Capital Markets and Portfolio Investment

There are no government restrictions on foreign investors’ access to local credit markets, though the local banking system generally extends only limited amounts of credit. Investors should not consider local banks a significant capital resource for new foreign ventures unless they use specific business development credit lines made available by bilateral or multilateral financial institutions such as the Central American Bank for Economic Integration.

A limited number of credit instruments are available in the local market. The only security exchange operating in the country is the Central American Securities Exchange (BCV) in Tegucigalpa, but investors should exercise caution before buying securities listed on it. Supervised by the National Banking and Insurance Commission (CNBS), the BCV theoretically offers instruments to trade bankers’ acceptances, repurchase agreements, short-term promissory notes, Honduran government private debt conversion bonds, and land reform repayment bonds. In practice, however, the BCV is almost entirely composed of short- and medium-term government securities and no formal secondary market for these bonds exists.

A few banks have placed fixed rate and floating rate notes extended to three years in maturity, but outside of the banks’ issuances, the private sector does not sell debt or corporate stock on the exchange. Any private business is eligible to trade its financial instruments on the BCV, and firms that participate are subject to a rigorous screening process, including public disclosure and ratings by a recognized rating agency. Historically, traded firms generally have had economic ties to the different business and financial groups represented as shareholders of the exchange. As a result, risk management practices are lax and public confidence in the institution is limited.

Money and Banking System

The Honduran financial system is comprised of commercial banks, state-owned banks, savings and loans institutions, and financial companies. There are currently 15 commercial banks operating in Honduras. There is no offshore banking or homegrown blockchain technologies in Honduras.

Foreign Exchange and Remittances

Foreign Exchange

Article 10.8 of CAFTA-DR ensures the free transfer of funds related to a covered investment. Local financial institutions freely exchange U.S. dollars and other foreign currencies. Foreigners may open bank accounts with a valid passport. For deposits exceeding the maximum deposits specified for different account types (corporate or small-medium enterprises), banks require documentation verifying the fund’s origin.

The Investment Law guarantees foreign investors access to foreign currency needed to transfer funds associated with their investments in Honduras, including:

• Imports of goods and services necessary to operate
• Payment of royalty fees, rents, annuities, and technical assistance

Remittance of dividends and capital repatriation

The Central Bank of Honduras  instituted a crawling peg in 2011 that allows the lempira to fluctuate against the U.S. dollar by seven percent per year. The Central Bank mandates any daily price of the crawling peg be no greater than 100.075 percent of the average for the prior seven daily auctions. These restrictions limit devaluation to a maximum of 4.8 percent annually. As of mid-July 2020, the exchange rate is 24.93 lempira to the U.S. dollar.

The Central Bank uses an auction system to allocate of foreign exchange based on the following regulations:

• The Central Bank sets base prices every five auctions according to the differential between the domestic inflation rate and the inflation rate of Honduras’ main commercial partners.
• The Central Bank’s Board of Directors determines the procedure to set the base.
• The Board of Directors establishes the exchange commission and the exchange agencies in their foreign exchange transactions.
• Individuals and corporate bodies can participate in the auction system for dollar purchases, either by themselves or through an exchange agency. The offers can be no less than $10,000, no more than $300,000 for individuals, and no more than $1.2 million for corporations.

To date, the U.S. Embassy in Honduras has not received complaints from individuals with regard to converting or transferring funds associated with investments.

Remittance Policies

The Investment Law guarantees investors the right to remit their investment returns and, if they liquidate their investments, to remit the principal capital invested. Foreign investors that choose to remit their investment proceeds from Honduras do so through foreign exchange transactions at Honduran banks or foreign banks operating in Honduras. These exchange transactions are subject to the same foreign exchange process and regulation as other transactions.

Sovereign Wealth Funds

Honduras does not have a sovereign wealth fund.

Most state-owned enterprises are in telecommunications, electricity, water utilities, and commercial ports. The main state-owned Honduran telephone company, Hondutel, has private contracts with eight foreign and domestic carriers. The Government of Honduras has yet to establish a legal framework for foreign companies to obtain licenses and concessions to provide long distance and international calling. As a result, investors remain unsure if they can become fully independent telecommunication service providers.

The state-owned National Electric Energy Company (ENEE) is the single greatest contributor to the country’s fiscal deficit.  According to the IMF, in 2019, ENEE’s total losses reached 1.2 percent of GDP, while its $3.2 billion debt level was almost ten percent of GDP. Energy reform legislation, passed in 2014, called for the separation of ENEE into three independent units for distribution, transmission, and generation. But according to a World Bank study, lack of political will and vested interests stalled efforts to unbundle ENEE. The electrical sector faces serious structural problems, including high electricity system losses, a transmission system in need of upgrades, vulnerability of generation costs to volatile international oil prices, an electricity tariff that does not reflect actual costs, and the high costs of long-term power purchase agreements (PPAs).

