Country Report Honduras February 2009

Summary

With less than one year left in power, Manuel Zelaya of the left-of-centre Partido Liberal (PL) is rapidly losing public support, owing to his government's lack of success in tackling crime, corruption and double-digit inflation.
The focus is turning to the November 2009 elections. Despite the slowing economy and the government's unpopularity, the polls currently favour the incumbent's candidate, Elvin Santos.
Despite the government's commitment under the IMF programme to reduce the fiscal deficit, we expect the target to be missed by a wide margin, given the economic slowdown and the 2009 polls.
As the Central Bank's policy reversal to an easing stance is likely to raise pressure on the currency, it will probably attempt once more to make the exchange rate more flexible.
A recession in the US and tighter global credit conditions, combined with decelerating domestic demand, will slow GDP growth in 2009. The 2010 recovery will be modest.
Given the deteriorating external accounts, there are growing concerns over their financing, despite access to concessionary financing and aid flows.

Politics were dominated in January by a combination of the president's cabinet reshuffle, the appointment of a new head of the financial watchdog and the selection of 15 judges to the Supreme Court.
Mr Zelaya's attempt to impose a president on the Supreme Court failed, a further indication of his weakening political base.
The public finances deteriorated markedly in the first nine months of 2008 owing to a sharp rise in spending and lower tax revenue and donations.
The government imposed minimum wage rises between 19% and 62% following a breakdown in private sector and union talks. The sharp hikes are another sign of the growing government populism.
Consumer prices eased to 10.1% year on year in January, close to the upper end of the 8-10% target range of the Central Bank. Falls in food prices and transport costs contributed to the weakening price trend.
Despite a real appreciation of around 11% in 2008 of the lempira against the US dollar, the government was determined to quash any talk about the easing of the exchange rate that has been fixed since 2005.

Source: Country Report