Honduras

Resilient growth underscores US-dependent recovery

Honduran growth slowed in 2023 due to a moderation in the growth of private consumption in the wake of expatriate remittances and exports. In 2024, economic activity should pick up slightly, but will be held back by some of the same factors that weighed on the economy in 2023. It will be underpinned primarily by private consumption, given the rise in household purchasing power associated with disinflation. Private consumption will also be driven by remittance growth, but the expected US economic slowdown should limit its growth which accounts for 90% of total remittances. Moderating US activity should also weigh on exports (48% of the total). In addition, possible El Niño droughts could threaten exports of agricultural products (coffee, bananas, shrimps, palm oil) which account for more than half of total exports. On the other hand, advances in infrastructure projects, stimulated by the Castro administration's 2024 Public Investment Program (PIP), will boost capital spending. Public consumption will boost the provision of social services through increased spending on education, healthcare, and social security coverage. Inflation will continue its deceleration begun in February 2023, but could remain above the tolerance range set by the Central Bank of Honduras (BCH, 4.0% ±1.0 pp). Inflationary pressures will persist, notably due to volatile food prices and a likely higher contribution from energy prices.

Twin deficits and the restoration of macroeconomic stability on the horizon

In 2023, the higher trade deficit and lower remittances widened the current account deficit. The deficit will remain high in 2024, although it is expected to ease slightly. The trade balance will remain in deficit, burdened by energy imports. Export growth will continue to be driven by US demand (moderated in 2024) for manufactured goods (clothing and textiles) and by exports of commodities such as coffee, while the diplomatic rapprochement with China could boost demand for exports from the latter. The upturn in tourism will slightly reduce the services deficit but will continue to be damped by persistent insecurity. Growth in remittances (27.8% of GDP in July 2023) will continue to be impeded by the limited activity expected in the US, which will affect the very large surplus on the transfers account. Multilateral financing and FDI flows (3.4% of GDP in 2022), particularly in the textile and clothing industry, will balance out the current account deficit. Foreign exchange reserves (5 months of imports for 2023 and 2024) should be sufficient to maintain the Lempira's sliding parity against the USD.

The fiscal balance will also remain in deficit but is expected to narrow. The measures included in the 2024 budget include household support through transfers and subsidies. To free up budgetary space to implement the 2024 PIP, a reduction in subsidies to the energy sector was introduced. In addition, a tax reform bill, blocked by the opposition in Congress, would reduce numerous income tax exemptions, thereby cutting tax expenditure. The President's economic and development programme, financially supported by the IMF (credit facility and extended credit facility of USD 822 million over three years), includes public debt restructuring to reduce debt servicing costs, and the creation of fiscal room for maneuver. Mainly external (54% of public debt stock in 2022), in the form of loans and sovereign bonds (respectively 84.4% and 15.6% in 2023), debt will remain predominantly concessional and sustainable in the short term. The agreement with the IMF will improve access to multilateral sources of financing, corresponding to 71.5% of public debt in 2023.

Opposition reshuffle and rapprochement with China

Xiamaro Castro of the left-wing Libre party was elected president of Honduras In November 2021 after garnering over 50% of the vote, thereby ending the twelve-year rule of the center-right National party (PN). Until October 2022, the Partido Libre and the Partido Salvador (PSH) led by Salvador Nasralla were allied in return for Luis Redondo's (PSH) Vice-Presidency and Presidency of the National Congress. However, in January 2022, a parliamentary crisis linked to the simultaneous and controversial elections of two Congress presidents (Jorge Cálix of the Partido Libre and Luis Redondo), caused the alliance to collapse. The legitimacy of Luis Redondo's election was finally recognised, but it left the Castro government with the minority (50 seats out of 128 in Congress). In addition, the context of persistent insecurity and the government's inability to curb it led to political reshuffles. The confrontation between rival gangs in June 2023, planned by maras inside a women's prison, led to an extension of the state of exception in areas where these groups are active. In August 2023, the opposition parties founded a new coalition (the Bloc d'Opposition Citoyenne - BOC) represented by Salvador Nasralla. It brings together several civil society players and political parties, including the PN, the main opposition party in Congress which holds 49 seats, as well as the Patriotic Alliance and the Liberal Party.

On the foreign policy front, Honduras severed diplomatic ties with Taiwan to establish diplomatic and economic relations with China. Although bilateral relations between Honduras and the US may be impacted by the change in policy towards Taiwan, the relationship between the two countries remains crucial. Cooperation to stem the flow of illegal immigrants to the US is set to continue. In addition, it remains Taiwan's main trading partner and primary source of remittances.

Last update: March 2024