Country Report Honduras June 2009

Outlook for 2009-10

• The constitutional reform plan of the president, Manuel Zelaya, will dominate the headlines in the coming months and reinforce his position, just as he was about to risk becoming a lame-duck president.
• The government's joint public-private-sector stimulus of US$250m over three years (2009-11) will be the primary initiative to help support the economy.
• The IMF is expected to extend Honduras's stand-by arrangement, which expired in April. The government's foreign exchange rate policy will be the main source of policy divergence.
• The Central Bank's easing bias is likely to keep pressure on the currency but it will not try again to make the exchange rate more flexible before 2010 as the move from a de facto fixed regime could lead to volatility.
• A global recession and a contraction in the US economy, its most important trade and investment partner, will hurt Honduras. The US economy will contract by 2.9% in 2009, before staging a feeble recovery in 2010.
• Honduran GDP will contract by 2% in 2009 owing to a decline in investment and consumer spending, before staging a modest recovery in 2010.
• An improvement in the external accounts and access to concessionary financing and aid flows should help ease concerns over financing.

Monthly review

• It is not clear whether a popular consultation on constitutional reform will go ahead on June 28th, owing to legal impediments.
• Mr Zelaya's order that military officers support the June 28th consultation has raised concerns about a possible intervention of the military in politics.
• The government and the IMF started talks in June over an extension of the 12-month stand-by arrangement that expired in April. The government and the IMF diverge on exchange rate and monetary policy.
• The central government fiscal surplus contracted sharply in January owing to lower revenue and a sharp rise in expenditure on the back of pre-electoral spending.
• The economic activity index of the Central Bank contracted by 1% in the first quarter and by 1.6% in March.
• Manufacturing activity increased in March according to the IMAE, as did manufacturing export earnings However, it was too early to tell whether this is the start of an upward trend.

Source: Country Report