Country Report Honduras October 2009

Outlook for 2010-11

• Roberto Micheletti, the former congressional president, will continue to govern as de facto president, following the ouster in June of Manuel Zelaya, which has left Honduras in a profound institutional crisis.
• The Economist Intelligence Unit premises its forecasts on the assumption that the elections will take place as scheduled on November 29th and that the next government will be recognised by the international community.
• After deep spending cuts in 2009 given a lack of aid and financing, the fiscal deficit will widen in 2010, reflecting a fast rise in catch-up spending. We expect a further deterioration in 2011 as the economy slows once again.
• The next government will allow the lempira, which has been fixed since mid-2005 and has become overvalued, to weaken from mid-2010.
• A US recovery in 2010 will help Honduran investment and exports recover, driving GDP up to 3%. However, renewed US weakness in 2011 will cause Honduran output to slow to 1.5%.
• After contracting by 4.4% in 2009, owing to a sharp decline in investment and consumer spending, the economy will recover to growth of 3% in 2010. However, it will weaken to 1.5% growth in 2011.
• After falling rapidly and sharply in January-August, inflation is set to start rising again in 2010 and 2011, driven by rising oil and food prices.
• After narrowing sharply in 2009, we expect the external deficit to widen in 2010 before narrowing again in 2011 owing to renewed US weakness.

Monthly review

• Mr Zelaya staged a surprising return to Honduras in late September, turning up in the Brazilian embassy where he sought refuge to avoid arrest by the de facto Micheletti government.
• This drove the de facto government to impose a curfew followed by a 45-day suspension of constitutional rights including the right to free expression and the rather to gather in public.
• Mr Micheletti has maintained domestic support for his government despite rumours that some businessmen supported a temporary return of Mr Zelaya to power. Other governments have continued to apply pressure.
• The political crisis has affected the fiscal position. Monetary indicators have also worsened as a result of the international economic sanctions.
• The trade deficit narrowed in July, owing to the one-off 48-hour trade embargo imposed upon Honduras in the wake of Mr Zelaya's ouster and to an acceleration in the import spending decline.