“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.”
The government lacks a strategy to attract foreign investment, says Marin, and as a result, Honduras has acquired a “bad reputation in the international market”.
While the spectre of Mitch continues to haunt the Honduran landscape, another spectre haunts its Financial regulators. This is the experience in Ecuador where systemic collapse was triggered, in part, by the collapse of a single bank. When Honduras’s Banco Corporativo collapsed last year following a discovery of fraud, the resilience of a regulatory and prudential system introduced some three years earlier was tested. It seemed to pass.
The government produced an instant safety net with a three-year depositors’ guarantee scheme. This Temporary Law for Financial Stability had the objective, said the central bank, of promoting stability in the Financial system. When the government scheme expires in October 2002, a private-sector insurance scheme will be fully Financed by local banks.
Says Asfura: “This will be the sole protection for the depositors. We are using the three years that the state programme runs to educate the public. They have to understand they have to look where they put their money.”
New strategies for economic reform and privatization are being pushed forward as the government seeks to introduce efficiency into its Financial and commercial sectors. The sale of concessions to run the country’s airports will be followed by the landmark privatization of Hondutel, the telecommunications company.
Privatizations of the electricity supply industry and the ports are also on the agenda.
Market structures are also being modernized and the Central Bank of Honduras has said it plans to introduce an electronic, integrated clearing system to make payments more efficient.
Local bankers hope this will be the cue for the creation of an interbank foreign-exchange market. Laws creating markets in stocks, insurance and reinsurance and a provision for the creation of private pension funds are also under consideration as the authorities seek to develop the Financial sector.
Banks are excluded from trading or retaining foreign exchange on their own books and the amount that can be withdrawn from the central bank in a single instalment is limited to $300,000. Asfura insists the procedure works and proved its worth by the minimal capital Flight that followed the disruption following the Hurricane.
“We don’t want a bank to control our foreign exchange. We regard our reserves as sacred,” says Asfura. Reserves are expected to remain at around $1 billion, equivalent to some four months’ worth of imports.
Asfura says her inflation target is 9% for 2000, but oil prices probably will push it to 11%, the higher end of the target range. A drop to single Figures is expected for the following year.
Fiscal policy is being implemented to achieve medium-term stability “while allowing for higher spending on social programmes”. The government has planned to increase its social spending from 9% of GDP to 10% in 2000.
The economy’s revival will be assisted by a bounce-back in production of basic agricultural crops, especially shrimp and melon. This will reduce the current-account deficit from 9% expected for the year 2000 to 6% to 7% of GDP for the following two years.
The services sector – principally maquiladora (textile and cloth assembly) and tourism – represents a growing part of the economy, maquiladora growing by some 20% annually.
Expanding regional trade is now a priority.
Honduras has embarked on a process of reducing its tariff regime. By the end of 2000, the maximum tariff for consumer-ready goods will drop to 15.0% from 17%. The tariff on capital goods and prime materials imported from outside Central America is 1.0% while tariffs on semi-Finished goods remain between 5% and 10%.
That challenges remain is indisputable. In December 1999 the country took a blow when Nicaragua levied a 35% tariff on Honduran imports in retaliation for a maritime border agreement signed by Honduras and Colombia. The measure has been declared illegal by regional authorities who have ordered its immediate suspension. But Honduran producers have lost more than US$15 million as a result.
Finance minister Gabriela Nuñez de Reyes details the recovery programmeCould you describe the impact of hurricane Mitch and how you are dealing with it?
| Nuñez de Reyes: “40% of our budget goes into debt servicing” | ||||||
Before hurricane Mitch annual growth stood at 5% to 6% but exports and infrastructure have suffered a lot since. Last year we expected 3% negative growth, though the Final number was only 1.9% negative growth. So the impact of the hurricane has been controlled. In 2000 we will have a positive economic growth and the economy is now starting to recover.
