Fiscal and external positions are improving
Economic growth is set to remain solid in coming years, benefiting from low oil prices, the recovery in the U.S. (remittances, exports) and increased FDI inflows as business confidence is improving. We expect real GDP to expand by +3.5% on average per year over 2015-2017.
Accompanied by the IMF, the government is enhancing fiscal and external positions. Inflation is contained, supported by the decline in fuel prices. The fiscal deficit was significantly narrowed to -4.3% of GDP in 2014 from -7.6% in 2013, notably through an increase by 3pps in the VAT rate to 15%, higher taxes on fuels and the removal of some tax exemptions. Current expenditure was also reduced, notably through the control of the wage bill. A new legislation for the electricity sector and a pension reform have been approved in combination with measures to strengthen tax administration. However, broadening the tax base proves difficult with approximately 70% of workers employed in theinformal sector.
The current account is now on a downward trend. The monetary authorities abandoned in 2011 the fixed exchange rate regime and introduced controlled flexibility which allows the lempira to fluctuate against the USD within a range of +/-5%. FX reserves have increased significantly, and cover now above 4 months of imports, vs 3 months in 2013. These are important financial buffers since the country is highly vulnerable to external shocks notably emanating from (i) the U.S. cycle (exports, investment and remittances); (ii) developments in agriculture prices, and notably coffee (6th world producer and 30% of employment), and (iii) changes in oil prices (15% of imports).
Although improving, business environment remains problematic
The business environment remains problematic. According to the Doing business 2015 survey of the World Bank, Honduras ranks 104th out of 189countries. Although if performs particularly well with regard to getting credit and trading across borders, important shortcomings remain in enforcing contracts, protecting investors and resolving insolvency. The rule of law and control of corruption are also problematic. Criminality remains one of Honduras’ major issues although the government seems committed to fight it. With powerful drug gangs, Honduras has the highest murder rate in the world (90.4 homicides per 100,000 people). According to the World Bank, the cost of violentcrime is close to 10% of GDP per year