Honduras: Leftist President Castro’s inauguration ends 12-year right-wing rule, but implementing reforms will be difficult

Event

President Xiomara Castro of the leftist party ‘Libertad y Refundación (Libre)’ took office on 27 January. She won the November 2021 elections comfortably, which marked the end of the 12-year rule by Honduras’ right-wing National Party. It is worth noting that the political transfer has been peaceful. This is a huge difference from the disputed 2017 presidential elections that ended in widespread protests that were violently repressed. Nevertheless, Castro’s presidential term will not be a walk in the park as her party already splintered in mid-January, following an internal conflict about the leadership of the National Congress. Politicians from her party allied with the opposition to vote for one of its members to head the Congress, breaking the agreement to appoint a lawmaker of Castro’s choosing. The dispute was resolved in early February but in the meantime, the president lacked a majority in Congress, which temporarily led to political gridlock.

Impact

The first female leader of Honduras and only female leader in Central America will have difficulties to deliver on her reform agenda. Despite the dispute being resolved in a couple of weeks, the early splintering of her party shows that dissidents might cause problems in the future as well. Furthermore, for some policy changes she will need the support of the right-wing opposition.

President Castro’s reform agenda is ambitious. A remarkable campaign pledge is her plan to repeal the Law on Zones for Employment and Economic Development (ZEDEs). These zones are governed by a special regime that allows investors to establish their own fiscal policies, security forces and judicial systems. The cancellation is a priority for the president but is likely to be difficult to implement, as many companies have already made substantial investments. Nevertheless, in general, the risk of contract changes, project delays and cancelations is on the rise in this Central American country. The president has already vowed to block new mining concessions and cancel private electricity generation contracts. Furthermore, she is more willing to change policies and contracts when facing community unrest or environmental concerns.

Other noteworthy campaign pledges include the tackling of corruption, poverty and crime. These reforms are sensitive issues for the population, especially as the Covid-19 pandemic has led to a huge recession of 9% in 2020, which in turn raised poverty, inequality and crime. In this regard, Honduras’ economic recovery (real GDP growth is forecasted at 4.4% in 2022 after a partial recovery of 4.7% in 2021) will be key. Moreover, if the president fails to tackle these issues, it might trigger social unrest in the coming year.

Lastly, it is likely that President Castro will try to negotiate an IMF programme – besides other multilateral lending – in order to secure lending for her policy reforms at low interest rates. A challenge for the negotiations is President Castro’s unwillingness to increase taxes while public debt stands at almost 60% of GDP at the end of 2021, which is an elevated level for this country.

Honduras’ short-term political risk rating – representing the country’s liquidity – is in category 2/7, which is a good risk category. The country has an adequate level of foreign exchange reserves while its short-term external debt is relatively low. Credendo’s MLT political risk – representing a country’s solvency – is in category 4/7, which is a moderate risk category. The biggest downside risks are potential new Covid-19 variants, a possible tightening of global financial conditions, heightened social tensions, lower-than-expected growth in the US (as Honduras is highly dependent on remittances from there) and climate change-related risks (e.g. fiercer tropical storms and droughts). The outlook for both political risk ratings is stable.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com