Country Report Honduras March 2009

Summary

The political focus is turning to the November 2009 elections. Despite the slowing economy and the government's unpopularity, the polls currently favour the incumbent party's candidate, Elvin Santos.
With the end of his term in sight, Mr Zelaya of the left-of-centre PL is rapidly becoming a lame duck president, and policy implementation will grind to ahalt.
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 downturn and electoral spending pressures ahead of 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 again try to make the exchange rate more flexible. The move from a de facto fixed regime could lead to volatility.
A recession in the US and tighter global credit conditions, combined with decelerating domestic demand, will cause GDP to contract 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.

The government and the opposition PN joined forces to make justice appointments in February, raising widespread criticism.
A February poll showed Mr Santos with 61% of voting intentions, ahead of the PN's Porfirio Lobo Sosa with 47%.
Preliminary fiscal data for 2008 showed that thanks to an apparent fourth-quarter improvement, revenue for the year rose by 16% and spending by 14%. However, no fourth-quarter breakdown was provided.
The government is talking to the IMF over an extension of the stand-by arrangement which expires in April for a further 15 months, thus providing some room for manoeuvre for the incoming government.
According to preliminary GDP data for 2008, the economy expanded by 4%, down from 6.3% in 2007. Growth was primarily driven by private consumption and investment.
On the supply side growth was driven by financial services, followed by construction and transportation.

Source: Country Report