1/ Defined as the last 15 years of the projection period. For the current DSA, the long term covers the period 2021-35, whereas for the previous DSA it covered 2020-34.
plus indemnification costs that are to be decided by the courts. As part of the implementation of a medium-term fiscal framework, the authorities are developing a comprehensive framework to analyze and determine potential fiscal risks.7 It is unclear at the time this DSA was prepared if contingent obligations could arise from measures related to situation of the Grupo Continental.
10. The evolution of external debt ratios is projected to follow a similar pattern (Table A2). External debt ratios are projected to peak at 39.1 percent of GDP in 2017, from about 37.5 percent of GDP in 2014. The share of external debt in total public debt rises slowly to about two-thirds by the mid-2020s. Afterwards, it increases as total debt decreases substantially due to fiscal
consolidation. Private external debt is less than 10 percent of GDP and is expected to shrink with the ongoing de-dollarization of the economy. The ratios for the PV of public debt and public debt service remain below their indicative thresholds in the baseline scenario throughout the projection period.(Table A4). No alternative scenario leads to breaching the thresholds for the PV of debt, as it was the case in the previous DSA. The threshold for the ratio of debt service to revenue is exceeded in only one year (2020) under the most extreme shock,8 an improvement with respect to the
previous DSA. The spikes reflect the amortization of a global bond with a balloon payment, which the authorities are planning to refinance to take advantage of improved financing conditions given Honduras’ recent upgrade in sovereign ratings, as discussed above. The ratio of debt service to exports and remittances remain well below its threshold under all scenarios. External public debt rises initially but remains below the indicative threshold and starts to decline before 2020, earlier than in the previous DSA due to stronger fiscal consolidation and more favorable external conditions. The threshold for the ratio of debt service to revenue is exceeded once only (in 2020, owing to the global bond repayment, as mentioned above).9
11. A customized scenario with several negative shocks shows that external public debt indicators remain below their indicative thresholds. The scenario aims at capturing key risks and vulnerabilities in Honduras. It includes negative shocks to GDP growth, which could arise from weaker external conditions; tighter external financing conditions that could be associated with negative developments in international financial markets such as Fed tapering and EM turbulence; a weaker fiscal position from possible slippages in the implementation of adjustment measures. In this scenario, external public debt rises initially but remains below the indicative threshold and starts to decline around the mid-2020s. The ratio of debt service to exports and remittances, and to revenue also remain below its indicative threshold, while a similar customized scenario in the previous DSA presented breaches of the debt service to revenue ratio.
7 Last May, in the published Medium Term Fiscal Framework the authorities included a section on fiscal risks. 8 This standardized stress test that simulates a 30 percent depreciation of the currency may overstate risks in a
country like Honduras with a longstanding stable US dollar exchange rate whose external debt is denominated primarily in US dollars. Under this same scenario, the probability of external debt distress breaches temporarily the corresponding thresholds in the case of the PV of public debt and in the case of the ratio of debt service to revenue.
9 In the last three years, Remittances were around 18 percent of GDP—still slightly below pre-global crisis levels but
expected to continue to recover over the next few years—and close to 40 percent of exports of goods and services. Figure A2 shows that the same results hold after the inclusion of remittances.
D. Conclusion
12. Despite improvements on public and external debt indicators and strong program implementation we have decided to maintain Honduras risk of debt distress as moderate. The improvement in debt indicators reflect the strongermacroeconomic policies underpinning the IMF- supported program, which has been translated into substantially lower fiscal and current account deficits. This is also aided by stronger economic growth compared to the previous DSA. External public debt indicators are expected to stay below their indicative thresholds (except for the ratio of debt service to revenue under the most extreme shock), provided that the program’s fiscal
consolidation and growth targets areachieved. However, the macroeconomic consequences of the designation of some companies within the GC are difficult to fully assess at this stage. In this light, we have maintained our previous assessment of Honduras risk of debt distress as moderate. At the same time, should the program’s fiscal consolidation and growth targets are achieved an improved rating of low risk of debt distress should be considered in a future DSA.
2015 2016 2017 Long term 2/
Real GDP growth (percent)
Baseline 3.5 3.5 3.7 4.0
Customized 3.1 2.6 2.5 3.5
Average interest rate on new external debt
Baseline 3.8 3.8 3.8 3.8
Customized 4.9 4.9 4.9 4.9
Fiscal balance (% GDP)
Baseline -2.5 -2.0 -1.9 -1.0
Customized -4.5 -3.7 -3.3 -1.3