Sovereign Credit Rating: Honduras

RUZZANTE Laura SAMOGGIA Diletta SHEN Yiqi STANESCU Ioana Raluca VANDEWIELE Karel VINCENSINI Julien VISLOUS Vaclav WANG Wenlu YAO Yingjia ZHANG Wenjie

Country Risk Analysis Professor Anouar Hassoune

Honduras (Republic of)

Major Rating Factors
Strengths:

Sovereign Credit Rating Foreign Currency B/Stable/B Local Currency B/Stable/B

Low levels of debt and interest payments following several debt relief packages Improving external liquidity and increasing foreign investors confidence International oversight speeds up key reform initiatives Low economic basis does not allow for a large buffer for extra income Political situation has still not fully stabilized after the constitutional crisis of 2009, institutional governance remains weak High susceptibility to global conditions, natural disasters and high volatility of output given concentration in agriculture Prevailing rigidities in the fiscal and monetary policies

Weaknesses:

Rationale
Our rating of the Republic of Honduras reflects our views on its moderate economic prospects, as well as currently relatively positive external liquidity. Primarily because of its dependence on the major markets, such as the USA and remittances, which have been severely affected by the recent economic downturn, the fiscal position of Honduras is extremely rigid with a general budget deficit of 4% in 2011. Our belief is that despite recently enacted and planned tax reforms, the government will have to run budget deficits of about 3% in 2012-2014, but this will largely depend on the global climate. Honduras has somehow recovered from the effect of the economic downturn and its GDP growth is expected to return to 4% in 2012. Future performance, however, is highly uncertain given the countrys high dependence on the agricultural exports, which bring about high volatility, extremely short economic cycle (which depends largely on weather) and its performance is thus also highly susceptible to negative weather anomalies frequent in the Caribbean region. The country is also still recovering from the coup dtat from 2009, when president Zelaya was forcibly expelled from the country. Thereafter, the government suspended many constitutional rights. Although, the new government led by president Lobo tries to contain the situation, corrupted police and army forces, as well as social unrest from the agricultural reform are significant causes for caution. The government attempts to counter this by financing social programs, however, world-wide food and energy price inflation, as well as the lack of oversight over police forces can prevent these programs from having a significant effect. Moreover, even if government reform can boost investors confidence, significant improvements in the ease of doing business are necessary, as the country lacks in comparison with its peers. Similarly, investments into infrastructure are still below our expectations, especially after the setback of the 2008 floods, although there is a promising $225 ml. investment announced in the expansion of Puerto Corts, the most important seaport in Central America. The main target of monetary policy will be to curb inflation, an effort which could be helped by the talks with rejoining Petrocaribe, which could help containing oil prices. On the other hand, strengthening ties with the Chvez rgime in Venezuela has been one of the reasons for criticism of former president Zelaya. Furthermore, the global spikes of food and oil prices could prove to be a challenge for the poor country nonetheless. The inflation differential is also putting pressure on the rigid exchange rate pegged to the US dollar, which has surfaced in the form of many (albeit small) adjustments in the last six months. The structure and liquidity of the banking sector has been improving and despite recent setbacks remains relatively strong. The same can be also said about the Honduran external liquidity, whose main indicators are in

better shape than most of its peer group, although the widening current account deficit could pose some problems, especially in light of the countrys low global competitiveness levels.

Outlook
The stable outlook reflects our belief that recent reforms can tackle the problems of fiscal and monetary rigidities and that the interest of investors in the country will remain strong. On the other hand, the growth potential is highly dependent on managing the risks of high inflationary pressures, short business cycle, as well as the low buffer of the weak economic base in case of any setbacks. Moreover, it is paramount for Honduras to settle its political crisis, as well as tackle the challenges of corruption, infrastructure and business environment to be able to see any positive change in its credit rating. Given the recent debt reliefs, the administration has some room to improve the situation in the country, even if their job will not be an easy one.

