Honduras contains all the ingredients for a thriving, prosperous economy: strategic location next to U.S. markets with a deep-water port, a rich endowment of natural resources, breathtaking tourist destinations, and hard-working people, including a significant cadre of skilled labor. Despite these advantages, per capita income in Honduras is the third lowest in all Latin America. Investors cite corruption, crime, and poor infrastructure and weak or nonexistent rule of law as the primary reasons that Honduras does not attract more of the private investment it needs to stimulate inclusive economic growth. According to the International Monetary Fund (IMF), real Honduran GDP grew by 12.5 percent in 2021, a rebound from the devastating effects in 2020 of the COVID-19 pandemic and twin hurricanes Eta and Iota. The IMF predicts the economy will grow by 3.8 percent in 2022.
The 2022 inauguration of Honduras first woman president, Xiomara Castro, marked the beginning of a new era in the country’s political economy. The participation of U.S. Vice President Harris at President Castro’s inauguration exemplified the strong U.S. commitment to Honduras. The two countries have committed to work jointly to address the root causes of migration, including by combating corruption and expanding economic opportunity. Since taking office, the Castro administration has launched initiatives to reduce corruption, improve education and public health, and create jobs.
These laudable efforts have been frustrated by fiscal challenges, including budget planning and debt management. Although the United States and international organizations including the IMF assess Honduras as low risk for debt distress, public messaging from the administration announcing a fiscal crisis roiled international bond markets, driving up the risk premium on Honduran debt. To address these budget shortfalls, the government announced it will utilize its foreign reserves to finance operations, which could put additional inflationary pressure on the economy. To help Honduras implement its social agenda without increasing its debt burden, the United States has begun a debt management technical assistance program with the Ministry of Finance.
In both public and private, the Castro administration emphasizes the need for job creation and private investment in Honduras. The government approved a new law in 2022 to facilitate the development and formalization of Micro, Small, and Medium Enterprises (MSMEs). The government’s Results-Based Governance system and other anti-corruption efforts are excellent examples of efforts to improve the investment climate. From the perspective of the private sector, however, these efforts have been overshadowed by policy decisions that have dramatically increased the uncertainty of investment returns. Chief among these was the May 2022 approval of a new energy law that threatens power generators with forced sale at a “just price” if they do not reduce their tariffs to the government’s satisfaction. The law provides no guarantee of future payment, stipulates that new energy investment must be majority state-owned, and all but eliminates private trade in energy. As a result of the new law, several private energy companies have discontinued planned projects in Honduras and are exploring investment opportunities in other countries in the region.
The Castro administration also eliminated the special economic zones known as “ZEDEs” by their initials in Spanish. The ZEDEs were broadly unpopular, and viewed by some as a vector for corruption, but their elimination raised concerns in the business community about the government’s commitment to commercial stability and the rule of law.
Another government policy contributing to uncertainty in the investment climate has been the elimination of the legal framework used by most businesses to employ per-hour workers. The law’s repeal fulfilled a Castro campaign promise, responding to criticism by labor unions that temporary work allowed companies to evade their social security obligations and exploit workers. Business representatives note, however, that many industries, including retail, tourism, and food service rely heavily on hourly labor and will be constrained by the new framework. Civil society representatives also point out that the change adversely affects women and students, who relied on hourly work to manage households and school schedules, although union leaders counter that the previous framework allowed employers to target women and young people for economic exploitation, given that their personal circumstances often do not allow them to take on full-time employment.
Many foreign investors in Honduras operate thriving enterprises. At the same time, all investors face challenges including unreliable and expensive electricity, corruption, unpredictable tax application and enforcement, high crime, low education levels, and poor infrastructure. Squatting on private land is an increasingly severe problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and strikes are additional concerns for private investors.
Despite these setbacks, over 200 American companies operate businesses in Honduras. Honduras enjoys preferential market access to the United States under CAFTA-DR, which has allowed for the development of intra-industry trade in textiles and electrical machinery, among other sectors. The proximity to the United States and established supply chain linkages means that opportunities exist to increase nearshoring sourcing to meet U.S. demand for a variety of goods. The White House “Call to Action to Deepen Investment in the Northern Triangle” is designed to coordinate increased U.S. investment in the region, including Honduras. This program, along with others, aims to support sustained and inclusive economic development in Honduras and surrounding countries.