Country Report Honduras May 2009

Summary

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 private-public-sector stimulus of US$250m over three years (2009-11) will be the primary initiative to help sustain the economy.
The IMF is expected to extend Honduras's stand-by agreement, 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 and it will probably try again to make the exchange rate more flexible. 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 will contract by 3.2% 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 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.

Further evidence has emerged of growing tensions within the ruling PL, as well as between the government and the legislature.
The Central Bank has set out its monetary programme for 2009-10, but its growth assumptions appear over-optimistic.
In April the Central Bank cut its Monetary Policy Rate by 125 basis points, to 4.5%, in order to help stimulate lending.
Following Article-IV consultations with the IMF in early May, the government and the Fund were set to continue discussing the possibility of an extension of the expired stand-by agreement, or the implementation of a new one.
The economic activity index of the Central Bank contracted by 1% in January-February. But a 2.7% decrease in February showed that the slowdown was continuing to deepen.
Inflation rose by 8.8% in March, moving back into the Central Banks target range of 9% (1 percentage point) set for 2009.