Country Report Honduras September 2008

Outlook for 2008-09

• With 15 months left in power, Mr Zelaya of the PL is rapidly losing public support in the face of his government's lack of success in tackling crime, corruption and rising inflation.
• Party politics is increasingly turning towards the November 2009 presidential and legislative elections. At present, the PN, last in power in 2002-06, is the narrow favourite to win the presidency.
• Despite the government's commitment under the IMF programme to reduce the fiscal deficit from 2.3% in 2007 to 1.5% in 2008 we consider it an over-optimistic target given the 2009 elections.
• Following publication of data for the first five months of 2008 we now expect the fiscal deficit to widen in 2008 and 2009, to 3.9% and 4% of GDP, up from 2.6% and 3.5% of GDP in our August report.
• Persistent price pressures will see the Central Bank tighten policy as it attempts to bring inflation back to target.
• A difficult external environment will slow GDP growth in late 2008 and in 2009 on the back of decelerating consumer and investment spending.
• Owing to continued rapid import growth we now expect the current-account deficit to widen to 14.9% of GDP in 2008 and 11% of GDP in 2009 (from 13.6% and 9.6% in our August report).
• Given the deteriorating external accounts, we are increasingly concerned about the financing of the external imbalance, despite high aid and solid FDI inflows.

Monthly review

• Mr Zelaya has circumvented Congress in order to formalise Honduras's entry to the Alternativa Bolivariana para los Pueblos de Nuestra America (ALBA, Bolivarian Alternative for American Countries), prompting fierce criticism.
• In a setback for the ruling party's presidential election campaign, Elvin Santos has been barred from standing in November's primary elections because he has been acting vice-president during the current term.
• Sharp rises in expenditure and low revenue growth weakened the public finances over the first five months of the year, bringing into doubt Honduras's ability to adhere to the stand-by arrangement with the IMF.
• The Fund has completed its first review of the stand-by arrangement, warning against further rises in public-sector wages and salaries.
• Strong second-quarter growth in construction output raised first-half growth to 5.8%, according to the monthly index of economic activity.

Source: Country Report