2005 2006 2007 2008 2009 2010

Interest Payments/Revenue

0%

10%

20%30%

40%

50%

60%

70%

2003 2004 2005 2006 2007 2008 2009 2010

Total Public Debt (% of GDP) -

end of year


11/13

11

Monetary Policy: Stable exchange rate, high inflation and key reforms

implementation

Monetary policy will be geared at containing inflation and safeguarding the external position

The central bank has prepared a plan for upgrading the monetary policy framework.

The authorities will continue to reform financial regulations and the financial safety net.

The Honduras Lempira has stabled at 18.9 (LCU per US dollar; period average) since 2006. Monetary policy hasmaintained a stable exchange rate to anchor inflation expectations and since the political crisis erupted tomaintain overall stability. However, the exchange rate is becoming increasingly overvalued having appreciated by15-20% since 2005 and some controlled flexibility may be introduced before too long.

Inflation has been relatively high, averaging 7.1% between 2007 and 2009. The government regulates the pricesof petroleum products, steel, pharmaceuticals, and services from state-owned utilities, and can impose pricecontrols on other goods and services as desired. In December 2010, headline inflation reached 6.5% close to theupper limit of the programmed range of 5.5-6% (+/- 1 percentage point), mostly reflecting the impact of higherfood, fuel and energy prices, and weather- related domestic supply shocks. Notwithstanding, core inflationdeclined to 4%.

To establish conditions for a robust and sustainable growth in the medium term, the government started toimplement key reforms in 2010, and has developed an economic program for 2011-2012 aimed at reducingmacroeconomic imbalances and strengthening the finances of the public sector.

Monetary policy will be geared at containing inflation and safeguarding the external position.

During 2010, the central bank stepped up the placement of its own securities to mop up liquidity while keeping itspolicy rate unchanged at 4.5%. The monetary program for 2011 is based on conservative assumptions for growthand net capital inflows, and targets an increase in net international reserves (NIR) of at least US$227 million, ontop of the large increase observed in late 2010. Although the projected increase in credit to the private sector ismoderate and consistent with a gradual economic recovery, the excess liquidity held by banks would be morethan sufficient to absorb a faster-than-envisaged pick up in the demand for credit. Importantly, the central bank iscommitted to tightening the monetary stance if inflation pressures intensify or if the NIR target comes under

pressure, as well as to maintain the policy of not extending credit to the public sector.

The central bank has prepared a plan for upgrading the monetary policy framework. The plan envisages development of an interbank market and of secondary markets for central bank andgovernment paper, improvement of the instruments for liquidity management, increasing the signaling content ofthe policy rate, and producing liquidity forecasts.

The authorities will continue to reform financial regulations and the financial safety net.

The National Commission of Banks and Insurers (CNBS) has initiated a review of the regulatory framework with aview to enhance transparency, information sharing, and protection of users of financial services. Work is alsounderway to strengthen the risk-based supervision framework for savings and loans cooperatives, and therelevant regulations are expected to be issued by February 2012. In consultation with the bank, the authoritiesare revising the recently issued norms for loan classification and reserve coverage to allow more flexibility inorder not to discourage banks activities in microcredit and housing. Finally, the CNBS is making progress inaddressing problems in two small banks. One bank was bought in late 2010 by a large credit cooperative and aspecial unit is being set up to recover nonperforming loans in order to repay the contribution of the depositinsurance fund. For the other small public bank, the authorities are currently assessing its financial condition and,once this is finalized, will develop a plan to restore its viability.

External Finances: Private external debt to increase as external liquidity is

improving

Current account deficit is widening in 2011 due to more imports at higher prices and increasing oil prices.

External liquidity ratio improved to a healthy level, higher than expected thanks to private capital inflows.

External debt increased in all sectors (financial, public and private) thanks to structural improvementsand increased confidence of external creditors.


12/13

12

Current account deficit is widening in 2011 due to higher imports at higher prices and increasing oil

prices.

