Victory for the ruling party’s presidential candidate might presage a more orthodox policy line tailored by an IMF programme, but the sovereign’s macro problems remain a concern given the risk of the election result being overturned.
Euromoney Country Risk experts continued to downgrade Honduras in the run-up to the recent presidential election in November as part of a longer-term trend that has seen the Central American state slip to 107th place in the global rankings (out of 186 countries), from 91st a year ago.
Rated B2 (negative) by Moody’s, B (stable) by S&P, but unrated by Fitch, the sovereign’s declining score – which fell two points to 35.7 out of a possible 100 in Q3 – has seen it slip into the lowest of ECR’s five tiered categories on a steeper descent than the regional average, into a category normally commensurate with a B- rating at best.
ECR’s select group of Honduras experts harbours concerns about many aspects of the country’s risk profile, with none of the 15 economic, political or structural indicators scoring more than 5.0 out of 10; many are languishing below 4.0.
A downgrade from a year ago to the monetary policy/currency stability sub-factor is a notable feature as inflation has proven hard to eradicate and devaluation fears continue to circulate.
The election outcome could provide the support needed to underpin the sovereign rating after victory for Juan Orlando Hernández, the ruling party’s candidate, who favours an orthodox policy approach supported by a new IMF programme, and a crackdown on the violent gang crime proliferating from an uncontrollable drug industry.
However, in the wake of public protest, the result could be challenged by leftist opponents. In any event, the country is rooted with considerable economic difficulties laid bare by reduced coffee production – pushing GDP growth down to below 3% this year, according to the IMF – due to the result of leaf rust, a damaging crop disease.
The fiscal deficit (7% of GDP this year) and debt stock (more than 40%) are rising, too, bloated by public-sector payrolls, while the reduced export volume of coffee, in combination with poorer terms of trade, is contributing to a current account-to-GDP deficit forecast to rise into double digits this year – putting a drag on reserves otherwise supported by bond issuance and heightening the risk of a currency correction.
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