ENEE controls most hydroelectric generation, which accounts for about one-third of total capacity. Approximately 50 percent of all power generation comes from diesel and bunker fuel oil plants and the remaining 20 percent comes from wind, solar, and biomass. Following a push for renewable energy in 2014, the government approved more than 80 contracts between ENEE and private producers for almost 2000 megawatts of new clean energy, although many of these projects are unlikely to materialize. In 2018, the government cancelled an incentive program offering a $0.03 per kilowatt-hour for renewable power due to high costs. Many businesses have installed on-site power generation systems to supplement or substitute for power from ENEE due to high costs and uncertainty about the semi-privatization process.

Honduran law grants municipalities the right to manage water distribution and to grant concessions to private enterprises. Major cities with public-private concessions include San Pedro Sula, Puerto Cortes, and Choloma. The state water authority National Autonomous Aqueduct and Sewer Service (SANAA) manages Tegucigalpa’s water distribution. The Honduran National Port Company (ENP) is the state-owned organization that oversees management of the country’s government-operated maritime ports, including Puerto Cortes, La Ceiba, Puerto Castilla, and San Lorenzo. Private companies Central American Port Operators and Maritime Ports of Honduras have 30-year concessions to operate container and bulk shipping facilities at Honduras’ principal port Puerto Cortes.

Privatization Program

The Honduran government is not actively seeking to privatize state-owned enterprises though it is seeking to increase private sector participation in the electric system. As part of the International Monetary Fund (IMF) December 2014 Stand-By Arrangement (SBA), concluded in December 2017, the Honduran government initiated reform of the state-owned energy company ENEE and created an independent Electric Energy Regulatory Commission. Under a new IMF SBA signed in July 2019, the Honduran government is preparing a plan to separate ENEE. While the structure of the new entity is unclear, under the previous SBA, Honduras was supposed to reform ENEE by creating a holding company with four components: a distribution company with an operations subcontractor supported by a trust agreement; a concession for the transmission network; a not-for-profit organization with public-private ownership to control the overall electrical system; and a privatized generation company that owns all ENEE generating facilities. These reforms were not realized, with the exception of a 2016 sub-contract by a Colombian-Honduran consortium to manage energy distribution.

Despite international pressure, President Hernandez allowed the four-year mandate of the OAS Mission Against Corruption and Impunity in Honduras (MACCIH) that expired in January 2020.  MACCIH began work in 2015 following widespread anti-corruption protests in the wake of a scandal involving Honduras’ social security fund. During its tenure, MACCIH  worked with the Public Ministry to bring cases against current and former public officials and to advance justice reform, including by presenting draft legislation for a Law of Effective Collaboration (similar to plea-bargaining law) to the Honduran authorities which remains under consideration in Congress.  MACCIH and the Public Ministry created a special anti-corruption unit (UFECIC) to pursue large-scale corruption cases which continues to exist despite the end of MACCIH’s mandate. Its replacement, UFERCO, operates within the Public Ministry with fewer resources and personnel.

U.S. businesses and citizens report corruption in the public sector and the judiciary is a significant constraint to investment in Honduras.  Historically, corruption has been pervasive in government procurement, issuance of government permits, customs, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system.  Civil society groups are critical of recent legislation granting qualified immunity to government officials and a law that gives the highly politicized government audit agency a first look at corruption cases.  In 2018, Congress passed a revision of the 1984 penal code that lowered penalties for some corruption offenses and critics argue contributes to a culture of impunity. The new code went into effect in June 2020.  Since 2012, the Honduran government has signed agreements with Transparency International, the Construction Sector Transparency Initiative, and the Extractive Industry Transparency Initiative.  Honduras is also receiving support from the Millennium Challenge Corporation in the development of an e-procurement platform and public procurement auditing.

The United States Foreign Corrupt Practices Act (FCPA) deems it unlawful for a U.S. person, and certain foreign issuers of securities to make corrupt payments to foreign public officials for the purpose of obtaining or retaining business for directing business to any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more information, see the FCPA Lay-Person’s Guide: http://www.justice.gov/criminal/fraud/ .

Honduras is a member of the UN Anticorruption Convention, which entered into force on December 14, 2005. The UN Convention is the first global comprehensive international anti corruption agreement and requires countries to establish criminal penalties for a wide range of acts of corruption. The UN Convention covers a broad range of issues from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The UN Convention contains transnational business bribery provisions that are functionally similar to those in the Organization for Economic Cooperation and Development Anti-Bribery Convention.

Honduras is a member of the Inter-American Convention against Corruption (OAS Convention), which entered into force in March 1997. The OAS Convention establishes a set of preventive measures against corruption; provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment; and contains a series of provisions to strengthen the cooperation between its states parties in areas such as mutual legal assistance and technical cooperation.

Resources to Report Corruption

Companies that face corruption-related challenges in Honduras may contact the following organizations to request assistance.

Public Ministry
Eva Nazar
Coordinator for External Cooperation
cooperacionexterna.mp@gmail.com
The Public Ministry is the Honduran government agency responsible for criminal prosecutions, including corruption cases.