Honduras - Outlook Indicators

GDP per capita (US$ m) Real GDP (% change) General government balance/GDP (%) General government interest/revenue (%) Total public debt/GDP (%) CPI (average % change) Current account balance/GDP (%) Gross financing needs/useable reserves plus current account receipts (%) Data: IADB, World Bank, IMF 2007 1727 6.2 -3.1 2.87 18.39 6.9 -9.03 104.7 Year ended Dec. 31 unless otherwise noted 2008 2009 2010 2011 1901 1903 2026 4.2 -2.1 2.8 3.7 -2.5 -6.2 -4.8 -4 2.67 3.75 5.04 19.24 23.06 25.58 11.4 5.5 4.7 -12.83 -3.64 -6.2 -7.00 102.1 90.23 90.58 90.3 2012f 4.0 -3.5 -

Comparative Analysis
In peer-wise comparison, Honduras is economically much weaker that its peers and therefore has a lower possibility of broadening its revenue base if necessary. Although it has been trying to catch up with the other countries, it has not been outgrowing them to narrow the gap. Its further growth potential is also very much dependent on developments in the region and the global economy. This is, however, a common feature in its peer group. The countrys real GDP growth outlook is comparable to that of its peers, but will be stabilizing at 4% in the coming year. In these terms, the best growth prospects are expected of Dominican Republic (12%), Guatemala (9%) and El Salvador (6%). On the other hand, a slow recovery is expected for Belize (0%) and Jamaica (3%).

6000 5000 4000 3000 2000 1000 0 Dominican Republic Data: World Bank Belize

GDP per capita (US$ ml.)

2006 2007 2008 2009 2010 El Salvador Guatemala Honduras Jamaica

Amongst its peers, Honduras stands as a country facing increased political difficulties, despite a reasonable economic perspective. Moreover, even as the Caribbean and the Central America have enjoyed a long history of drug trafficking, rising violence level and corruption, Honduras has topped its rated peers in homicide rate with 82 homicides per 100,000 population.1 The natural location as a corridor for trafficking drugs, high portion of gang structures and a legacy of violence has dimmed the light for a democratic and stable society for the country. Monetary and fiscal policies are aimed at fostering and sustaining a stable environment. The monetary policy in Honduras has maintained a stable exchange rate in recent years, which is also the case in El Salvador and Belize. In terms of inflation, Hondurass 2005-2009 average inflation is around 7.6%, relatively higher than El Salvador, Guatemala, Belize and Dominican Republic. Inflation went down a little in Honduras in 2010 but still not very good.

Average Inflation
Five-year average(2005-2009) 16 14 12 10 8 6 4 2 0 2010 2011f

Honduras

El Salvador

Guatemala

Belize

Jamaica

Data: IMF, f - forecast

Dominican Republic

Honduras total public debt to GDP position is strong within the region, and can be compared to the highest rated peers such as the Dominican Republic and Guatemala. However, It should be noted that without the two turns of debt forgiveness that happened in the last decade, Honduras total public debt to GDP would be considerably higher, at around 63% (thus below the B+ and BB-/+ rated peers).

Total Public Debt To GDP (end of period)

120% 2010 100% 80% 60% 40% 20% 0% Honduras Belize (B-) Jamaica (B-) Dominican Republic (B+) El Salvador (BB-) Guatemala (BB+)

Data: IADB
Source: UNODC Homicide Statistics 2011

Honduras fiscal flexibility remains low, and the countrys rigidity is due primarily to the high wage bill. Despite the conservative Lobo governments commitment to fiscal consolidation, issues such as tax revenue collection need to improve in order to allow the country flexibility for much needed social and capital expenditures. Interest payments as a percentage of revenues remain low, yet may be misleading. Despite the overall level being low compared to its peers, the domestic bond issuances of 2008-2010 put fiscal pressure on Honduras (due to the short maturity of the bonds and relatively high interest rates). The government is now pursuing a policy of debt maturity restructuring that is expected to alleviate pressure.

Interest Expense/Revenue
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Honduras Belize (B-) Jamaica (B-) Dominican Republic (B+) El Salvador (BB-) Guatemala (BB+) 2010

Data: IADB

Honduras overall fiscal position is amongst the worst of its peers, yet it is forecasted to improve significantly over the next few years, conditional on a tight control on spending, improved revenue collections, and no unexpected continent liabilities (the banking system appears to be well capitalized, but the threat of natural disaster exists and its impact may be severe).

