Honduras: Value-added potential

Honduras straddles Central America, with most of it on the Caribbean coast and a small sliver on the Pacific. Although it appears to be small, it is actually the second-largest country in Central America.

Nicaragua is first, followed by Honduras, which itself is slightly larger than Guatemala. In regard to population, it is also ranked second to Nicaragua, with 8.7 million inhabitants.

Unfortunately, with a GDP of US$25 billion, when it comes to per capita income, it is ranked second to last in the region and all of Latin America. Only Nicaragua is poorer.

Honduras is mainly an agricultural country, with some light manufacturing. Its two main agricultural exports are coffee and bananas, but the operations are mainly owned by large multinational corporations and they send most of the value-added earnings abroad. One of the country’s major comparative advantages is Puerto Cortés, which is the only deepwater port in Central America, not counting Panama.

The country also has abundant arable land in the interior, but most of the territory is mountainous. Its infrastructure is poor and the terrain is not amenable to mechanised farming or transportation. Honduras also has a meaningful maquila industry, assembly for export, which is one of the reasons it is a member of the Central American Free Trade Association, or CAFTA-DR.

Actually, Honduras was a member of the Central American Common Market, CACM, during the 1960s, but it pulled out following the 1969 Football War with El Salvador. The trade agreement was not a very good experience, since it established high trade barriers for the region, but eliminated internal tariffs. As a result, Honduras was inundated by cheap Salvadorian industrial goods and equally cheap Guatemala agricultural products.

After the demise of the CACM, Honduras refocused its efforts on low-end textile manufacturing and it became a part of the maquila production chain that spans the region. This is not to say that Honduras does not have the potential to move up the value-added chain, it has a literacy rate of 89 per cent.

Despite being poor, Honduras is a solid credit, rated BB- by S&P and B1 by Moody’s. The country has averaged a GDP growth rate of 3.5 per cent yea- over-year since 2014, and the International Monetary Fund, IMF, expects it to decline 2.4 per cent y/y in 2020. This is mainly due to the onset of COVID-19.

Fortunately, the pandemic has not had the same devastating effect as in many other countries. This could be due to several factors, including the rural nature of Honduran society, the low levels of interaction with the international community and lack of testing facilities.

The slowdown in economic activity has hit the fiscal accounts, and the government shortfall reached 4.9 per cent of GDP for the twelve months through toJune. The country’s external debt also reached 33 per cent of GDP. Fortunately, international reserve levels are high, covering almost all of the external obligations.

Informal export

Although Honduras has few export products, one of its major informal exports is its population. Tens of thousands of Hondurans immigrate every year, mostly to the United States, escaping drug-related violence and looking for better opportunities abroad. According to the Pew Research Center, Hondurans sent home US$2.7 billion in 2019 and are expected to send back US$2.5 billion in 2020, in spite of the sharp slowdown in US economic activity.

Honduran remittances represent almost 10 per cent of GDP, making it one of the countries that are most dependent on the largesse of its citizens living abroad. As a result of the huge remittance inflows, the country’s current account deficit is only 0.7 per cent of GDP.

In regard to monetary policy, Honduras’ inflation rate has been low. It was 4.1 per cent in year 2019 and declined to 3.4 per cent in September of this year. This allowed the central bank to reduce the benchmark interest rate to 3.75 per cent, from 4.5 per cent, in early August.

As a result of the COVID-related financial meltdown, the lempira weakened a bit, but it has since returned to its pre-COVID levels. Fortunately, Honduras enjoys strong multilateral and international support. The IMF has pledged a US$531-million Standby Facility to assist the country, and the government also placed a US$600-million bond deal in June.

The close relationship with Washington is mainly due to the loyalty successive Honduran governments have demonstrated for decades. During the 1980s, Honduras was a close ally in the fight against the communist insurgency that popped up in the region.

Honduran bonds performed well during the third quarter, gaining more than 5 per cent and the yield curve narrowed and steepened significantly. Nevertheless, the amortisation schedule is a bit challenging, with most of the maturities coming due over the next 10 years.

Overall, Honduras is an interesting country and credit, but it is a story that is based mainly on remittances and its loyalty to Washington.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.wmolano@bcpsecurities.com