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Rating Action:

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

21 Jul 2021

New York, July 21, 2021 -- 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 strong fiscal framework relatively to peers with debt metrics that remain below B medians despite the pandemic induced increase

2. Credit challenges deriving from weak institutions and limited economic development

Honduras' local and foreign currency country ceilings remain unchanged at Ba1 and Ba3, respectively. The three-notch gap between the local currency ceiling and the sovereign rating reflects limited government presence in the economy and a moderate external vulnerability risk. The two-notch gap between the foreign currency ceiling and the local currency ceiling incorporates Honduras' relatively weak policy effectiveness that may be prone to impose transfer and convertibility restrictions in times of stress.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION AT B1

FIRST DRIVER: A STRONG FISCAL FRAMEWORK RELATIVE TO PEERS WITH DEBT METRICS THAT REMAIN BELOW B MEDIANS DESPITE THE PANDEMIC INDUCED INCREASE

Honduras' debt metrics have worsened due to the pandemic crisis but remain below those of most B-rated peers. In 2019, right before the pandemic, Honduras' general government debt to GDP reached 42% and Moody's estimates it will reach almost 56% in 2022. In comparison the median for B1-B2 rated peers is forecast to reach 70% of GDP by next year.

The increase in the debt burden is the result of higher fiscal deficits, which Moody's expects will fall as the pandemic shock recedes. Government deficits averaged only 0.3% of GDP in the five years prior to the crisis but jumped to a forecast average of 4.7% for 2020 and 2021 due to a combination of both lower revenues and higher expenditures. For next year Moody's forecasts the fiscal deficit will fall to 2.5% of GDP and a further drop in 2023 and 2024 will result in debt stabilizing below 60% of GDP.

The government's debt affordability also compares favorably with peers with Honduras' interest payments to revenue of about 8% in 2021 substantially lower than the 13% peer median.

Although Honduras has a higher portion of its debt denominated in foreign currency than similarly rated countries, estimated at 69% in 2021, most of that is with bilateral and multilateral institutions which lend at below market rates. Over 50% of all of Honduras' debt is with such institutions and despite demonstrated access to both local and international capital markets Moody's estimates the country will continue to rely heavily on official funding.

A program with the IMF, in place since 2019 and recently expanded to total $769 million in lending, provides access to low cost funding and continues to represent an important support factor of the country's strengthened fiscal framework.

SECOND DRIVER: CREDIT CHALLENGES DERIVING FROM WEAK INSTITUTIONS AND LIMITED ECONOMIC DEVELOPMENT

Weak institutions remain a structural credit challenge for Honduras. The country ranks in the lowest 10 percent of rated sovereigns in the Worldwide Governance Indicator (WGI) scores for government effectiveness and the rule of law. It ranks in the lower 30% for other measures of institutional strength such as control of corruption. Domestic political risk is also a relevant factor, as evidenced by both WGI scores and a recent history of protests and political turmoil.

Honduras' 2017 presidential elections led to accusations of voter fraud and widespread protests and two years later other protests erupted over perceived government corruption. Honduras will hold new presidential elections in November of this year. The risk of a flare up remains high given limited government responses to high levels of poverty and income inequality.

The rating is 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 2021, is less than half the $52 billion median for similarly rated sovereigns. GDP per capita on PPP terms in 2020 (latest available data) reached $5,450, compared to the $9,804 median for peers.

Honduras has historically benefited from relatively stable economic growth. Real GDP rose 3.7% on average in the decade prior to the pandemic. Health-related lockdowns and the impact of tropical storms resulted in a 9% drop in the economy last year. Moody's expects economic activity will rebound to 4.8% growth 2021 and a gradual return to trend growth of about 3.5% annually after that. Very high remittances, averaging over 20% of GDP per year, remain a key support for the economy.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects our expectation that medium-term growth prospects and the government's commitment to prudent fiscal and monetary policies will stabilize debt after the recent pandemic induced increase.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Honduras' ESG Credit Impact Score is highly negative (CIS-4) reflecting its weak governance profile and limited resilience due to low economic development, its moderately negative exposure to environmental risks, and above all its highly negative exposure to social risks.

Honduras' exposure to environmental risks is assessed as moderately negative (E-3 issuer profile score) based on the country's exposure to climate change risks from recurring droughts and hurricanes, which can deplete agricultural production. Exposure to physical climate risk is the major concern for the country while access to water, the depletion of natural capital, and waste and pollution are all moderately negative risks for Honduras.

Exposure to social risks is highly negative (S-4 issuer profile score), a result of the country's high levels of poverty and inequality, low education outcomes and high levels of domestic violence. Like many other emerging economies Honduras benefits from a comparatively benign demographic structure.

The influence of governance on Honduras' credit profile is highly negative (G-4 issuer profile score) reflecting its weak government effectiveness, rule of law, and control of corruption. Political polarization remains high, which can affect growth and reform implementation. Anti-government protests have been common in recent years amid accusations of electoral fraud and corruption.

GDP per capita (PPP basis, US$): 5,450 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -9% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -4.5% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.9% (2020 Actual) (also known as External Balance)

External debt/GDP: 46% (2020 Actual)

Economic resiliency: b1

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

On 15 July 2021, 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 materially decreased. The issuer's institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Evidence that the debt increase has plateaued, and that fiscal deficits have returned to pre pandemic levels, coupled with low post-election political risks could generate upward pressure on the credit rating. Alternatively, continued rising debt metrics, resulting from lower growth, or relaxed fiscal constraints, could lead to a negative rating action. A worsening of structural institutional weaknesses, including heightened political protests related to the presidential election, could also lead to a downgrade.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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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