Honduras

Politics:

• Analysis

  Honduras politics: Out of control

  Central America: Out of control

  In the first of two reports on the threat of rampant violence to Central America's small republics, we look at the risk of Honduras becoming a failed state

  WHEN soldiers bundled Honduras's elected president onto an aeroplane to Costa Rica in a coup in 2009, nobody believed that the Central American country would swiftly get back to normal. But even pessimists must be disappointed by what has happened. Although the constitutional crisis was resolved early in 2010 after the election as president of Porfirio Lobo and the return of Manuel Zelaya, his ousted predecessor, Honduras continues to march backwards. Gang violence, catalysed by drug trafficking, and weak law enforcement have given Honduras the highest murder rate in the world. Poor financial management and the hangover from a stop to aid after the coup have left the government struggling to pay its bills. And Congress has picked a fight with the judiciary, creating fresh constitutional strains just as the country gears up for another presidential election in November.

  The scale of violence is dizzying. Last year saw 86 murders per 100,000 people according to the National Autonomous University. That was about the same as in 2011, but more than double the Central American average--itself among the highest in the world (see chart). In 2012 Honduran men in their 20s faced a 1-in-300 chance of being murdered, or 1-in-150 in the most dangerous towns.

  Drug mafias, under pressure in Mexico, have set up in Honduras. In January the authorities discovered a cache of weapons, including a gold-plated AK-47, believed to belong to Mexico's "Zetas" mob. Honduras's wild coast and empty jungle provide landing points for some 40% of cocaine destined for the United States. Traffickers pay their hired help in drugs rather than cash, creating a local market and the mayhem than goes with it. Some of the violence comes from gangs known as maras, which migrants form in jails in the United States and remain members of in Central America after they are deported.

  Then there are seemingly targeted assassinations. At least 25 journalists, including eight last year, have been killed since the coup. Some members of the opposition have accused the government of snuffing out dissent. But Robert Marín, a reporter on El Heraldo, a newspaper, who has himself received threats, points out that journalists of all political stripes (and none) have been victims. So, too, have gay-rights campaigners--at least eight were killed last year--and lawyers, 15 of whom were murdered. However, these are by no means the people most at risk: some 60 taxi drivers were killed in 2012, in many cases following extortion attempts, and about 70 police. Last month the teenage son of a former police chief was shot dead.

  The underlying problem is that few of the killings are investigated, let alone punished. Even as Honduras's murder rate has doubled, the number of police has fallen, from about 14,000 in 2009 to 13,000 now. Many supplement their $400 monthly wages by charging a "war tax" on citizens. A vetting programme begun in August tested 1,231 officers by the end of the year, firing 281 of them. A further 450 left voluntarily. The remainder are due to be vetted this year, and a thousand more recruited annually until the force reaches 20,000. Training time has been doubled, to 12 months.

  It will take a decade fully to restore faith in the police, which had "fallen into total discredit", admits Héctor Mejía, the force's spokesman. The army patrols with the police in Tegucigalpa, the capital, and in the northern city of San Pedro Sula, as part of an "emergency" measure renewed three times since it was introduced in 2011.

  Many Hondurans are taking protective measures into their own hands. In Villa Cecilia, a small working-class suburb of mechanics, seamstresses and policemen in Tegucigalpa, residents pay 700 lempiras ($35) per household per month to employ four security guards with shotguns. Next will come CCTV, an entry-phone system and a bigger perimeter wall. "If you want to sleep well, you have to pay", shrugs Jiovanny Aguilera, a taxi driver whose home is protected by two metal doors, barbed wire, and a pair of large dogs. The city government has encouraged such barrios seguros, permitting residents to block off their streets. The poorest districts, built on steep hillsides lacking formal roads, remain unsealed.

  Despite the violence, Honduras's economy grew by a respectable 3.3% last year, and clocked up record (legal) exports. A free-trade deal with Central America and the United States has helped to attract maquila factories and call-centres, and to protect investments from political turbulence. Remittances keep consumption going, as shown by the glitzy shopping malls mushrooming in the capital.

