A 150 percent increase in public debt has become a burden for Honduras’s economy that can be overcome with fresh aid from China, more mining revenue and oil exploration, President Porfirio Lobo said.
Lobo, elected in the wake of a 2009 coup, boosted local debt to 52 billion lempiras ($2.6 billion) in June from 21 billion lempiras before he took office. Central America’s biggest coffee producer had little choice after much of Latin America cut relations and the economy contracted, Lobo said in an interview yesterday from his home near Tegucigalpa.
“Domestic debt levels are high and growing,” said Lobo, a 65-year-old former rancher. “When we entered the government, the economy had contracted 2.4 percent due to the political and economic crisis. We were completely isolated.”
Investment from China is critical to Honduras, Lobo said. The government will this month sign an accord with the Industrial & Commercial Bank of China for a $295 million loan to fund the second stage of the Patuca 3 hydroelectric project.
In June, Honduras announced plans to work with a Chinese company on an Atlantic-to-Pacific railroad to boost trade across the Central American isthmus. There is a “huge” opportunity to boost exports to China, Lobo said.
“Chinese financing is very important for us,” he said in his living room, near a photo of him meeting Pope Benedict XVI. “It is historic for us because we do not have diplomatic relations with China.”
Lobo says he wants to revoke and re-issue as many as 280 unused mining concessions to boost production and increase royalties. Honduras should also pare back tax exemptions that total about 22 billion lempiras to broaden the government’s revenue stream, he said.
“There are lots of tax exemptions in the country,” said Sarah Glendon, an analyst at Moody’s Investors Service in New York. Exemptions total about 6 percent of gross domestic product and the country has “very weak fiscal oversight,” she said.
The country’s mining industry includes operations by Vancouver-based Aura Minerals Inc. (ORA) and zinc miner Nyrstar (NYR), based in Belgium. BG Group Plc approved in April an agreement to search for oil off Honduras’s Caribbean coast, the first offshore exploration effort in Honduras in 30 years.
After selling $500 million in bonds in March, the government still plans to sell another $250 million when rates fall, Lobo said, without giving a specific target. The yield on the country’s notes due in 2024 has climbed to 10.7 percent from 7.5 percent as investors sell emerging market debt on bets the U.S. Federal Reserve will slow its stimulus efforts, causing interest rates to rise.
Honduras’s dollar bonds lost 18 percent since being sold in March, more than double the 8.8 percent decline for emerging market debt over the same period, according to data compiled by Bloomberg and JPMorgan Chase & Co.
Barclays Plc’s withdrew from the March bond sale, prompting Honduras to amend the prospectus. The country said it faced a $205 million lawsuit tied to a government-owned logging company, according to the revised document sent to investors and obtained by Bloomberg News.
Citing problems with enforcing contracts and barriers to starting a business, Honduras was ranked 125th out of 185 economies in the World Bank’s “Ease of Doing Business” report this year, four spots higher than 2012.
“I would think if you are a manufacturing company looking for a decent place to move your factory in Central America, I don’t see Honduras being at the top of your list,” said Carl Ross, a managing director at Oppenheimer & Co. in Atlanta.
With elections in November, the next government will have to tackle a homicide rate the World Bank says costs about 10 percent of GDP. Reducing violence will boost the economy and should be one of the next government’s top priority, Lobo said.
Central bank President Maria Elena Mondragon said in an interview Sept. 4 that Honduras is overcoming investor fears of drug violence and needs to rein in a widening budget deficit to sustain economic growth.
Economic growth is forecast to slow to 3 percent this year from 3.3 percent last year, due in part to diminished coffee exports stemming from leaf rust disease, the International Monetary Fund said last month.
While Lobo is prohibited from running for re-election, among the eight contenders for president is Xiomara Castro de Zelaya, the wife of the former leader who was overthrown in 2009.
Castro, 53, has criticized the country’s two leading political parties for failing to resolve Honduras’s crime and drug trafficking problems.
“Bipartisanship has converted the country into a stage for drug-traffickers and militiamen where justice is bought and sold,” Castro said in a June 16 speech. “It has made Honduras into the most violent country in the world.”
Lobo said enthusiasm for the general election is a sign that the country is on the right track and that Hondurans don’t want a return to the uncertainty of 2009.
“It’s the first time that we have this many candidates participating,” Lobo said. “For me, that is a mission accomplished considering that democracy has overcome the previous political difficulties.”
To contact the reporter on this story: Adam Williams in Tegucigalpa, Honduras at email@example.com