Publish in Perspectives - Wednesday, September 25, 2013
Juan Orlando Hernandez inaugurates the SPS call center in April. (Photo: Hernandez Campaign)
Honduras’ outlook is stable despite electoral uncertainty and a pending lawsuit against the government.
BY FRANCO UCCELLI
Presidential and congressional elections are scheduled for November 24 and the inauguration of the new government for January 27. While recent polls suggest that the presidential race remains wide open, most people believe Juan Orlando Hernández, the current head of congress and the candidate for the ruling rightist Partido Nacional (PN), will likely defeat Xiomara Castro, the wife of former ousted President Manuel Zelaya (2006-09) and the candidate for the leftist Libertad y Refundación (LIBRE) party, who is viewed as having lost some of her initial momentum. The private sector regards Hernández, the continuity candidate, as the best choice, and trusts that not only will he (thanks to their support) win the election, but will boost confidence, foster stronger growth, and fix the country’s beleaguered fiscal situation. Should Xiomara Castro win, however, policy uncertainty will rise and Honduras’s fundamental prospects may deteriorate. Amid a fragmented political environment, no party is expected to secure a majority in congress. Long dominated by a conservative two-party system, this is the first time that so many candidates (eight in total) are vying for the presidency and the first time that a leftist candidate has a real chance of winning.
Fiscal consolidation will be a top policy priority. A stubbornly high fiscal deficit remains Honduras’s main macroeconomic challenge. Indeed, the latest official forecast calls for the government shortfall to close 2013 at 6.0 percent of GDP (private sector estimates put it a bit higher at around 6.5 percent), in line with last year’s result and significantly higher than 3.5 percent and subsequently revised 4.5 percent earlier projections. Much of the higher-than-expected deficit is related to overly-optimistic revenue projections, rather than to ballooning expenses. To fix the situation, the government is planning to submit to congress a number of reforms immediately after the November 24 election in hopes that they would be approved before the January 27 inauguration of the new administration. Among other measures, the fiscal reform proposal will aim to reduce tax exemptions from their current 6 percent of GDP level to around 4 percent and introduce anti-tax-evasion policies. Narrowing the deficit is seen as critical for any new government to restore fiscal credibility in the country. Accordingly, there seems to be broad consensus regarding the need to “fix the fiscal”.
Government needs to raise $250 million by year end. To cover its 2013 financing needs, the Lobo administration requested and was granted congressional authorization to issue bonds totaling $750 million either domestically or externally. In March, it floated a debut bond in the international market for $500 million. With the fiscal deficit running higher than expected and $250 million in market debt pending, the government is currently assessing its options. While it recognizes that reopening the existing 2013 global issue would probably be impractical given its relatively low price in the secondary market, the government has not ruled out issuing a new global bond, perhaps with a shorter tenor than the 2013s, and has purportedly received multiple expressions of interest from foreign investors. Should the terms (price) of a new global bond not be favorable from the perspective of the government, the authorities have indicated that current domestic liquidity levels and appetite for a new bond, either in local or foreign currency (the law authorizing the bonds does not specify the currency), are ample, and hence issuing debt locally would also constitute a viable option. A third alternative, albeit not one that is actively being pursued, would be for the central bank to extend a short-term bridge loan for the full $250 million to the government (the organic law of the central bank would allow it because it would be equivalent to less than 10% of the previous year’s government revenues). Such loan, however, would have to be repaid before the end of the current calendar year, making its very short-term nature a lot less desirable.
New IMF program is likely. Although the Lobo administration opted not to pursue a new formal agreement with the IMF after the latest Stand-By Arrangement and SCF expired in March 2012, given the recent deterioration of Honduras’s fundamentals, all of the leading parties, including the leftist LIBRE, have expressed interest in negotiating a new accord. Whether such accord would be treated strictly as precautionary, as has been the case with every arrangement since 2008, would depend on the outcome of the November election, the composition of the new congress, the extent to which LIBRE, if elected, would receive financial support from Venezuela, and any other special circumstances. Most local observers believe that if either the ruling PN or the Partido Liberal (PL)—Honduras’s other traditional party, which is currently in third place—were to win the election, a new IMF accord is a foregone conclusion.
CORFINO litigation should be resolved shortly. According to official sources, the government of Honduras is expecting a favorable judgment in the lawsuit brought about in the US against the government in an alleged case of conspiracy, breach of contract, and fraud that dates back to the 1990s. The Honduran government is expecting a favorable court ruling that would liberate it from any responsibility over the CORFINO liability, which is estimated to total more than $200 million, and would prevent the attachment of any government assets in the US, such as the financial resources set aside to service the 2023 global bond. The favorable resolution of the CORFINO dispute would pave the way for the government to continue to make interest and principal payments on its external liabilities without any form of legal interference.
Baseline scenario should support outstanding bonds. While local observers generally attribute the recent underperformance of Honduran sovereign bonds to elevated uncertainty related to the ongoing electoral process and the pending legal case against the government of Honduras, they note that the negative trend can be easily reversed if the outcome of the election is benign (from a market standpoint) and the court case is decided in favor of the government. Further improving market sentiment toward Honduras could be the announcement of a comprehensive plan to “fix the fiscal” and a commitment to sign a new accord with the IMF. While none of these developments is by any means guaranteed, our interaction with local contacts during our recent visit to Tegucigalpa suggested to us that they should be viewed as the baseline scenario, and as such one that should support Honduran bonds in the near term.
Franco Uccelli is an analyst with JP Morgan Chase. This column is based on a recent trip report. Republished with permission.