  But the resilient economy hides weak public finances. The government's unpaid bills to its workers and contractors amount to 4% of GDP. Many teachers have stopped turning up at school. A standby agreement with the IMF has not been renewed. As a result, the World Bank has halted its budget support, though it plans to step up other project funding. The government has turned to borrowing in the expensive local market. It is considering an international bond issue. But last month Moody's, a credit-rating agency, changed its outlook on Honduras's already weak credit rating to negative. The government has told several loss-making state-owned companies to come up with reform plans by the end of March. But any savings may be squandered in the run-up to the election.

  Honduras's politics has become as dysfunctional as its government and security forces. In December Congress voted to sack four Supreme Court justices who had repeatedly found new laws to be unconstitutional. Their replacements have been more co-operative, approving several controversial laws. One gives the legislature the power to sack senior public officials. "The rule of law in this country has broken down", says Ramón Custodio, head of the official but independent Human Rights Commission. He is among the officials who can now be fired by Congress. He also worries about a media bill that promises new taxes and regulations, which newspapers have described as censorship.

  The head of Congress, Juan Orlando Hernández, is the candidate of the ruling National Party in the presidential race. Polls show him neck and neck with Xiomara Castro, Mr Zelaya's wife. Salvador Nasralla, a television personality, is running for a new Anti-Corruption Party. He has little chance of winning, but he may split the anti-Zelaya vote, to Ms Castro's advantage. If Honduras is to halt its spiral of decline, it desperately needs strong democratic leadership and an end to its political splits. Neither looks likely.

  

  March 09, 2013

• Background

  Honduras: Key figures

  Jose Manuel Zelaya Rosales

  Jose Manuel Zelaya Rosales took office as president for the Partido Liberal (PL) for a four-year term on January 27th 2006. Mr Zelaya, a ranch owner from the eastern department of Olancho, formerly represented the PL as a member of Congress and was head of the Fondo Hondureno de Inversion Social (FHIS, the social investment fund), between 1994 and 1999. His political movement, the Movimiento Esperanza Liberal, is not one of the PL's traditional factions, a factor that helped increase the support of floating voters in the November 2005 election, who wanted to see a change in political direction. Mr Zelaya's strong leadership style and his approach to foreign policy have been a source of friction, not only with political opponents, local business leaders and the international community, but also with his political allies within the PL.

  Roberto Micheletti Bain

  Roberto Micheletti Bain has been a PL deputy to Congress for 25 years and president of Congress since 2006. He is a close ally of a former PL president, Carlos Roberto Flores Facusse (1998-2002), who in turn remains an important influence, not only within the PL, but on Honduran politics in general. Mr Micheletti has created his own faction within the PL to run for president with the support of key PL leaders, such as the businessman and politician, Jaime Rosenthal Oliva, and his son, Yani Rosenthal Hidalgo, former minister of the presidency. Most PL legislators also support the pre-candidacy of Mr Micheletti.

  Elvin Santos Ordonez

  Elvin Santos Ordonez is the current vice-president of Honduras. As leader of the PL faction "Movimiento Elvincista", he wants to run for the presidency, although there are legal impediments to his candidacy. Among his supporters are Juan Bendeck, a former manager of the state-owned electricity company, Empresa Nacional de Energia Electrica (ENEE), and Rafael Pineda Ponce, a former president of Congress (1998-2002) and presidential candidate (2001). Mr Santos, a civil engineer, has been head of the construction company owned by his family, and has also been head of the Camera Hondurena de la Industria de la Construccion (Honduran Construction Industry Chamber).

  Porfirio Lobo Sosa

  Porfirio Lobo Sosa is the president of the Partido Nacional (PN) and a deputy. He narrowly lost to Mr Zelaya in the 2005 presidential election. He was president of Congress during the PN administration of Ricardo Maduro (2002-06). He heads the Trabajo y Seguridad (labour and security) faction of the PN, the party's most influential faction, and will run again as pre-candidate for the presidency in the primaries of November 2008. Among his main supporters are Miguel Pastor, former mayor of Tegucigalpa, and a former president, Ricardo Maduro (2002-06).

