Country Report Honduras August 2008

Outlook for 2008-09

• With less than 18 months left in power, Mr Zelaya of the PL is rapidly losing public support in the face of his government's lack of success in tackling crime, corruption and rising inflation.
• Party politics is increasingly turning towards the 2009 presidential and legislative elections. At present, the PN, last in power in 2002-06, is the narrow favourite to win the presidency.
• Despite the government's commitment under the IMF programme to reduce the fiscal deficit from 2.3% in 2007 to 1.5% in 2008 we consider it an over-optimistic target given the 2009 elections.
• We expect the fiscal position to deteriorate in 2008 and 2009 as spending on wages and salaries rises further ahead of the 2009 elections.
• Persistent price pressures will see the Central Bank tighten policy as it attempts to bring inflation back to target.
• A difficult external environment will slow GDP growth in late 2008 and in 2009 on the back of decelerating consumer and investment spending.
• The current-account deficit will widen sharply in 2008 before easing in 2009, raising increasing concerns over Honduras's financing position despite continued high inflows of aid and FDI, by historical standards.

Monthly review

• Party politics has become increasingly dominated by the November primaries. In early August, all parties had sent their completed candidate lists to the Supreme Electoral Tribunal.
• July saw more strike action from teachers and bus and taxi drivers demanding higher wages and fares to cope with the rising cost of living.
• An electricity tariff adjustment, as mandated under the IMF stand-by arrangement, narrowed ENEE's operational deficit in May and June but also contributed to an acceleration in inflation during the period.
• Despite a sharp rise in trade since 2006 with the US and Central America under the DR-CAFTA umbrella, Honduras's trade balance worsened with all its trading partners apart from Nicaragua.
• The current-account deficit nearly quadrupled in the first quarter of 2008 owing to the sharp rise in the trade deficit.

Source: Country Report