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Tuesday, September 26 2017 @ 06:58 AM AST

Reforms should help reduce Honduras' gov't deficit to 6.3% of GDP: S&P

Photo by Dennis Jarvis, Flickr

Standard & Poor's today affirmed Honduras 'B/B' Sovereign Credit Ratings Affirmed saying its Outlook Remains Stable. Below is the full report.


Recent fiscal reforms should help reduce Honduras' general government deficit to 6.3% of GDP this year and 6% of GDP in 2015, resulting in continued, but moderating, increases in the sovereign's debt burden in the next three years.

The recently elected administration of President Juan Orlando Hernandez is likely to follow stable economic policies and seek to boost GDP growth.

We are affirming our 'B' long-term and 'B' short-term foreign and local currency sovereign credit ratings on Honduras.

The stable outlook reflects our expectation of a gradual reduction in Honduras' large fiscal deficits this year and in 2015, along with steps to contain losses in the energy sector and boost long-term growth prospects.


On Aug. 14, 2014, Standard & Poor's Ratings Services affirmed its 'B' long-term and 'B' short-term foreign and local currency sovereign credit ratings on the Republic of Honduras. The ratings outlook remains stable. In addition, the transfer and convertibility assessment remains unchanged at 'B+'.


The ratings on Honduras reflect its rising debt burden resulting from diminished fiscal flexibility, increased external liabilities, weak political institutions, low-income economy, and foreign exchange regime rigidities that constrain monetary policy.

Fiscal measures undertaken earlier this year could help reduce the general government's fiscal deficit--which includes the central bank's losses on open market operations and budgetary transfers to public utilities--to 6.3% of GDP in 2014 and to 6% of GDP in 2015 from an unprecedented 8.2% of GDP in 2013.

Continued high fiscal deficits will boost net general government debt to about 39% of GDP in 2015, up from 13% in 2009, and interest expenses to 15% of general government revenues. Financing the budget deficit, as well as
substantial amortization of internal debt in the next three years, could strain Honduras' shallow domestic capital markets.

We project that Honduras' current account deficit will be lower than last year but remain high at 7.8% of GDP in 2014. The deficit could fall modestly to 7% in 2015, based on higher exports and higher remittances, both linked to the expected recovery of the U.S. economy. We project that the country's gross external financing needs could be 100% of current account receipts (CAR) and usable reserves over the next two years. Despite Honduras' low narrow net external debt--18% of CAR this year--net external liabilities close to 90% of CAR demonstrate a wider set of external liabilities.

Honduras' political institutions, including the system of checks and balances among government branches, remain weak. The recently elected administration of President Juan Orlando Hernandez of the National Party faces the challenge of improving security, addressing the fiscal deficit, and strengthening the government's implementation capacity for its planned reforms.

Foreign exchange regime rigidities continue to constrain the central bank's monetary policy. Honduras has heavily managed its exchange rate within a narrow band since 2011, which would allow local currency to depreciate about
4% (plus/minus 1) this year. We expect inflation to increase this year toward 6.5%. Nearly 30% of commercial bank claims and deposit liabilities are denominated in foreign currency, creating a vulnerability to sharp movements
in the exchange rate.

Honduras is a low-income country with a projected per capita GDP of $2,265 in 2014. The country's small, open economy is moderately diversified, with agricultural and light manufacturing exports, financial and communication
services, and mining. We project that GDP could grow 3% in 2014 (up from 2.6% in 2013), equal to per capita growth of 1%. The country's trend rate of growth is likely to be 3% over the next two years.

The local currency rating on Honduras is 'B', reflecting the limited flexibility of the country's monetary policy, its shallow domestic capital markets, and its history of fiscal slippage, typically around the time of national elections.

The transfer and convertibility assessment is 'B+', one notch higher than the foreign currency sovereign rating. The ready availability of U.S. dollars provided by tourism, remittances, exports, and the close economic ties with El
Salvador (whose currency is the U.S. dollar) reduces the risk, in our view, that the Honduran government would try to impose exchange controls and block the outflow of foreign currency during an event of default.


The stable outlook reflects our expectation that the government will gradually reduce its fiscal deficit this year and next year, slowly containing its financing needs. We also expect that the net general government debt burden,
projected to be 34.4% of GDP in 2014, will gradually stabilize over the next years, thanks to both moderately higher GDP growth and continued fiscal correction. The government is likely to rely mainly on the domestic market for
funding its deficit this year following a sharp recent increase in external commercial debt.

We could lower the ratings if the government fails to reduce its fiscal deficit this year and next and address perennial losses in the energy sector, resulting in greater financing needs and potential pressures on the level of official foreign exchange reserves. A continued increase in the net general government debt burden, or a material decline in foreign exchange reserves, could undermine investor confidence and raise the risk of instability, leading to a downgrade. Conversely, a substantial fiscal correction, including measures that strengthen structural deficiencies in the energy sector, could enhance investor confidence. That, along with policies that promote faster GDP growth while containing the current account deficit, could stabilize and eventually reverse the trend of a rising government debt burden and improve the sovereign's financial profile. We could raise the rating under such a scenario.

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