  Mario Canahuati

  Mario Canahuati is an industrial engineer and a former president of the Consejo Hondureno de la Empresa Privada (COHEP, Honduran Council of Private Enterprise). He is a powerful businessman, who was part of the PN ticket in the 2005 presidential election, and was Honduran ambassador in the US in 2000-05. As leader of the PN faction "Todos somos Honduras", he is a pre-candidate for president in the 2008 primaries.

  November 20, 2008

• Structure

  Honduras: Political structure

  Official name

  Republic of Honduras

  Form of state

  Unitary republic

  The executive

  President, elected for a four-year term

  National legislature

  National Congress of 128 seats, comprising one member and one substitute member elected for every 35,000 people or fraction over 15,000

  Legal system

  US-style Supreme Court system

  National elections

  November 2009 (legislative and presidential); next elections due November 2013 (legislative and presidential)

  National government

  Porfirio Lobo Sosa took office on January 27th 2010 following his victory in the November 2009 election

  Main political organisations

  Government: Partido Nacional (PN)

  Opposition: Partido Liberal (PL); Libertad y Refundación (LIBRE); Partido de Innovación Nacional y Unidad-Social Demócrata (PINU-SD); Partido Demócrata Cristiano de Honduras (PDCH); Partido Unificación Democrática (PUD)

  Key ministers

  President: Porfirio Lobo Sosa

  Vice-president: María Antonieta de Bográn

  Agriculture: Jacobo Regalado

  Culture & sports: Bernard Martínez

  Defence: Marlon Pascua

  Economy, industry & commerce: Adonis Lavaire

  Education: Marlon Escoto

  Finance: Wilfredo Cerrato

  Foreign affairs: Arturo Corrales Álvarez

  Health: Arturo Bendaña

  Interior & justice: Áfrico Madrid

  Labour & social security: Felícito Ávila

  Natural resources & environment: Rigoberto Cuéllar Cruz

  Planning & international co-operation: Julio Raudales

  Presidency: María Antonieta de Bográn

  Public security: Pompeyo Bonilla

  Public works, transport & housing: Miguel Pastor

  Tourism: Nelly Jérez

  Private secretary to the presidency

  Reynaldo Sánchez

  National Congress president

  Juan Orlando Hernández

  Central Bank president

  María Elena Mondragón

  November 16, 2012

• Outlook

  Honduras: Key developments

  Outlook for 2013-17

  • The president, Porfirio Lobo, will benefit from a stable economy and international recognition, but intra-party rifts and antagonism with the judicial branch could compromise his political agenda.
  • The government's economic agenda will continue to be influenced by an IMF arrangement that expired in March 2012. Negotiations for a follow-up deal have not been successful but are ongoing.
  • Resumed access to financing and more robust domestic activity will lift GDP growth to an average of 4% in 2013-17, but the economy will remain vulnerable to swings in US demand.
  • The fiscal deficit will remain above 3% in the short term, before narrowing to 2% of GDP by 2017. A series of new fiscal measures are being debated, and a new IMF deal is likely to be conditional on these being implemented.
  • Annual inflation is forecast to average 5.8% in 2013-17, but consumer prices will remain vulnerable to supply shocks and adverse weather.
  • After some initial readjustment, the new crawling band regime will result in a gradual depreciation of the lempira, to La25:US$1 by end-2017.
  • The current-account deficit will average 8.7% of GDP in 2012-13, before narrowing as a result of a more competitive exchange rate, as well as a stronger recovery in remittances.