The current account deficit as a % of GDP is still at a slightly low level in 2010 (-6.3), has altered from thepreviews level of 2009 (-3.7), but is on the recovering path from a much lower value in 2008 (-13.8). Predictionsfor 2011 are at even lower levels 7.0 (IMF), due mainly to the export partner concentration: very strong

relationship with the United States and to increasing prices of import consumables like oil and food. Exports ofprocessed products were up, especially knitwear, clothing, and vehicle instrument panels. The United Statescontinued to be the main destination for processed products from Honduras (84.5%). Imports, which also grew by17.1% in 2010, are amounting to US$ 8.549 billion, as against a drop of 30.2% in 2009. This stems from higherfuel and food prices, among other factors. Fuels and lubricants represent 20.8% of total imports and grew by32.6%.

Honduras External indicatorsYear End 2005 2006 2007 2008 2009 2010 2011e

(% of nominal GDP)

Current account balance -3.12 -3.70 -9.03 -12.83 -3.64 -6.20 -7.00

Trade balance -17.69 -21.23 -27.44 -33.00 -18.51 -20.24 -19.84

Total external debt 65.81 45.89 33.60 33.20 39.39 39.38 40.40Current account receipts 79.82 79.41 76.79 73.71 59.90 62.20 60.20

(% of CARs)

Current account balance -3.70 -6.00 -13.3 .19.5 -6.07 -9.97 -12.7

Net external investment payments 5.90 6.30 6.50 3.50 3.90 3.60 3.50

Net external interest payments 0.10 -0.70 -1.20 -0.40 0.16 0.31 -0.40

Net external liabilities 52.80 29.30 25.80 37.00 54.90 65.30 70.60

Total external debt 65.80 45.90 33.60 33.20 39.39 39.39 50.40

Usable reserves/current accountpayment (months) 2.60 2.80 2.70 2.20 2.82 3.10 3.10

Gross financing needs/current accountreceipts plus reserves (%) 98.10 104.40 104.70 102.10 90.23 90.58 90.30

External liquidity ratio improved to a healthy level, at higher than expected levels thanks to private

capital inflows.

The country's external liquidity, calculated by the ratio of Gross external financing needs to the sum of currentaccount receipts plus usable official foreign exchange reserves has shown improvement from the previewsperiods after 2008, demonstrating an increasingly healthy liquidity status. Comparable countries, for exampleJamaica, have a substantially lower liquidity level. We expect this figure to increase in the next periods, after IMFsprediction of increasing reserves.

External debt has increased in all sectors thanks to structural improvements and increased confidence of

external creditors.

There has been a substantial increase in the Financial Account (from a 314M$ in 2009 to 1,247M$ in 2010, mainlydriven by increasing General Government Net Long-Term Borrowing (from a 32,1M$ level in 2009 to380M$ 2010) and an increase in foreign investment in the Maquila sector, where net liabilities to externalinvestors have risen from -9,9 M$ to 191,1 M$. The financial sector has also stabilized, with net Financial Sectorborrowing increasing from -282,8 M$ to 29,4 M$. Private capital inflows -and especially FDI- started to recover in2010 and continued rising in 2011. FDI was estimated at 831 M$ in 2011 (compared to 799 M$). NetInternational Reserves were estimated at 2949 million US$, compared to 2719 M$ in 2010. We expect thisincrease to continue in the future, as policies have been implemented to improve the investment regulation.

Ratings Detail (as of January 24, 2011)

Honduras (Republic of)

Sovereign Credit RatingForeign Currency

Local Currency

B/Stable/B

B/Stable/BPopulation 8.1 million (2011 estimate)


13/13

13

Per Capita GDP $ 2, 026 (2010)

Current Government President - Porfirio LoboVice President - Maria Antonieta Guillen

Election Schedule Last - November 2009Next - November 2013

credit rating honduras

Documents