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Rating Action:

Moody's affirms Honduras' B1 ratings; maintains stable outlook

12 Jun 2019

New York, June 12, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Honduras' B1 long-term issuer and B1 senior unsecured bond ratings. The outlook remains stable.

The rating affirmation at B1 balances:

1. A comparatively strong fiscal framework that has stabilized debt at levels lower than rated peers'

2. Rating constraints stemming from weak institutions, domestic political risk and comparatively low wealth levels

Honduras' long-term foreign-currency bond ceiling remains unchanged at Ba2. The foreign-currency bank deposit ceiling remains at B2, while the local-currency bond and bank deposit ceilings remain at Ba2. The short-term foreign-currency bond and bank deposit ceilings remain unchanged at NP.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION AT B1

FIRST DRIVER: FISCAL FRAMEWORK THAT HAS STABILIZED DEBT LEVELS

On 6 May, the government of Honduras and the International Monetary Fund (IMF) reached a staff-level agreement on a precautionary Stand-By Arrangement and Standby Credit Facility program. The agreement with the IMF will further support the fiscal consolidation efforts in place since 2014 and will likely improve the financial position of the public electricity company.

As a result of fiscal consolidation efforts, Moody's expects Honduras' general government to post modest fiscal surpluses averaging 0.2% of GDP in 2019 and 2020, compared to fiscal deficits averaging 2% of GDP in 2013-2017. Improvements in the fiscal balance are a result of both higher revenue intake and lower expenditures. A new streamlined tax agency has enabled the government to increase its revenue intake by 3% of GDP since 2013 -- a notable accomplishment considering that most Central American sovereigns have been unsuccessful in their efforts to increase their tax intake.

Honduras' fiscal balance compares favorably to the -2.5% of GDP median for B1-rated sovereigns (2019), and has been sufficient to stabilize general government debt at around 41% of GDP, lower than the 52% of GDP median for similarly rated sovereigns. Debt as a percentage of government revenue, which the rating agency projects will reach 152% this year, also compares favorably to the 229% median for B1-rated peers. Because Moody's expects the government debt burden to remain relatively stable over the next two to three years, only fiscal consolidation measures beyond what is currently planned would allow for debt ratios to fall in the coming years.

SECOND DRIVER: CONSTRAINTS ON THE RATING STEM FROM WEAK INSTITUTIONS, DOMESTIC POLITICAL RISK AND LOW WEALTH LEVELS

Honduras' rating is constrained by a weak institutional framework, evidenced by the country's low rankings in the Worldwide Governance Indicator scores. Honduras scores in the 10th percentile of all rated sovereigns in terms of both government effectiveness and the rule of law. Domestic political risk is also a relevant factor, as evidenced by the administration's decision to backtrack on education and health reforms that were approved last year after protests against government policies.

The rating is also constrained by the small size of the economy, its limited degree of diversification given high dependence on maquila- and agriculture-based activities, and a low level of overall economic development. Honduras' nominal GDP, which Moody's estimates at $25 billion in 2019, is less than half the $52 billion median for B1-rated sovereigns. GDP per capita on PPP terms in 2018 (latest available data) reached $5,212, compared to the $9,804 B1 median. The income gap will likely increase over time as Honduras is growing slower than similarly rated sovereigns, with an average annual real GDP growth of 3.4% for the next three years compared with a 4.2% average for B1 peers.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that medium-term growth prospects and the government's commitment to prudent fiscal and monetary policies will maintain debt ratios at close to current levels, despite pressures arising from high poverty levels and relatively weak institutions.

WHAT COULD CHANGE THE RATING UP

Faster and sustained GDP growth coupled with continued fiscal discipline that leads to declining government debt ratios could generate upward pressure on the credit profile.

WHAT COULD CHANGE THE RATING DOWN

Conversely, downward pressure could emerge on Honduras' credit profile if future policy behavior is not consistent with recently created institutional arrangements, preventing additional progress on fiscal consolidation and stalling the positive trends observed in recent years.

GDP per capita (PPP basis, US$): 5,212 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.7% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.2% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 0.2% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.2% (2018 Actual) (also known as External Balance)

External debt/GDP: 37.6% (2018 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 07 June 2019, a rating committee was called to discuss the rating of the Honduras, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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