U.S. firms have found corruption and rule of law to be a continued constraint to successful commercial activities in Honduras. The level of corruption rose slightly as Honduras ranked 157th out of 180 countries in Transparency International’s (TI) Corruptions Perceptions Index in 2022, which ranks perceived levels of public sector corruption by experts and businesspeople. At present, Honduras and the UN are negotiating the form, function, and timing of an UN-led International Commission Against Corruption and Impunity (CICIH).
Lengthy Due Process
While open to foreign investment with limited restrictions and performance requirements, companies have experienced long waiting periods for regulatory and legislative approvals. Judicial reviews can take years or longer. Some critics argue that corruption and politicization also negatively impact the judicial process in Honduras.
Investors frequently cite the high costs of electricity and unreliable service as impediments to doing business in Honduras. Improving reliability and decreasing end-user costs within the electricity sector is a critical area for Honduras. The sector needs improvements in energy generation, transmission and distribution infrastructure, and reduction of technical and non-technical losses. A new energy law approved in May 2022 declared energy as a human right and consolidated the government’s control over the sector and reversed previous reforms that mandated the unbundling of the generation, transmission, and distribution functions of the state-owned electric utility. The energy utility forced renegotiations of contracts including lowering the cost of energy. The law states that if these negotiations fail, the state may purchase the electricity generating assets at a “just price” determined by the government. The law also sharply curtailed the ability of private firms to purchase electricity from private generators. Additionally, it requires that 51 percent of all projects in generation, transmission, and distribution be state-owned, sharply limiting options for private investment into the sector. Energy shortages causing blackouts are chronic problems around the country.
Low Budget Execution
In 2022, the balance of external public debt was approximately 50 percent of the country’s Gross Domestic Product, down from a peak of 52.7 percent in 2020. Despite this relatively low risk of debt distress, the government has chosen to pay down its national debt rather than reprofiling it with new bond issuances. Ironically, reforms to the public procurement system have led to historically low budget execution rates, around 42 percent, leaving the Honduran government with more than $1 billion unspent in its Treasury Single Account at the end of 2022. This lack of government spending represented a missed opportunity to generate economic activity through fiscal stimulus.
Honduras’ business climate is hampered by low education levels and a weak healthcare system. A stronger focus on human capital investments by the new government would improve social outcomes and foster economic opportunities.
Large Informal Economy
An estimated 73 percent of the economically active population is engaged in the informal sector, which competes with formally registered firms for domestic market share.
Starting a Business
Although efforts are underway to streamline administrative procedures to start a new business, obtaining some licenses can still take a few months and burdensome regulatory requirements remain a challenge. Companies often cite complex tax policies as a constraint for further expansion.
Citizen security is one of the government’s highest priorities and remains a major concern in Honduras. The government declared a state of exception, suspending normal constitutional rights in late 2022. Although the homicide rate has dropped by more than half since 2011 (from 87 murders per 100,000 inhabitants to 35 in 2022-which is the lowest in the last decade), it remains high by international standards. The cost of crime and violence in Honduras is estimated to equal 6.5 percent of GDP. Violent gangs have threatened citizen security and are known for carrying out extortion rackets against businesses and communities across the country. Theft, pickpocketing, and armed robberies can occur in urban areas.
Climate Change and Natural Disasters
Honduras is highly vulnerable to extreme meteorological events. Flooding caused by normal moderate to heavy rain causes major infrastructure concerns. Severe economic and critical infrastructure damage occurred after hurricanes Eta/Iota hit Honduras in late 2020. These weather-related phenomena have affected over 4.5 million Hondurans and 68.2 percent of the productive sector, generating serious infrastructure, social, and environmental damages that still constrain growth and compromise food security. An Emergency Response and National Reconstruction and Mitigation plan is currently underway by the government of Honduras, aimed at sustainable and resilient remediation.
According to Honduran Central Bank’s data, the GDP contracted by 9.1 percent in 2020 but rebounded 12.5 percent in 2021 and is expected to have returned to pre-COVID growth levels (approximately 3.7 percent) by the end of 2023. COVID restrictions were lifted in early 2023.
Port of Cortes
Importers of bulk grains such as corn, soy, wheat, and rice that pass-through Port of Cortes report shortages of what is received versus what is offloaded. Documented losses have reached a cumulative total of $11 million USD over the past three years.
Land title procedures have been an issue leading to investment disputes involving U.S. national and corporate landowners. Resolution of disputes in court often takes years. There are claims of widespread corruption in land sales, deed filing, and dispute resolution, including claims against attorneys, real estate companies, judges, and local officials. Additionally, there are reports of members of farmers’ cooperatives blocking access or even invading property owned by U.S. entities ahead of the case being resolved in the court system. In June 2023, the Castro administration created the Commission for Agrarian Security and Access to Land to address ongoing conflicts and land rights issues in the agricultural sector. While the process to resolve land invasions remains bureaucratic and lengthy, it is an initiative focused on reducing violence and promoting increased economic opportunity for both campesinos and the private sector.
Market participants are currently faced with policy uncertainty, weak rule of law, and digital piracy