- Since 2010, Honduras has been enjoying robust GDP growth and moderate inflation.
- The current account deficit has narrowed in the past years to a modest level.
- External debt ratios remain moderate while debt service is low after debt-relief initiatives in the 2000s.
- Liquidity has improved as highlighted by the recent upgrade of the short-term political risk rating in June.
- Honduras has sound public finances thanks to a strong commitment to fiscal consolidation.
- Main vulnerabilities are the large reliance on trade and remittance earnings from the US and weather-related events.
Since 2010, after a brief recession the year before, Honduras has enjoyed robust GDP growth and moderate inflation. Additionally, the current account deficit has narrowed distinctly in the past years to a modest level. Indeed, the Central American country benefits from high remittance earnings, relatively low oil prices and strong FDI inflows. Consequently, foreign exchange reserves strengthened and stand at a comfortable level, explaining the short-term political risk upgrade in June 2018. Moreover, the country enjoys relatively moderate external debt and a low debt service since the debt relief initiatives in the 2000s.
Since 2014, the government has been strongly committed to fiscal consolidation as president Hernández made it a top priority to keep government finances sustainable. As a consequence, Honduras has sound public finances with positive primary surpluses, small fiscal deficits and a moderate public debt.
This positive picture notwithstanding, some structural deficiencies, such as the high crime levels, remain to be addressed. Moreover, the external accounts are subject to downside risks. The high reliance on trade and remittance earnings from the US, as well as fuel imports make the country vulnerable to protectionist US policy changes and increasing oil prices respectively. Lastly, the country is exposed to climatic events (e.g. hurricanes, volcanoes and earthquakes) while the agriculture sector is an important source of revenues (accounting for roughly one fifth of export revenues).
Even when taking into account these vulnerabilities, the economic fundamentals significantly improved in the past years while economic forecasts show a stable but bright outlook, resulting in an upgrade of the MLT political risk to category 4/7.
Analyst: Jolyn Debuysscher – firstname.lastname@example.org