Overall Balance (% GDP)

0% -1% -2% -3% -4% -5% -6% Honduras Jamaica (B-) 2010 Belize (B-) Dominican Republic El Salvador (BB-) (B+) Guatemala (BB+)

Source: IADB -7% Data: IABD

Foreign position characterized by a large current account deficit. Honduras faces a large current account deficit compared to its peers, placing the country in a rather weak foreign position. The large current account deficit is however not as problematic, as it reflects good trading relationships and high inflows of capital from abroad. However, Honduras large dependency on its relationship with the United States means the country is again highly inflexible.

Current Account Balance (% GDP)

Honduras
0.00 -1.00 -2.00 -3.00 -4.00 2010 -5.00 -6.00 -7.00 -8.00 -9.00 -10.00

Jamaica (B-)

Dominican Republic (B+)

Belize(B-)

Guatemala (BB+) El Salvador (BB-)

Source: IADB

In terms of external liquidity, Honduras presents a positive outlook through the gross external financial needs to CAR and foreign exchange reserves ratio. Honduras is among the most liquid countries in the group and presents a positive look over the coming years in what concerns external liquidity.

Gross External Financing Needs/CAR + Reserves (%)

250 200 150 100 50 0 Honduras Data: IADB Jamaica (B-) Dominican Republic (B+) Belize(B-) Guatemala (BB+) El Salvador (BB-)

2010

External debt (% of exports of goods, services and income)

350 300 250 200 150 100 50 0 Honduras Data: IADB Jamaica Belize Dominican Republic Guatemala El Salvador

Another positive indication is that the external debt over Current account Receipts is very low compared to its peers in the group. The external debt position has increased in all sectors, mainly due to structural improvements that have increased confidence.

Political Environment: Precarious Political Stability That Raises Society Fears

Effective actions and deep reforms needed to be implemented to ensure public security. Significant efforts remain to be made to counter corruption in the police force.

Public security remains a major concern and calls for organizational reforms Despite the efforts of the Lobo administration to promote national reconciliation and restore democratic order after the nations political turmoil in 2009 that ousted President Manuel Zelaya (central-left Liberal Party) for his attempt to extend his presidential term, the soaring rates of violent crimes, drug related murders and human rights abuses still reflect the institutional weakness of the governance. Serious concerns have been raised towards the act of violence against officials, experts and journalist who are involved in anti-drug movement, fighting against corruption and human rights. Government and army have reacted by authorizing the armed forces to serve in police capacity and geared up aggressive actions against drug cartels and gang violence. However, argument follows that sending drug-financed military only deteriorates the situation and even leads to abuse of forces without reforms in justice administration. Police corruption continues to sweep the country with little hope for improvement Corruption in Honduras is a deeply rooted problem. The national police are frequently involved in bribery, drug trafficking, extrajudicial killings and intimidation of human rights groups. The killing of two students by the police received pressure from the US and the release of four policemen accused for the murder further stimulated public outrage. Measures have been taken by President Lobo to crack down corruption and clean up the institution sacking top police commanders, arresting 176 police officers and deploying military to take on policing responsibilities. However, it remains questionable whether corrupt police can be systematically ruled out in the short run and whether President Lobos commitment is more than lip service. New coup plot poses threat to government stability before next presidential campaign in 2014 Rumors of coups against Lobo have struck several times since Zelaya was ousted in 2009. Vice President Ponce claimed that powerful sectors are seeking to take advantage of Lobos efforts to deal with the police crisis to weaken Lobos administration politically. Besides, the legitimacy of Lobo government is still questionable for major South American countries such as Brazil and Ecuador. In order to help the country rejoin the Organization

of American States and further integrate into the international community, president Lobo signed a reconciliation accord that lets the exiled leader back. However we estimate that this will ease the occurrence of a new coup and threaten the countrys political stability.

