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International Monetary Fund. Western Hemisphere Dept.
The near-term outlook has worsened, while a recovery is expected for next year. Amid a weak health system and a surge in infections over the summer, the gradual reopening of the economy has faced setbacks and the pandemic is having a stronger and more protracted social and economic impact than expected. While the policy response to the Covid-19 shock was appropriately designed, there have been implementation challenges and delays. The authorities’ monitoring system of pandemic-related spending and civil society oversight helped identify missteps to implement corrective actions, for which they are receiving technical assistance from FAD and the Inter-American Development Bank (IDB). More recently, Honduras is also facing the challenge to respond to two tropical storms, which the authorities intend to manage within the contour of the current economic program.
International Monetary Fund. Western Hemisphere Dept.
This paper presents Honduras’ Second Reviews Under the Stand-By Arrangement and Arrangement Under the Stand-By Credit Facility, Requests for Augmentation and Rephasing of Access, and Modification of Performance Criteria. The coronavirus disease 2019 pandemic and external spillovers are expected to hit Honduras hard, and the augmentation of access will support the authorities’ response to mitigate the impact. The completion of the reviews will help Honduras meet urgent balance of payments needs stemming from the pandemic, including increased health care and social spending. The authorities continue to take steps to improve the institutional framework in the electricity sector. Important measures have been incorporated into the program. These aim at improving governance and facilitating the unbundling of the national electricity company. Tariffs continue to reflect the cost of electricity provision while providing subsidies to the poor. The augmentation of access under the Stand-By Arrangement and the Arrangement under the Standby Credit Facility should help the authorities cover external financing needs to mitigate the impact of the pandemic.
Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil
Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.
International Monetary Fund. Western Hemisphere Dept.
The IMF-supported program (2014-17) succeeded in reducing Honduras' macroeconomic imbalances. The next step is to adopt institutional reforms to entrench macroeconomic stability to put Honduras on a higher potential growth path.
International Monetary Fund. Western Hemisphere Dept.
This paper discusses Honduras’ Fifth and Sixth Reviews under the Stand-by Arrangement (SBA). All continuous performance criteria for the end of June 2017 were met. The indicative target on the National Electricity Company’s (ENEE) operating revenue-to-spending ratio was missed by a small margin owing to up-front fees paid to the loss-recovery concessionaire. On the structural front, notable reforms are the adoption of a fiscal responsibility law to anchor a sustainable medium-term fiscal position; the overhaul of the tax administration; and the reduction in the heavily overstaffed payroll of ENEE. The authorities have indicated that they will not purchase the amount available on completion of these reviews, in line with their intention to treat the SBA as precautionary.
Koffie Ben Nassar, Edder Martinez, and Anabel Pineda
This paper analyzes the determinants of banks’ net interest margins in Honduras during 1998 to 2013—a period characterized by increasing banks’ net interest margins, foreign bank participation and consolidation. In line with findings in the previous literature, we find that operating costs are the most important drivers of banks’ net interest margins. We also find that competition among banks has led to higher concentration and that funding by parent banks positively impacts foreign banks’ net interest margins. Together, these results suggest that banks, particularly foreign banks, are under pressure to consolidate and reduce operating costs in order to offer competitive interest margins. We conclude that further structural reforms and consolidation may lower banks’ net interest margins.
International Monetary Fund
This paper examines Honduras’s 2005 Article IV Consultation and Second Review Under the Poverty Reduction and Growth Facility. In the period 1960–2000, output growth in Honduras ranked among the lowest in the region. During the 1990s, when growth recovered in the rest of Central America, in Honduras it only kept pace with population growth. The authorities embarked on an economic reform program that focuses on ensuring macroeconomic stability and strengthening growth prospects through the development of human capital and basic infrastructure.
Mr. Michael Keen, Mr. Paul K. Freeman, and Mr. Muthukumara Mani
Natural disaster risk is emerging as an increasingly important constraint on economic development and poverty reduction. This paper first sets out the key stylized facts in the area-that the costs of disaster have been increasing, seem set to continue to increase, and bear especially heavily on the poorest. It then reviews the key economic issues at stake, focusing in particular on the actual and prospective roles of, and interaction between, market instruments and public interventions in dealing with disaster risk. Key sources of market failure include the difficulty of risk spreading and, perhaps even more fundamental, the Samaritan's dilemma: the underinvestment in protective measures associated with the rational expectation that others will provide support if disaster occurs. Innovations addressing each of these are discussed.
Mr. Paolo Mauro and Yishay Yafeh
This paper analyzes the Corporation of Foreign Bondholders (CFB), an association of British investors holding bonds issued by foreign governments. The CFB played a key role during the heyday of international bond finance, 1870-1913, and in the aftermath of the defaults of the 1930s. It fostered coordination among creditors, especially in cases of default, arranging successfully for many important debt restructurings, though failing persistently in a few cases. While a revamped creditor association might once again help facilitate creditor coordination, the relative appeal of defection over coordination is greater today than it was in the past. The CFB may have had an easier time than any comparable body would have today.
International Monetary Fund. External Relations Dept.
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