New York, May 11, 2015 -- Moody's Investors Service has today revised the outlook on Honduras' government
bond ratings to positive from stable. Concurrently, Moody's
has affirmed the foreign and local currency government's issuer ratings
and senior unsecured ratings at B3.
RATINGS RATIONALE
RATIONALE FOR THE POSITIVE OUTLOOK
Moody's decision to revise the outlook on Honduras' ratings
is based on our expectations for:
1. Continued progress toward fiscal consolidation targets,
building on the fiscal deficit narrowing to 4.4% of GDP
in 2014
2. Continued commitment to fiscal and structural reforms set out
in the December 2014 IMF agreement
3. Reduction of government liquidity risks
The affirmation of the B3 ratings reflects Honduras' trajectory
of high fiscal deficits and rising debt ratios, weak economic strength
given the small size of the economy and low income per capita and very
low institutional strength.
The country ceilings remain unchanged. The long-term local
currency bond and deposit ceilings are B2, the long-term
foreign currency deposit ceiling is Caa1, and the long-term
foreign currency bond ceiling is B2.
FIRST DRIVER -- Continued progress toward fiscal consolidation targets
The fiscal deficit narrowed to 4.4% of GDP in 2014 from
7.9% of GDP in 2013 surpassing even the government's
own target of 4.7% of GDP. Fiscal consolidation was
supported by a tax reform that raised revenues close to 2% of GDP,
expenditure cuts and, more importantly, measures that have
introduced discipline in the budget process. Efforts to curtail
expenditures have focused on maintaining public sector salaries constant
in nominal terms, reducing the number of public sector employees,
cutting back investment spending, and reducing government transfers
(i.e., subsidies, social assistance programs,
transfers to municipalities and loss-making state-owned
enterprises).
To improve the budget process, no revisions are now allowed to the
limits set in the budget -- in 2012 and 2013 limits were revised
more than 20 times. Also, new projects can be approved only
if others are cut or cancelled and legal sanctions can be imposed on officials
who exceed spending limits. A budget committee was created to review
the ministries' spending requests and only those requests that fall
within the budget limits are approved. An important change in debt
management is the government's decision to stop accumulating arrears
with suppliers, known as floating debt.
Government officials are planning to deliver fiscal deficits lower than
those agreed with the IMF, targeting a deficit of 3.8%
of GDP in 2015 compared to 4.0% in the agreement.
The government's target for 2016 is 3.0% of GDP compared
to 3.4% in the agreement.
SECOND DRIVER -- Continued commitment to fiscal and structural reforms
as set out in the December 2014 IMF Agreement
Fiscal consolidation efforts that began early in 2014 have become more
structured after the government signed an IMF agreement on December 2014.
The IMF program has facilitated policy consistency to government efforts,
while quarterly reviews provide continuing monitoring. In March
the IMF issued a statement after the first review indicating that all
quantitative targets for December 2014 were met, in most cases with
ample margins. Continued commitment to meeting or exceeding fiscal
and structural benchmarks set out in the IMF Agreement would support continued
positive pressure on the rating.
The IMF agreement incorporates fiscal consolidation targets that will
require the government to cut current expenditures in 2015-17 as
revenue-enhancing measures were already adopted after the 2013
tax reform was implemented last year. Since current expenditures
comprise mostly public sector salaries (8.2% of GDP equivalent
to 45% of current spending), we expect reductions in the
government's wage bill will have a material impact on the fiscal
deficit. We expect public investment will continue to contract
and also that government transfers, which represent 7% of
GDP, will be curtailed. Transfers to local governments and
other public entities will be maintained in nominal terms in 2015,
while those going to the national electricity company (ENEE) will be gradually
reduced. Spending in key social assistance programs, also
part of government transfers, will not be reduced but will be better
targeted. Measures affecting ENEE are also part of the IMF agreement,
including increases to electricity tariffs and reducing the company's
wage bill.
THIRD DRIVER -- Reduction of government liquidity risks
Refinancing risks have been reduced as a result of a lower fiscal deficit
in 2014, the lengthening of debt maturities in the domestic market,
and increased access to multilateral financing. Proactive debt
management aimed at containing interest costs by prioritizing, according
to the authorities, the use of concessional and multilateral debt
versus external debt issuances will support further upward pressure on
the rating. Gross financing needs remain elevated at around 7.5%
of GDP.
RATIONALE FOR AFFIRMING THE B3 RATINGS
The positive outlook reflects Moody's expectation that Honduras
will continue to make steady progress in 2015 in terms of fiscal consolidation
and that the government will continue to comply with targets set in the
IMF program.
While a positive outlook suggests that, if current conditions are
preserved, this may lead to a material reduction in Honduras'
credit risks, the track record is short with only the first IMF
review being completed.
B3 ratings reflect high fiscal deficits, rising debt ratios,
deteriorating debt affordability, increased reliance on short-term
domestic debt and higher gross financing needs due to the significant
increase in debt in the last six years. The B3 ratings also reflect
weak economic strength given the small size of the economy, low
income per capita and high crime rates which hinder long-term GDP
growth, while very low institutional strength is explained by weak
government effectiveness and rule of law, as well as low control
of corruption.
WHAT COULD CHANGE THE RATING - UP
There could be upward pressure on Honduras' ratings if: (i) the
government continues to reduce its fiscal deficit this year, (ii)
the government complies with targets set in the IMF program in the second
part of 2015, and (iii) government liquidity risks continue its
downward trajectory by lengthening debt maturities in the domestic market.
WHAT COULD CHANGE THE RATING - DOWN
The outlook could be revised to stable if (i) fiscal consolidation is
halted or reversed, (ii) there is a reemergence of near-term
refinancing pressures involving domestic debt, or (iii) reduced
access to multilateral funding that leads to limited financing options.
COUNTRY CEILINGS
The country ceilings did not change as a result of this action.
The long-term local currency bond and deposit ceilings remain at
B2. The long-term foreign currency deposit ceiling remains
at Caa1. The long-term foreign currency bond ceiling remains
at B2. All short-term ceilings remain at Not Prime.
Country ceilings reflect a range of undiversifiable risks to which issuers
in any jurisdiction are exposed, including economic, legal
and political risks. These ceilings act as a cap on ratings that
can be assigned to the foreign and local-currency obligations of
entities domiciled in the country.
GDP per capita (PPP basis, US$): 4,729 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.1% (2014 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.8%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: -4.4%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -7.4% (2014 Actual)
(also known as External Balance)
External debt/GDP: 36.9% (2014 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 May 2015, a rating committee was called to discuss the rating
of Honduras, Government of. The main points raised during
the discussion were: The issuer's fiscal or financial strength has
materially increased. The issuer's governance and/or management,
have materially increased. The issuer has become less susceptible
to event risks. Other views raised included: The issuer's
economic fundamentals, including its economic strength, have
not materially changed. The issuer's institutional strength/ framework,
have not materially changed.
METHODOLOGY
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy 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 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Ariane Ortiz-Bollin
Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Anne B Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes Honduras' outlook to positive; affirms B3 ratings