Economic Prospects: Looking for a way out

Activity is recovering from the 2009 recession with growth perspectives remaining in the bottom bracket of Honduras peer group Poverty reduction and discrepancies over macro objectives are major challenges for the upcoming years High concentration in agriculture make the economic cycle extremely short and volatile. Threats from weather anomalies are also present.

Republic of Honduras - Growth Indicators

2008 Growth % GDP (real terms) CPI growth In $ (1980 basis) Per capita GDP In % of GDP Credit to private sector 4.0 10.8 1,901.8 9.9 2009 -1.9 3.0 1,910.58 5.0 2010 2.8 6.5 2,014.70 4.1 2011e 3.5 8.0 2,101.31 9.2 2012e 4.0 6.5 2,163.1 9.9

Honduras belongs among one of the poorest countries in the world measured on per capita GDP basis and therefore has a very low tax basis, on which to create revenue if necessary. Moreover, several key aspects of the Honduran economy threaten its future growth. First, the Honduran economy is highly concentrated with agriculture being the most dominant sector. This leads to high output volatility, which makes the Honduran economic cycle extremely short and unpredictable. Moreover, the fact that the country is constantly exposed to rare, but severe natural disasters could severely impact the countrys fundamentals and its ability to honor its obligations. Hurricanes Fifi (1974) and Mitch (1998) are just the latest to severely impact the country. Another major issue of concern is the high levels of inflation. With the world food prices increasing, Honduras can benefit somehow on its agricultural exports, however, for the majority of population this would increase their living costs, threatening the social climate. Commodities markets have been historically volatile and they directly threaten the purchasing power of the wide low income class in Honduras and thus absorb a large part of nominal GDP growth. This is after the global downturn has already affected the level of remittances, on which a large proportion of the population depends. Furthermore, given the fact that the Honduran Lempira is pegged to the dollar, the inflation differential will create tensions on devaluation of the currency. This has already translated into a high instability of the official exchange rate in the last six months after a long time of relative calmness. To this effect, the Central Bank has worked on improving its capacity to implement efficient programs through open market interventions over the past months, which enhance its credibility and sterilization capacity. At the same time the government is committed to build on the progress to date to further strengthen macroeconomic stability and reduce public sector and external vulnerabilities. Policy makers will then have to strike a balance when tightening monetary policy and limiting public expenses. They will have to manage hot money inflows and its effects on inflation through credit while backing growth through structural reforms and credit to the private sector. The government is also trying to set up anti-poverty measures by investing 1.5% of the GDP each year into social programs. However the situation may not change in the short run. Furthermore it is investing in infrastructure, which is really necessary. The highly problematic agrarian reform, which has resulted in many clashes between local land-owners and their forceful collectivization through illegal and forceful evictions, has shattered many communities and its crimes remain largely unresolved.

According to the Global Competitiveness Report, Honduras belongs amongst countries transitioning from factor driven to efficiency driven production, with some weaknesses in labor market efficiency and higher education compared to its peers. Moreover, local business owners name crime & theft, corruption and inefficient government bureaucracy as the most problematic factors. Since output gaps have been negative over the last two years the current increase in imported inflation is perturbing job creation. Reaching objectives for both growth and inflation may then be contradictory, as fighting inflation and enhancing credibility and stability will generate more unemployment and increase the cost of debt. Unfortunately, markets have not been well oriented for Honduras recently, as according to the Inter-American Development Bank, the terms of trade have been deteriorating for Honduras from 115 to 100 over the past decade. In the long-term view, the widely backed political initiative to establish several city-scale reform zones (REDs) can bring positive change to the climate. With its independent executive and judiciary powers and backed by prominent libertarian economists, it is an initiative worthy to keep an eye on.

Fiscal Flexibility: Improving Efforts, Yet Rigidity Persists

Despite fiscal consolidation efforts, Honduras fiscal position remains rigid, partly due to the high salary expense. Fiscal balance is anticipated at 4% for 2011, and is planned to fall gradually to 2% by 2016. This may prove difficult, however, should the global situation further exacerbate. Debt-to-GDP remains relatively low, contributing to low interest burden, yet restructuring of upcoming maturity of short-term bonds may pose challenges.