  Review

  • A project to create Regiones Especiales de Desarrollo (RED, Special Development Regions), or "charter cities", has been declared unconstitutional by the Supreme Court owing to issues of sovereignty and governance.
  • A recent UNDP report has ranked Honduras as one of the region's most unequal societies, with inequality worsening since 2009.
  • A rise in profit outflows has widened the current-account deficit to 2.5% of GDP in January-June, while FDI and reserves fall.
  • External debt increased only modestly in the first six months of 2012, mostly owing to public-sector disbursements.
  • Monthly economic activity expanded by 5.1% in January-June. Although actual GDP is likely to be lower, monthly figures have suggested a healthy rate of expansion so far in 2012.
  • Exports outpaced imports in first half of 2012 aided by a narrowing of the non-maquila trade deficit (as a share of GDP) as a new EU trade deal comes into force in June.

  November 16, 2012

Economy:

• Background

  Honduras: Economic background

  Real gross domestic product by sector
  (% share of GDP)
  	2003	2004	2005	2006	2007
  Agriculture	12.8	13.4	13.7	13.5	13.4
  Industry	30.1	29.1	28.7	28.3	28.1
  Services	57.2	57.5	57.6	58.2	58.6
  Source: Economist Intelligence Unit.

  Download text file (csv format)

  November 20, 2008

• Structure

  Honduras: Economic structure

  Data and charts: Annual trends charts

  
  

  

  November 16, 2012

• Outlook

  Honduras: Country outlook

  Honduras: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The political scene has now shifted towards the next general election, which is expected to be held in late 2013. These will be the first fully free and fair elections since 2005, given that the most recent ballot took place shortly after the July 2009 coup d'état, in which the military, backed by right-wing factions, ousted the former left-wing president, Manuel Zelaya (2006-09), from power. Honduras's two main parties, the ruling centre-right Partido Nacional (PN) and Mr Zelaya's former party, the Partido Liberal (PL) are once again expected to be the main contenders. However, the former dual-party political environment is now more fractured, most notably owing to the creation of Libertad y Refundación (LIBRE), Mr Zelaya's new party, whose members split from the PL. LIBRE is expected to garner the support of the radical left, given that the PL has shifted to a more centrist stance after the coup.

  ELECTION WATCH: The next presidential election will take place in late 2013 and most parties have now begun gearing up for the contest. Within the PN, Mr Lobo (who cannot run for re-election) has directly backed Juan Orlando Hernández, the current leader of the legislature, but this has been against the wishes of other PN factions which have favoured Ricardo Álvarez (the mayor of the capital, Tegucigalpa). Mr Álvarez has received a recent boost in the form of an endorsement by a former president, Ricardo Maduro (2002-06). The candidates are running roughly neck-and-neck in recent polls. The PL will also be keen to present a more moderate centre-left platform, and its two main potential candidates, Mauricio Villeda and Yani Rosenthal, both have strong pro-business credentials. The PL, however, will have to share the left-wing vote with the newly established LIBRE, which has chosen Mr Zelaya's wife, Xiomara Castro, as its preliminary presidential candidate. However, Mr Zelaya's popularity among conservatives and even the centre-left is weak, and will hamper LIBRE's chances of forging a broader support base, in what has become an increasingly polarised society.

  INTERNATIONAL RELATIONS: Honduras's diplomatic efforts will be focused on strengthening economic and security ties with the US (Honduras's major trade and investment partner and the main destination for Honduran emigrants), along with neighbouring Central American economies within existing multilateral frameworks, such as the Sistema de la Integración Centroamericana (SICA, the System for Central American Integration) and the Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA). A SICA-EU association agreement was signed in June, and should help boost trade links between Honduras and Europe. Closer ties are also expected with Venezuela, particularly as Honduras has been a beneficiary of PetroCaribe oil financing funds since late 2011. Calls for a unified regional strategy against drug-trafficking and violence have made only modest headway because of differences between the various regional leaders. Mr Lobo's administration has remained opposed to alternative measures such as decriminalisation of drug use, which has been promoted by Guatemala's president, Otto Pérez Molina.

