Sept. 5 (Bloomberg) -- Honduras is overcoming investor fears of drug violence and needs to rein in a widening budget deficit to sustain economic growth four years after a coup, central bank President Maria Elena Mondragon said.
The next government should eliminate tax exemptions to increase revenue and control public spending following November presidential elections, Mondragon said in an interview yesterday in Tegucigalpa. The budget deficit is projected to reach 6 percent of gross domestic product this year from an initial forecast of 4.5 percent, she said.
“The fiscal deficit continues to be a big challenge,” Mondragon, 56, said in her office overlooking the national soccer stadium. “There should be a simpler tax policy to be able to control evasion and improve tax collection.”
Growth in Central America’s biggest coffee producer has averaged 3.6 percent per year since the 2009 coup that sent then President Manuel Zelaya into exile and caused Honduras’s $18 billion economy to contract 2.4 percent. His successor, Porfirio Lobo, boosted public sector debt to 52 billion lempiras ($2.5 billion) from 21 billion lempiras in 2009 to help stabilize the economy as investors fled.
Yet a homicide rate of 86 for every 100,000 citizens, one of the highest in the world and almost 20 times the U.S. level, costs the country about 10 percent of GDP, the World Bank estimates. About 87 percent of all cocaine smuggling flights departing South America land in Honduras, the U.S. State Department said in a March report.
Drug-related violence “is undoubtedly a problem and we recognize that it is a problem in the country,” Mondragon said. “It isn’t a problem exclusive to Honduras, but unfortunately it has been perceived as such due to negative publicity.”
Standard & Poor’s lowered Honduras’s credit rating last month to B from B+, citing a rising debt burden and a limited ability to fund deficit spending. The B rating, five levels below investment grade, puts Honduras in the same category as Ghana and Venezuela.
Honduras’s dollar bonds lost 16 percent since being sold in March, double the 8 percent decline for emerging market debt over the same period, according to data compiled by Bloomberg and JPMorgan Chase & Co. The yield on the bonds was little changed at 10.73 percent at 12:32 p.m. local time.
“It’s just not sustainable for an economy to be growing on the back of public sector investment,” said Carl Ross, managing director at brokerage firm Oppenheimer & Co. in Atlanta. “It needs to be replaced by private sector investment.”
Foreign direct investment since the 2009 turmoil will more than double to about $1.1 billion this year, lagging behind Costa Rica, Guatemala and Panama, which is undertaking a $5.25 billion expansion of the Panama Canal, according to United Nations data.
Under Lobo, Honduras signed a $624 million contract with Manila-based International Container Terminal Services Inc. to improve port facilities and generate as many as 10,000 new jobs. It also signed an accord with BG Group Plc to search for oil off the Caribbean coast, the first offshore exploration effort in Honduras in 30 years.
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. Consumer prices rose 5.6 percent in July from a year earlier, up from 5.3 percent in June, led by increasing health costs, and may accelerate to 5.8 percent, Mondragon said.
The currency, the lempira, has weakened 2.4 percent against the dollar this year to 20.39. The lempira fluctuates within a set band and is fairly valued, Mondragon said. The government isn’t considering joining El Salvador and Panama in abandoning the currency for the dollar, she added.
Mondragon, who received a master’s degree from the University of Memphis in Tennessee, was the country’s second female central bank chief and is one of about 20 in the world, including governors in Russia, Argentina and South Korea. She said she picked up a taste for barbecued ribs and blues music while in Memphis. The daughter of an economist, Mondragon started her career at the bank in 1976, while still an undergraduate.
“As a child, I never imagined I would study economics,” Mondragon, a mother of three who was the first head of the Central American Monetary Council, said. “I feel very honored and proud to be in my position.”
With her term set to expire in January, Mondragon said the next government will face a “tough job” in improving the fiscal situation. Analysts agree.
“Addressing the fiscal deficit is an absolute must for the incoming president, no matter who it is and the options are limited and the situation is going to be very difficult,” said Jefferson Finch, who tracks Honduras at the Eurasia Group in New York. “It’s going to be a very challenging fiscal situation.”
To contact the reporter on this story: Adam Williams in Tegucigalpa, Honduras at firstname.lastname@example.org