Expenditure, Revenue and Balance Performance As part of the IMF loan arrangement, Honduras has agreed to commit to fiscal consolidation via controlled spending (mainly to mitigate the effects of the low expected growth and relatively high wage bill). The relatively high wage bill faced by the government makes it inflexible, but the fiscally conservative Lobo government is likely to going to attempt to limit excessive spending on wages (and consumption), at least until the run-up to the next election (which will happen in 2013). Stringent control over current expenditure would allow for much needed social and capital spending. Tax reforms introduced in 2010 are expected to raise revenues by about 2% of GDP, and improve the tax revenue performance in Honduras (which has been deteriorating since 2007). Progress has been made in strengthening tax collections to avoid evasion. However, the government's low revenue levels still remain the main challenge in order to restore fiscal balance. In 2010 revenues amounted to 17.35% of GDP, and primary expenditures to 21.28% of GDP. The gap may be seen as worrying because of the recent trend of rising expenditures and diminishing revenues (although admittedly such trend only emerged with the crisis). The anticipated budget deficit for 2011 is 4%, which is predicted to fall gradually to 2% by 2016. Such levels of deficit are necessary to restore health, yet are unlikely to give Honduras stimulus flexibility in the event of another economic slowdown (or possibly recession). Therefore, albeit the progress made, Honduras fiscal position remains rigid.

Fiscal Balance
-1 -1,5 -2 -2,5 -3 -3,5 -4 -4,5 2011a 2012f 2013f 2014f 2015f 2016f

Source: EIU estimates

Debt and Interest Burden While the arrangement with the IMF is in place, and give Honduras relatively low debt burden, concerns about debt sustainability are low (despite the dependence on external financial support). During the last decade there have been two turns of debt forgiveness by multilateral and bilateral creditors, which have brought the debt-toGDP ratio from 63% to approximately 23% in 2011. Starting from 2012 the public sector debt is expected to decline due to a general improvement both on the control of current expenditure and on the public fiscal sector. The latter will ameliorate thanks to the tax measures approved in 2010, which are expected to increase the tax revenue of the government up to 15.4% of GDP (It amounted to 14.8% of GDP in 2010). Concerning the public sector current spending, the government will manage to keep it within the ceiling set in the 2011 budget by favoring high-impact capital investment projects and welltargeted social spending. These actions, along with the public sector enterprises and public pension funds will have a positive impact on the public sector. The country is characterized by a high degree of foreign currency denominated debt, which is expected to reach 18.9% of GDP in 2011 with an upward trend for the following years (the forecast for 2012 is 19.6% of GDP). In addition, the country has a conspicuous amount of external official financing due to the limitations of the local market and it has a significant deficit in the external current account, which is approximately 7% of the Gross Domestic Product and with stable outlook. During the 2008-2010 period, due to limited external financing, Honduras central government raised funding via the issuance of short-term domestic debt (maturity 1-3 years), with coupon rates ranging from 8% to 13% (main buyers were commercial banks and pension funds). The issuance of such debt gave rise to a stringent repayment schedule. Since 2010 the government has been working on a refinancing strategy to extend the maturity of the bonds and alleviate pressure, and is expected to continue pursuing such debt management strategy. For example, in early 2011 two voluntary bond conversions took place, allowing for refinancing of debt worth 1.2% of GDP Due to the low debt burden, interest payments stay low at 1.3% of GDP in 2010, replicating the value of 2009 and importantly interest payments remain at low percentages of revenue (although they are seeing a sharply increasing trend probably due to the domestic bond issuance). Off-budget and Contingent Liabilities One of the major contingent liabilities a government could face is represented by the financial sector yet with sluggish growth and an increase in deposits, banks have been increasing their net position with the Banco Central de Honduras (BCH). Overall the banking sector appears to be well capitalized, with regulatory capital to riskweighted assets having increased from 13.2% pre-crisis to 14.9% in 2010. Furthermore, since 2008, the percentage of liquid assets to total assets held has been increasing, and had reached approx. 24.4% in 2010 (liquid assets to total short-term liabilities was 58.2%). In 2010 non-performing loans (NPL) to total loans fell from 4.7% in 2009 to 3.7%, and NPL coverage by provision is strong, reaching 118.9% in 2010. However, non-earning assets (net of provisions) still correspond to 47.8% of the banks regulatory capital, and banks profitability has not yet recovered (with a 2010 ROE of 12.5%, just over half the level it was pre-crisis). Another possible contingent liability that could significantly deter Honduras fiscal position is the possibility of a natural disaster. The rigidity of the fiscal position may cause problems in case such events were to materialize, and it is unclear whether government finances would be able to withstand the pressure.

