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Honduras - Economy

Roughly 1 million Hondurans have migrated to the United States. Remittance inflows from Hondurans living abroad, mostly in the United States, are the largest source of foreign income and a major contributor to domestic demand. Remittances totaled $2.8 billion in 2009, down 11.8% from 2008 levels; that is equivalent to about one-fifth of Honduras’ GDP. The repatriation of migrants who transit through the country on their way to the United States continued following the disputed agreement signed in September 2019 with the Trump administration.

Economic activity recovered in 2021, but not enough to make up for the drop due to the Covid crisis. Household consumption, the main driver of domestic demand (80% of GDP in 2019), will be hurt by the population displacement following the two storms in November 2020, as well as by the rise in unemployment both in the country (12% at the end of 2020), as well as among expatriates in the United States. Standing at 10.3% in October 2020, the unemployment rate among the U.S. Latino population was expected to decline more slowly than in other groups, reflecting Latinos’ over-representation in the jobs hardest hit by the crisis. The catch-up effect observed on remittance flows in the second half of 2020 would fade. Expatriate remittances, which accounted for 21.5% of GDP in 2019, should therefore be less dynamic than before the crisis, limiting the growth of one of the main financial windfalls for Honduran households. Public demand increased as part of the plan to support the economy and the reconstruction program following the two storms of November 2020. External demand was constrained by the recovery of demand in the United States, the main destination for the free zones' manufacturing industry. In this context, the central bank continued with an accommodative monetary policy, with inflation at the bottom end of its target window (4% +/- 1%). the policy rate is expected to be held at 30% following the last cut at the end of 2020. On the supply side, construction benefited from the reconstruction work on infrastructure destroyed by the storms. Restaurant and hotel services, on the other hand, would remain impacted for a prolonged period, in a country where tourism was struggling to develop. The manufacturing industry was driven mainly by the production of protective medical equipment, which was still in high demand worldwide. Conversely, textile production remained hamstrung by weak growth in global consumption. Agricultural production, which accounted for 15% of GDP in 2019, suffered from the bad weather conditions at the end of 2020, which destroyed part of the agricultural land as well as the roads used to transport goods from the main coffee-growing areas. The "Turcos" are the small industrial and financial elite, predominantly of Arab/Palestinian origin, who dominate the Honduran economy and have tremendous weight, usually exercised behind the scenes, on its politics. Prominent memberws include Miguel Facusse, his son-in-law Fredy Nasser, the Kafie Brothers and Camilo Atala. It is highly likely that at least some of them knew about the 2009 coup. These are the so-called "Power Groups" railed against by Zelaya and his leftist supporters. The vast majority of the Honduran business community both publicly and privately supported the removal of President Manuel "Mel" Zelaya from office 28 June 2009. Major business organizations have published full-page ads supporting the coup and recognizing the legitimacy of the Micheletti regime. In private, some business leaders concede that the way Zelaya was removed was illegal, but they were universally adamant that he should not be brought back.

Honduras’ investment climate is hampered by high levels of crime, a weak judicial system, corruption, low educational levels, and poor transportation and other infrastructure. Honduras’s poverty level and informality remain high, while potential growth and employment remain relatively low. While social spending has been protected, structural reforms to boost growth and employment should focus on reducing crime and violence; closing infrastructure gaps, especially in energy; and increasing financial market access for poor households and the efficiency of public spending.

Since December 2014, the government’s economic reform policies are laying a path for inclusive growth, greater coverage of the social safety net, and a better foundation for fiscal sustainability— including additional resources to improve citizens’ security. These achievements will anchor the strategy to obtain higher growth and better social conditions and job creation over the medium-term.

“In 2015, economic performance was better than expected. Real output grew at 3.6 percent supported by a boost in investment and the recovery in private consumption—which responded positively to a reduction in gasoline prices and strong remittances inflows. An improved macroeconomic policy mix and lower international oil prices have helped to reduce headline inflation, and narrow the external current account deficit. Headline inflation decelerated to 2.4 percent from 5.8 percent in the previous year, well below the inflation target of 4.5 percent. Meanwhile, the external current account deficit narrowed to 6.3 percent of GDP in 2015, higher than the 6.0 percent of GDP foreseen in the program, but lower than the 7.4 percent of GDP achieved in 2014. Net international reserves increased by US$307 million, supported by private capital inflows in excess of program projections.

“The 2016 economic growth outlook is favorable, amid steady credit growth and an expected increase in net international reserves. Real output growth is projected to grow by 3.6 percent in 2016, supported by agriculture, construction (including scaled-up public sector infrastructure investment) and a more supportive monetary policy stance.

Honduras, with an estimated per capita gross domestic product (GDP) of $4,200 in 2010 (PPP), is one of the poorest countries in the western hemisphere, with about 65% of the population living in poverty. While 2010 estimates project GDP to have grown by 2.8%, Honduras’ GDP fell by 2.1% in 2009. Reasons for this contraction included the worldwide economic downturn and the political crisis surrounding the forced removal of President Zelaya from power. Previously, the economy grew by more than 6% per year from 2004 to 2007, and by 4% in 2008.

Historically dependent on exports of agricultural goods, the Honduran economy has diversified in recent decades and now has a strong export-processing (maquila) industry, primarily focused on assembling textile and apparel goods for re-export to the United States, as well as automobile wiring harnesses and similar products. Despite the recent economic diversification, there continues to be a large subsistence farming population with few economic opportunities. Honduras also has extensive forest, marine, and mineral resources, although widespread slash-and-burn agricultural methods and illegal logging continue to destroy Honduran forests.

Because of a strong commercial relationship with the United States, Honduras was hit hard by the international economic downturn, especially in the maquila industry, where orders were estimated to have declined about 40%, and where about 30,000 workers lost their jobs in 2008 and 2009 out of a pre-crisis workforce of 145,000. The maquila sector began to see an upswing toward the end of 2009 as the U.S. economy stabilized, and it has begun re-expanding its employment base. Over one-third of the Honduran workforce was considered either unemployed or underemployed in 2010.

In addition to the effect of the global financial crisis, the Honduran economy suffered the effects of mismanagement during the Zelaya administration, previous administrations, and the de facto regime post-coup), the freezing of external financing and cooperation from the international community in response to the ouster of Zelaya in June of 2009, structural economic difficulties, and the devastating effects of natural phenomena (i.e. dengue-fever breakouts, drought and floods) during 2010.

The global financial crisis certainly hit the Honduran economy with a double-punch. First, the slowdown of the economic activity in the United States, which is the main market for Honduran exports, signified a decline in exports and further increase in the deficit. Second, the higher rate of unemployment in the US, as well as tightening anti-immigration stance in some states of the union have affected the ability of Hondurans residing in the US to continue sending remittances back home. The percent of households receiving remittances has decreased from 20% in 2006 and 2008 to less than 15% in 2010; a reduction of about 25 percent (see Figure I.8). Among those who still receive remittances, about 40% reported receiving less money than before the crisis. The total amount of the remittances was reduced in about 11% between 2008 and 2009.





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Page last modified: 10-12-2021 16:08:18 ZULU