  POLICY TRENDS: Throughout much of Mr Lobo's term, economic policy has been focused on meeting the targets set by an earlier IMF stand-by arrangement (2010-12) and which the government is currently attempting to renew (with no success so far). With macroeconomic and monetary stability now well established, policy has focused primarily on reversing the fiscal deterioration seen since the 2009 recession and coup d'état. However, the government has achieved mixed success in passing new fiscal measures, some of which have been shot down by the Supreme Court. The courts have also declared unconstitutional an innovative plan to create "charter cities", modelled on China's special economic zones but which violated some of the constitution's statutes on sovereignty and governance (and also faced strong public opposition). Throughout the remainder of the term, there will be strong domestic pressure to boost social spending on reducing poverty and inequality, as well as fighting crime. However, weak institutional development, corruption and excessive red tape will limit the country's economic potential, as will difficulties in reducing unemployment (and underemployment). This in turn has helped fuel the country's very high crime rate, which shows no sign of abating.

  ECONOMIC GROWTH: Following real GDP growth of 3.6% in 2011, the Economist Intelligence Unit expects growth to remain subdued in the short term (averaging 3.8% in 2012-13), after which it should pick up to an average of 4.1% in 2014-17 once global conditions stabilise, particularly in the US (Honduras's main trade and investment partner), and the investment and trade benefits of DR-CAFTA materialise. On the domestic side, we also expect a more pronounced pick-up in credit growth in the medium term. This is still considerably lower than the 5.6% annual average seen during the 2003-08 boom period, although it is more in line with Honduras's structural rate of growth, given that the country's growth potential is restricted by a weak productive capacity (particularly in higher value-added sectors) and a relatively poorly educated workforce. Overall, economic performance will remain highly dependent on the US business cycle, owing to strong trade and investment linkages. The defeat of the "charter cities" initiative may also result in a modest setback to the country's growth prospects, even though there were strong doubts about whether the project would have made a lasting contribution to the country's development.

  INFLATION: Like many other emerging markets, Honduras is vulnerable to supply-side inflationary pressures owing to global commodity price volatility, but domestic factors such as adverse weather and supply bottlenecks also have a major impact, particularly on food prices (which account for a large share of the local consumption basket, particularly for the poor). Annual inflation has risen in recent months, reaching 5.3% year on year in September. Still, this is within the lower end of the informal target range of 5-7% for 2012-13 set by the Banco Central de Honduras (BCH, the Central Bank). Our forecast envisions inflation rising to a still manageable 6.1% by end-2012, but this is subject to risks emerging from higher domestic liquidity and potential domestic supply shocks. In the longer term, the implementation of more effective liquidity control will give the BCH wider scope for monetary policy action to manage inflation. At the same time, a faster depreciation of the currency later in the outlook period could raise the costs for Honduran imports, particularly for consumer and capital goods.

  EXCHANGE RATES: In July 2011 the BCH lifted the fixed currency peg in place since 2005 and returned to the earlier crawling peg exchange-rate regime. Since then, the lempira has weakened to La19.7:US$1 in September, a nominal depreciation of 4.1% year on year. The BCH has tried to minimise currency volatility by allowing the lempira to float only within a 7% band above or below the peg (still set at La18.9:US$1), and limiting the price of US-dollar bids, in order to prevent speculation. The IMF had previously called for a faster depreciation, but the government refused on the grounds that it could spark inflation. In real terms, the lempira is expected to depreciate by around 1.5% in 2012, the first time it has weakened in nearly a decade. We expect the lempira to reach La25:US$1 by end-2017.

