Fiscal Position To Remain Tenuous
BMI View: After an estimated budget deficit of 6.0% of GDP in 2012, Honduras' nominal fiscal shortfalls will remain substantial in the coming quarters . Indeed, while the government anticipates a deficit of 3.5% of GDP in 2013, we forecast that the shortfall will come in at 5.0%, highlighting that increased political pressure in the run-up to the country's election will make substantial fiscal consolidation difficult .
Honduras' fiscal position will remain tenuous in the coming quarters, as the November 2013 general election stretches the country's already structurally weak fiscal accounts. As such, after a substantial estimated budget deficit of 6.0% of GDP in 2012, we forecast a shortfall of 5.0% of GDP - well above the government's projected deficit of 3.5%. Moreover, we note that recent months have been marked by severe cash flow problems for the government on the back of a sharp increase in debt servicing costs. While the administration has indicated that a planned international bond issue will ensure greater liquidity in coming quarters, we caution that rising yields may threaten the country's ability to turn over its debt.
Weak Revenues, Elevated Expenditures
After expenditure growth far outstripped revenue growth in 2012, we anticipate more of the same in 2013. While the central bank has not yet released a full breakdown of the 2012 data, data issued by the Ministry of Finance shows that through the first three quarters of 2012 expenditures grew by 11.4% year-on-year (y-o-y), far outstripping more modest 6.6% y-o-y revenue growth. This came on the back of both weaker-than-anticipated tax revenue collections (with a recovery rate of only 88.6% in Q312) and substantial increases in spending on current transfers. Moreover, despite having passed emergency spending reductions meant to go into effect in Q412, the government's preliminary deficit estimate suggests that officials largely failed to implement the cuts.
|Wages And Interest Weigh Heavy On Expenditures|
|Honduras - Breakdown Of Q313 Expenditures, %|
Going forward, with presidential and legislative elections coming up in November, we believe the government will be hard pressed to bring about fiscal consolidation in 2013. On the revenue side, we highlight that wages and salaries make up a majority of current expenditures (51.3% in the first three quarters of 2012) and more than a third of total expenditures, and in an election year it will be politically challenging to substantially reduce wages. Moreover, we highlight that one of the biggest problems facing the Honduran government is the numerous tax exemptions built into the budget, which have resulted in the government failing to collect between HNL9bn and HNL13bn according to various analyst's estimates. While the government has temporarily suspended all tax exemptions to review them, we note that in the run-up to the November elections, the current government may be unwilling to risk the political ramifications of removing the tax exemptions permanently.
Downside Risks Abound
While we are already forecasting a fairly substantial fiscal deficit in 2013, we note that the risks lie more to the downside. Specifically, the government's recently passed 2013 budget does not address the fate of six government owned firms, including Empresa Nacional de Energía Eléctrica (ENEE), the Empresa Nacional Portuaria and Empresa Hondureña de Telecomunicaciones, which combined, posted an approximately HNL8.0bn fiscal shortfall in the past year according to local newspapers. Rather, the government has specified that the companies will undergo major overhauls in the next two months, at which point their budgets will be re-examined. We remain cautious though, noting that these companies have operated at a loss for a number of years, and with a high wage bill on the back of overstaffing as well as substantial subsidy burdens weighing on their budgets rapid change will not be easy. This suggests that the government's fiscal burden could be even greater than the 5.0% of GDP we are currently forecasting.
|Debt Load Rising|
|Honduras - Composition Of Public Debt|
Finally, we believe that the country's debt burden will also continue to threaten its fiscal position. In the wake of the global financial crisis and the country's own 2009 political crisis, Honduras's total public debt has risen from 25% of GDP in 2009 to 34% as of Q312. Moreover, while the country's debt load is still relatively modest compared to other regional economies, the maturity of its internal debt remains relatively short-dated. In the coming months, the government plans to issue up to US$750mn in external debt, hoping to take advantage of record low borrowing costs for frontier markets. However, we caution that yields could start to rise as investors begin to move from bonds to equities in an environment of stronger global growth, suggesting the government could struggle to turn over its debt.