Change font size:   

 
Cash management poll 2008:

Cash management poll 2008:

Results now live

Abigail Hofman:

Abigail Hofman:

I wonder if ______ is an extremely optimistic person or in a cocoon of senior management denial

weeklyFiXLiquid real estate
Skip Navigation LinksHome :: Back Issues :: Honduras rebuilds after the hurricane

September 2000

Honduras rebuilds after the hurricane


When hurricane Mitch washed away the bridges, houses and crops of Honduras two years ago, many of its banks remained open and the staff at the finance ministry came into work. The authorities wanted to give a message: business as usual. The economy survived the devastation and recovery is now under way. But Honduras had to seek help from the multilaterals and the Paris Club. And that comes at a price, reports Nick Kochan




"It was like nothing had happened," says Victoria Asfura de Diaz, the president of the central bank, recalling the calm Financial market reaction to a powerful natural disaster. "There was no run on the banks.
       
Asfura de Diaz: "We regard our reserves as sacred"
Everybody behaved properly. They had trust and confidence in the system." Brave words.
As the country has picked up the pieces and rebuilt its infrastructure, the damage to the economy and Finances of Honduras has been acknowledged. Mitch killed thousands of people, destroyed or damaged 100 bridges and wiped out some 70% of the crops. The vital coffee and banana plantations, in particular, were devastated. Banana exports were the worst hit by the hurricane with an expected $309 million-worth of exports in 1999 falling to $47 million. Exports as a whole fell back to levels not seen since 1995.
But the economy, like the people, proved resilient. The expected 3% contraction turned out a year later to be no more than a 1.9% decline. The feared upsurge in inflation was kept to a very manageable 3% increase. The country also maintained the stability of its exchange rate as a result of a $473 million net gain in international reserves. The government maintained a lower-than-expected deficit which stood at 4.1% of GDP at the end of 1999 against an expected 6.3%.
Hurricane Mitch pulled the country together in a spirit of national defiance, says Asfura.
The usually troublesome trades unions which were due a pay rise at the end of the year were persuaded to defer it, while businesses agreed to a price freeze on staples of the economy, in particular food. "Donations from the international community helped a lot but Hondurans played their part. They showed real commitment," she says.
Brenie Matute, vice president of the Fundacion para la Inversion y Desarrollo de Exportaciones (FIDE) praises the government's Financial management: "The strict Fiscal policy maintained by the Honduran government despite the pressures of the national reconstruction process kept all major macroeconomic indicators within agreed limits.
This has led to economic stability that has surpassed the government's own projections.
But 1999 has been one of the most difficult years for the Honduran economy in the last decade."
The destruction of the export trade stretched the balance of payments to the limit and Honduras has been forced to go to the multilaterals to extend its credit lines.
       
The government plan calls for social spending to increase from 9% of GDP to 10% this year
Exports fell 21% and imports rose 9% in 1999 as the country mopped up. A 0.8% current-account deficit on the balance of payments in 1998 rose to 3.2% of GDP in 1999 when the country went to the authorities cap in hand.
The present value of Honduras's external debt is $3.3 billion, of which a third is owed to the Paris Club group and 40% to the World Bank and the IDB.
An IMF Enhanced Structural Adjustment Facility (ESAF) in March 1999 offered $200 million of support over three years and patched up the balance of payments deficit until the bananas started growing again. The programme, later renamed The Poverty Reduction and Growth Facility, provided support worth $103.6 million for 1999.
In December 1999, Honduras was admitted to the Heavily Indebted Poor Countries (HIPC) initiative which will assist it with relief on external debt. The package will qualify Honduras for both IMF and IDB relief and help it negotiate its Paris Club obligations. But even before HIPC membership was confirmed, the country had won a reduction of Paris Club debt equivalent to 67% of its net present value.
The Paris Club improved the terms of debt to spread the amounts due over Five years starting in 2003. Debt relief worth some $439.2 million was obtained for the three years up to 2002.
The price for the HIPC package has been high, according to Jorge Navarro, a senior manager at the government research agency, UNAT: "[It] has evolved from being a reduction in the stock of debt to no more than an annual relief in the cost of servicing the debt. At First we thought it was a no-strings operation but now it looks very conditional. There is also an implied view about democracy which not everybody shares." Navarro also fears that limits will be placed on the country's private-sector borrowing by the HIPC concessions.
Other schemes to help Mitch-affected countries have included The Consultative Group for the Reconstruction and Transformation of Central America. This was launched in May 1999 and offered the country Financial cooperation worth more than $2.7 billion. But Asfura warns that this money is certainly not coming all at once - it may not even come at all. "This cooperation is a gradual process that depends on granting-countries' approval and programming mechanisms." The Emergency Trust Fund for Central America came to the rescue of all the region's stricken economies and has assisted with multilateral debt service payments.
       
The country has built up considerable reserves from donors but disbursement has been slower than expected, says UNAT's Navarro. "The government is being very careful not to start too many projects which they may not be able to fulfil safely." Government efforts to get honest and transparent procedures are seen by some as causing excessive paperwork and delay.
However, government officials also argue that the earliest part of a rebuilding process is also the slowest and the process will gain speed as it proceeds.
Infrastructure rebuilding increasingly will be funded by international investors as multilateral agencies will require the government to invest in the social sector, says Roger Marin Neda, a private banker.
This will require the country to make itself more attractive as a destination for foreign direct investment. FDI accounted for more than half of the inflows in 1999 but Marin argues that the government "needs to make life easier for the international investor. Investors are uncertain about the country's institutional system, such as the transparency of its judiciary."
  Page 1 of 3  Next | Single Page






Broker: What my broker has made me

Top 10 financial definitions that are funnier since the credit crunch

  1. US treasury market reaches breaking point

  2. Top 10 financial definitions that are funnier since the credit crunch

  3. Top 10 reasons to tell your boss you deserve a bonus this year

  4. Nomura’s great leap forward: Will Lehman takeover help fulfil its global ambitions?

  5. Eksportfinans turns to government for funding

Latest Issue

December 2008
Ruromoney Jobs Post a job

Home | Mobile site | Contact Us | Debt markets | Equities | Foreign exchange | Banking | Alternative Investments | Regions and Emerging markets | Polls & Awards | Structured credit | Back issues | Euromoney store | Useful links and Related events | Site Map

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions, Privacy Policy before using the site.

All material subject to strictly enforced copyright laws. © 2008 Euromoney Institutional Investor PLC.