  EXTERNAL SECTOR: The current-account deficit widened to 8.6% of GDP in 2011, from 6.2% in 2010, but it is expected to fall to 7.3% of GDP by 2017, on the back of a weaker currency and rising investments in the free zones. Trade has benefited mostly from a rise in agricultural prices (most notably coffee prices, Honduras's largest single export), in contrast with the maquila (offshore assembly for re-export) sector, which has performed less well owing to sluggish US import demand (although in the longer term it will receive a boost from DR-CAFTA). However, high import requirements for fuel and manufactures will keep the trade deficit wide, at an average of 20.7% of GDP in 2013-17, even though a more flexible currency will aid competitiveness. Tourism is set to gain an increasing share of services exports, but the perception of high crime will erode Honduras's attractiveness relative to other Central American and Caribbean destinations, sustaining a moderate services deficit. Rising profit repatriation and interest payments on foreign debt will hold the income deficit steady at an average of 4.5% of GDP in 2013-17, while the current transfers balance will average 19.3% of GDP in 2013-17, as remittances from Hondurans working in the US increase. The current-account deficit will be financed mostly by inward foreign direct investment (FDI), which should reach US$1.6bn by 2017 (6.8% of GDP), as free zones expand. With multilateral and bilateral aid also flowing in, we expect reserves of US$3.9bn by 2017 to provide three months of import cover.

  November 20, 2012

• Forecast

  Honduras: 5-year forecast summary

  Outlook for 2012-16: Forecast summary

  Forecast summary
  (% unless otherwise indicated)
  	2011a	2012b	2013b	2014b	2015b	2016b
  Real GDP growth	3.6	3.7	3.9	4.0	4.1	4.1
  Gross agricultural production growth	5.6	3.9	3.1	4.1	5.1	6.1
  Gross fixed investment growth	14.2	8.9	8.4	8.2	8.0	8.0
  Unemployment rate (av)	4.9c	4.5	4.2	3.9	3.5	3.2
  Consumer price inflation (av)	6.8	5.1	5.5	6.0	5.8	5.8
  Consumer price inflation (end-period)	5.6	5.5	6.0	5.9	5.8	5.8
  Weighted average local currency lending rate	18.6	17.8	17.8	17.5	17.3	17.3
  Central government balance (% of GDP)	-4.6	-3.8	-3.3	-2.8	-2.4	-2.2
  Exports of goods fob (US$ m)	7,204	6,946	7,316	7,806	8,355	9,042
  Imports of goods fob (US$ m)	-10,338	-10,662	-11,245	-11,988	-12,744	-13,640
  Current-account balance (US$ m)	-1,503	-1,661	-1,582	-1,617	-1,655	-1,627
  Current-account balance (% of GDP)	-8.6	-9.1	-8.3	-8.1	-7.9	-7.3
  External debt (end-period; US$ bn)	4.6c	4.9	5.4	5.9	6.3	6.8
  Exchange rate La:US$ (av)	18.90	19.51	20.48	21.48	22.50	23.50
  Exchange rate La:US$ (end-period)	18.90	19.95	20.93	21.96	22.97	23.95
  Exchange rate La:€ (av)	26.30	24.94	25.86	26.91	27.85	29.61
  Exchange rate La:€ (end-period)	24.45	25.54	26.27	27.12	28.82	30.12
  a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

  Download the numbers in Excel

  Download text file (csv format)

  August 22, 2012

View detailed map

Country Briefing

Land area

112,492 sq km; mountainous with narrow coastal strips; the Bay Islands and several other islands are located in the Caribbean. Other small islands are in the Gulf of Fonseca on the Pacific coast

Population

7.8m (2011 estimate)

Main towns

Population in '000 (2006)

Distrito Central (a) 922.2

San Pedro Sula 579.0

Choloma 188.2

La Ceiba 156.4

(a) Includes Tegucigalpa and Comayagüela

Climate

Tropical on coast, moderate inland

Weather in Tegucigalpa (altitude 1,004 metres)

Hottest month, May, 12-33°C (average daily minimum and maximum); coldest month, February, 4-27°C; rain falls mainly in May-November

Languages

Spanish; English on Bay Islands

Measures

Metric system; also old Spanish units

Currency

1 lempira (La) = 100 centavos. Average exchange rate in 2011: La18.9:US$1

Time

6 hours behind GMT

Public holidays

January 1st (New Year's Day); Maundy Thursday; Good Friday; April 14th (Day of the Americas); May 1st (Labour Day); September 15th (Independence Day); October 3rd (Soldiers Day); October 12th (Columbus Day); October 21st (Armed Forces Day); December 25th (Christmas)

March 20, 2012