Association for a More Just Society (ASJ)
Yahayra Yohana Velasquez Duce
Director of Transparency
Residencial El Trapiche, 2da etapa Bloque B, Casa #25 +504-2235-2291
info@asjhonduras.com
ASJ is a nongovernmental Honduran organization that works to reduce corruption and increase transparency. It is an affiliate of Transparency International.

National Anti-Corruption Council (CNA)
Alejandra Ferrera
Executive Board Assistant
Colonia San Carlos, calle Republica de Mexico
504-2221-1181
aferrera@cna.hn
CNA is a Honduran civil society organization comprised of Honduran business groups, labor groups, religious organizations, and human rights groups.

U.S. Embassy Tegucigalpa, Honduras
Attention: Economic Section
Avenida La Paz
Tegucigalpa M.D.C., Honduras
Telephone Numbers: (504) 2236-9320, 2238-5114
Fax Number: (504) 2236-9037

Companies can also report corruption through the Department of Commerce Trade Compliance Center Report a Trade Barrier website: http://tcc.export.gov/Report_a_Barrier/index.asp .

Despite recent progress on improving security in Honduras, crime and violence rates remain high and add cost and constraint to investments. Continued low-level protests and uncertainty pose a challenge to ongoing stability. Tensions could increase significantly in advance of the 2021 presidential election.

U.S. citizens should be aware that large public gatherings might become unruly or violent quickly. For more information, consult the Department of State’s latest travel warning: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Honduras.html.

Honduras has a large supply of low-skilled labor and faces a limited supply of skilled workers in all technological fields, including medical and high technology industries.  The 2019 unemployment rate in Honduras was 5.7 percent and nearly half of Hondurans are underemployed.   Honduran law lays out a multitier system for calculating minimum wage, based on the employment sector and size of the company.  The Secretariat of Labor and Social Security (STSS), private sector, and labor confederations renegotiate specific starting levels on a multi-annual basis.

The Honduran Labor Law prescribes a maximum eight-hour workday, 44-hour workweek, and at least one 24-hour rest period per week.  The Labor Code provides for paid national holidays and annual leave.  Most employment sectors also receive two months bonuses as part of the base salary, known as the 13th and 14th month salary, issued in mid-December and mid-June, respectively.  New hires receive a prorated amount based on time-in-service during their first year of employment.  The Labor Code requires companies to pay one month’s salary to employees terminated without cause.  Companies do not owe severance to employees who resign or are terminated for cause.  Employees terminated for cause can contest the basis for the termination in court to claim severance.  There are no government-provided unemployment benefits in Honduras, although unemployed individuals may have access to their accumulated pension funds.

Many employers hire employees on a temporary basis under the Temporary Employment Law.  In some cases, employers will renew employees under short-term contracts, sometimes over a period of years.  Labor groups allege that some employers use temporary contracts to avoid responsibility for severance, provide employee benefits, and prevent union formation.  The STSS is responsible for registering collective bargaining agreements.  The Labor Code prohibits the employment of persons under the age of 14, but grants special permission for minors between ages 16 and 18 to work evenings as long as it does not affect schooling.  The majority of the violations of the labor-related provisions of the children’s code occur in the agricultural sector and informal economy.

While Honduran labor law closely mirrors International Labor Organization standards, the U.S. Department of Labor has raised serious concerns regarding the effective enforcement of Honduran labor laws.  Labor organizations allege the STSS fails to enforce labor laws, including the right to form unions, reinstating employees unjustly fired for union activities, child labor, minimum wages, hours of work, and occupational safety and health.  A U.S. Department of Labor report provided recommendations to address labor concerns in Honduras and called for a monitoring and action plan (MAP) to improve labor law enforcement in Honduras.  In October 2018, the U.S. Department of Labor released a MAP assessment update noting significant progress toward addressing areas of concern and extending the MAP’s mandate.

The U.S. Department of State Country Report on Human Rights Practices describes a number of labor and human rights compliance issues that affect the Honduran labor market (https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/honduras/).  These include employers’ anti-union discrimination, refusal to engage in collective bargaining, threats against union leaders, employer control of unions, and blacklisting of employees who support unions.

The U.S. International Development Finance Corporation provides loan guarantees and direct loans for investments in priority areas: energy, healthcare, critical infrastructure, technology, small and medium enterprises and women-owned businesses.  DFC maintains direct links to USAID and development impact aims, with investments prioritizing low and low-middle income countries and a USAID employee seconded to the DFC as Chief Development Officer. With a global investment cap at $60 billion (increased from OPIC’s previous cap of $29 billion) the DFC is expected to invest aggressively in Honduras, facilitated by numerous agencies at post.  Loans range from $1 million to $250 million with loan guarantees mobilizing potentially more.  The DFC also offers political risk insurance, technical assistance for financial institutions, and in the coming year the possibility of local currency lending and limited equity authority.  The Export-Import Bank of the U.S. also provides project financing in Honduras.  Honduras is a party to the World Bank’s Multilateral Investment Guarantee Agency.