Total Public Debt (% of GDP) end of year

70% 60% 50% 40% 30% 20% 10% 0%
2003 2004 2005 2006 2007 2008 2009 2010

Interest Payments/Revenue
6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0%
2003 2004 2005 2006 2007 2008 2009 2010

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Source: IADB

Source: IADB

Monetary Policy: Stable exchange rate, high inflation and key reforms implementation
Monetary policy will be geared at containing inflation and safeguarding the external position The central bank has prepared a plan for upgrading the monetary policy framework. The authorities will continue to reform financial regulations and the financial safety net.

The Honduras Lempira has stabled at 18.9 (LCU per US dollar; period average) since 2006. Monetary policy has maintained a stable exchange rate to anchor inflation expectations and since the political crisis erupted to maintain overall stability. However, the exchange rate is becoming increasingly overvalued having appreciated by 15-20% since 2005 and some controlled flexibility may be introduced before too long. Inflation has been relatively high, averaging 7.1% between 2007 and 2009. The government regulates the prices of petroleum products, steel, pharmaceuticals, and services from state-owned utilities, and can impose price controls on other goods and services as desired. In December 2010, headline inflation reached 6.5% close to the upper limit of the programmed range of 5.5-6% (+/- 1 percentage point), mostly reflecting the impact of higher food, fuel and energy prices, and weather- related domestic supply shocks. Notwithstanding, core inflation declined to 4%. To establish conditions for a robust and sustainable growth in the medium term, the government started to implement key reforms in 2010, and has developed an economic program for 2011-2012 aimed at reducing macroeconomic imbalances and strengthening the finances of the public sector. Monetary policy will be geared at containing inflation and safeguarding the external position. During 2010, the central bank stepped up the placement of its own securities to mop up liquidity while keeping its policy rate unchanged at 4.5%. The monetary program for 2011 is based on conservative assumptions for growth and net capital inflows, and targets an increase in net international reserves (NIR) of at least US$227 million, on top of the large increase observed in late 2010. Although the projected increase in credit to the private sector is moderate and consistent with a gradual economic recovery, the excess liquidity held by banks would be more than sufficient to absorb a faster-than-envisaged pick up in the demand for credit. Importantly, the central bank is committed to tightening the monetary stance if inflation pressures intensify or if the NIR target comes under pressure, as well as to maintain the policy of not extending credit to the public sector. The central bank has prepared a plan for upgrading the monetary policy framework. The plan envisages development of an interbank market and of secondary markets for central bank and government paper, improvement of the instruments for liquidity management, increasing the signaling content of the policy rate, and producing liquidity forecasts. The authorities will continue to reform financial regulations and the financial safety net. The National Commission of Banks and Insurers (CNBS) has initiated a review of the regulatory framework with a view to enhance transparency, information sharing, and protection of users of financial services. Work is also underway to strengthen the risk-based supervision framework for savings and loans cooperatives, and the relevant regulations are expected to be issued by February 2012. In consultation with the bank, the authorities are revising the recently issued norms for loan classification and reserve coverage to allow more flexibility in order not to discourage banks activities in microcredit and housing. Finally, the CNBS is making progress in addressing problems in two small banks. One bank was bought in late 2010 by a large credit cooperative and a special unit is being set up to recover nonperforming loans in order to repay the contribution of the deposit insurance fund. For the other small public bank, the authorities are currently assessing its financial condition and, once this is finalized, will develop a plan to restore its viability.