We worked hard last year to reduce the pressure on the international reserves and make more room in the Fiscal programme to invest in the social sector and in the reconstruction process. So this has facilitated the management of the macro-economic indicators and this year we can expect positive growth of around 4% to 5% and we expect 5% growth next year.
Last year we went to the Consultative Group for help Financing the productive sector and reconstruction. They indicated support worth $2.7 billion for Honduras’s reconstruction process. 70% of that is being implemented now.
This is very important because we need new resources to recover and we have acquired these resources from donor countries and organizations and also some very concessional loans from the IDB and the World Bank.
Could you describe the significance of the HIPC agreement?
Around 40% of our budget goes into debt servicing and our external debt of around $4 billion represents around 80% of GDP but in terms of the Fiscal sector it represents around 300%. So we had to do something to achieve a more permanent solution for the external debt, and not only short-term relief.
This is why we had to call for rescheduling of the bilateral debt with the Paris Club. This was important but not enough because 65% of our total debt is with multilateral organizations.
The only option that we had after that was the HIPC initiative. This led to a debt sustainability analysis and to link debt relief to the real intention to invest more in the social sectors.
The debt relief we will obtain just from the HIPC initiative will represent around $900 million. It will be achieved through reducing debt servicing costs over the next ten to 15 years. That is very important for the Fiscal profile. But it will also release a lot of resources for improving education, health and housing. Some productive sectors, especially small producers and enterprises will also benefit.
Debt relief of this kind takes a lot of pressure off the international reserves. But the local productive sector will be ready to substitute for imports and we will be producing more and exporting more and repatriation of foreign exchange is growing a lot. But we need to make sure that we have more international reserves coming from the productive sector.
What are the implications for the government of joining the HIPC programme?
We have to prepare a poverty-reduction strategy. Honduras had one before HIPC but we now have more resources to Finance a different plan and we expect to have that done by March next year. The country needs still more investment and it needs to take advantage of the commercial treaties, especially those with Mexico, with the USA and with the Central American countries.
What are the main engines of growth in Honduras other than agriculture?
Our agriculture remains one of the economy’s main components but there are other sectors which are expanding, in particular tourism.
We have two new laws, approved in late December 1998, to stimulate more tourism and more mining companies to come into the country. Concessional law has been used to privatize airports and this will start in October.
So we have this framework for more opportunities for investors to come and we have many international companies coming from Spain, from Mexico and from the US making more investments.
Can you make it easier and quicker for foreign investors to set up in Honduras?
We need to simplify the procedures. We have submitted a new law to the Congress which will be discussed in the next months to make it easier for foreign and local enterprises to set up in the country. We have a new investment law that was submitted to the Congress that will reduce administration and create one office to centralize all these procedures.
What would you say is the big attraction for a foreign investor?
I think we have the experience in the maquila [textile]sector. We have good quality labour and a responsible strategy. Honduras is well-placed in terms of its distance to the US and other countries.
We have the CBI enhancements that will give us a lot of opportunities for investors. We have one of the biggest ports in the region, the biggest outside the Atlantic coast, and we have a democracy that everyone respects. We have simplified the taxation structure to make it easier.
How important is privatization to the government?
We believe the capitalization process will enable us to attract foreign savings to the country in a very efficient way.
The telecommunications company is currently going through the capitalization process. We are almost at the Final stage and we have three very important and prestigious international companies – France Telecom, Telmex and Telefonica – bidding to buy the company.
We need to capitalize the company because there is substantial demand for the main telecommunications services that is not being met due to lack of investment. Our other capitalization plans will involve ports and other services.
Are the worst effects of hurricane Mitch behind you now or are you still rebuilding?
We have many programmes that will last four years but the main infrastructure is already rebuilt, you can move around the country and you have all the public services and we don’t have any shortage of energy. The country is normal now.
Of course, there is a lot of work to do but mainly in the rural areas where there are many communities where we need to make small projects.
