Honduras

Moderate growth dependent on the US economy

In 2024, economic growth was impacted by the US slowdown. This weighed on Honduran exports and expatriate remittances, which are the main drivers of private consumption, with the US accounting for 90% of the total in 2023. This trend is set to continue in 2025. However, private consumption (50% of GDP) will continue to be supported by easing inflation. Inflation will continue the deceleration trend that began in February 2023, remaining within the Honduran central bank's target range (4.0% ± 1.0 point). Having kept its benchmark interest rate at 3% since November 2020, the Central Bank of Honduras (CBH) decided to raise it to 4% in August 2024. However, the effectiveness of its monetary policy remains restricted by the low flexibility of the exchange rate and its interventions on the foreign exchange market. Last, the increase of between 5.5% and 7% in the minimum wage depending on the size of the company, which entered into effect in January 2024, will also support household consumption.

Export growth is expected to slow, continuing to reflect mainly the less dynamic US demand for maquiladora products (clothing and textiles). The US is Honduras' main trading partner. Exports of agricultural products such as coffee, bananas, shrimp and palm oil, which account for more than half of the country's exports, will also fall.

In addition, private investment – both domestic and foreign – will continue to be hampered by increasing state control, illustrated by the takeover of electricity distribution by the Empresa Nacional de Energía Eléctrica (ENEE, the state-owned electricity company). On the other hand, in the run-up to the 2025 general elections, public investment will partially compensate the trend in the wake of the 2024 budget, which provided for a 34% increase in spending allocated to the Public Investment Programme (PIP), including 40% for the modernisation of road and energy infrastructure.

Persistent external imbalances

The current account deficit widened in 2024 due to the increase in the trade deficit. At the same time, growth in expatriate remittances (representing 28% of GDP in 2023) has returned to a normal pace after rising sharply in recent years. The trend is expected to continue in 2025. The trade balance will remain in deficit, burdened by energy imports. In addition, the US slowdown will have an impact on textile exports, with the US accounting for 70.5% of total Honduran maquilla exports. Exports of agricultural products will remain under pressure on back of the reduction in export volumes and persistent challenges, such as climate hazards, farm closures and lower yields. This will be partly offset by the good performance of wiring harness sales, in line with growing demand from the US automotive sector. The current account deficit will be covered mainly by multilateral financing and FDI flows (3.2% of GDP in 2023), particularly in the textile and clothing sectors. Last, the BCH's foreign exchange reserves, covering 4.3 months of imports in September 2024 (compared with 6 and 5 months respectively at the end of 2022 and 2023) are trending downwards. They will remain under pressure, notably due to the reduction in expatriate remittances and central bank intervention on the foreign exchange market to control the slide in the lempira, the country’s currency.

In 2024, the public deficit widened as a result of increased current expenditure and public investment (10.5% of GDP). The deficit is expected to increase slightly again in 2025. The budget bill for 2025 that was presented in September 2024 provides for additional social and infrastructure spending, the financing of which depends on the passing of a budget reform bill known as the Tax Justice Act that was proposed in March 2023. The reform bill has stalled in Congress due to opposition from conservative and pro-business forces. Supported by the IMF, the reform envisages broadening the tax base and improving the collection and efficiency of spending. Positive effects on the deficit are expected as part of gradual fiscal consolidation, which is overdue. This is part of a three-year programme signed with the IMF in August 2023 and financed by an Extended Credit Facility and an Extended Fund Facility totalling USD 822 million. Under the programme, the Castro administration plans to increase investment in infrastructure and human capital, expand social security coverage and seeks to pass a tax justice law. Last, the foreign debt, which accounts for half of the total public debt, is held by official creditors on favourable terms concerning rates and duration.

A paralysed political environment ahead of the 2025 general elections

President Xiomara Castro of the leftist Libre party was elected in November 2021 after winning over 50% of the vote. She took office in January 2022, marking the end of a twelve-year rule by the centre-right National Party (PN). Since the start of her term of office, her administration has faced persistent tensions in Congress. Although agreements with the opposition resulted in appointments in the first half of 2024 to head up institutions such as the Court of Auditors and the Electoral Justice Tribunal, the situation deteriorated when 10 Libre members of Parliament defected to the right-wing Liberal Party (PL) and following the resignation of Vice-President Salvador Nasralla in April 2024. As a result, Libre now has 40 seats out of a total of 128 in Congress, while the PN, allied with the PL and the centrist Honduran Saviour Party (PSH), is the largest party in Congress with 43 seats). In the run-up to the primaries in March 2025 and the general elections scheduled for November 2025, these tensions are likely to persist. Domestic security remains a major issue. The state of emergency, in place since November 2022, has been extended to cover a large part of the country. Honduras remains the country with the highest homicide rate in the region despite a 30% decrease in the first seven months of 2024.

On the external front, after severing diplomatic relations with Taiwan in 2023, the Castro administration is strengthening its ties with China. However, economic dependence on the US, its leading export market and main source of remittances, will remain key. Cooperation with Washington to control illegal immigration is set to continue. However, the President's decision to call into question the automatic extradition of drug traffickers to the US will weaken the fight against drug trafficking despite the fact that Honduras is a key transit country of drugs to the US.

Last updated: October 2024