External Finances: Private external debt to increase as external liquidity is improving

Current account deficit is widening in 2011 due to more imports at higher prices and increasing oil prices. External liquidity ratio improved to a healthy level, higher than expected thanks to private capital inflows. External debt increased in all sectors (financial, public and private) thanks to structural improvements and increased confidence of external creditors.

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Current account deficit is widening in 2011 due to higher imports at higher prices and increasing oil prices. The current account deficit as a % of GDP is still at a slightly low level in 2010 (-6.3), has altered from the previews level of 2009 (-3.7), but is on the recovering path from a much lower value in 2008 (-13.8). Predictions for 2011 are at even lower levels 7.0 (IMF), due mainly to the export partner concentration: very strong relationship with the United States and to increasing prices of import consumables like oil and food. Exports of processed products were up, especially knitwear, clothing, and vehicle instrument panels. The United States continued to be the main destination for processed products from Honduras (84.5%). Imports, which also grew by 17.1% in 2010, are amounting to US$ 8.549 billion, as against a drop of 30.2% in 2009. This stems from higher fuel and food prices, among other factors. Fuels and lubricants represent 20.8% of total imports and grew by 32.6%.

Honduras External indicators

Year End (% of nominal GDP) Current account balance Trade balance Total external debt Current account receipts (% of CARs) Current account balance Net external investment payments Net external interest payments Net external liabilities Total external debt Usable reserves/current account payment (months) Gross financing needs/current account receipts plus reserves (%) 2005 -3.12 -17.69 65.81 79.82 -3.70 5.90 0.10 52.80 65.80 2.60 98.10 2006 -3.70 -21.23 45.89 79.41 -6.00 6.30 -0.70 29.30 45.90 2.80 104.40 2007 -9.03 -27.44 33.60 76.79 -13.3 6.50 -1.20 25.80 33.60 2.70 104.70 2008 -12.83 -33.00 33.20 73.71 .19.5 3.50 -0.40 37.00 33.20 2.20 102.10 2009 -3.64 -18.51 39.39 59.90 -6.07 3.90 0.16 54.90 39.39 2.82 90.23 2010 -6.20 -20.24 39.38 62.20 -9.97 3.60 0.31 65.30 39.39 3.10 90.58 2011e -7.00 -19.84 40.40 60.20 -12.7 3.50 -0.40 70.60 50.40 3.10 90.30

External liquidity ratio improved to a healthy level, at higher than expected levels thanks to private capital inflows. The country's external liquidity, calculated by the ratio of Gross external financing needs to the sum of current account receipts plus usable official foreign exchange reserves has shown improvement from the previews periods after 2008, demonstrating an increasingly healthy liquidity status. Comparable countries, for example Jamaica, have a substantially lower liquidity level. We expect this figure to increase in the next periods, after IMFs prediction of increasing reserves. External debt has increased in all sectors thanks to structural improvements and increased confidence of external creditors. There has been a substantial increase in the Financial Account (from a 314M$ in 2009 to 1,247M$ in 2010, mainly driven by increasing General Government Net Long-Term Borrowing (from a 32,1M$ level in 2009 to 380M$ 2010) and an increase in foreign investment in the Maquila sector, where net liabilities to external investors have risen from -9,9 M$ to 191,1 M$. The financial sector has also stabilized, with net Financial Sector borrowing increasing from -282,8 M$ to 29,4 M$. Private capital inflows -and especially FDI- started to recover in 2010 and continued rising in 2011. FDI was estimated at 831 M$ in 2011 (compared to 799 M$). Net International Reserves were estimated at 2949 million US$, compared to 2719 M$ in 2010. We expect this increase to continue in the future, as policies have been implemented to improve the investment regulation.
Ratings Detail (as of January 24, 2011) Honduras (Republic of) Sovereign Credit Rating Foreign Currency Local Currency Population

B/Stable/B B/Stable/B 8.1 million (2011 estimate)

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Per Capita GDP Current Government Election Schedule

$ 2, 026 (2010) President - Porfirio Lobo Vice President - Maria Antonieta Guillen Last - November 2009 Next - November 2013

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