Overseas business risk: Honduras

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The overseas business risk report provides information on security and political risks UK businesses may face when operating in Honduras.

1.Overview

As one of the poorest and least industrialised countries in Latin America, Honduras is heavily dependent on agricultural products such as bananas, coffee and sugar, for its foreign exchange earnings. This makes the economy extremely vulnerable to commodity price and climatic changes.

Other key areas of the economy include manufactured goods produced by local assembly plants (maquiladoras), particularly in the textile industry, as well as tourism and the construction industry. In 2023, Honduras registered the fourth highest economic growth rate in Central America with 3.6%. The global economic crisis of the Covid-19 pandemic and the damages caused by tropical storms ETA and IOTA, domestic challenges of violence and inequality, have had a strong adverse impact on the economy and in recent years it has showed a deceleration, partially attributable to the decline in the demand for textiles in the United States.

The pandemic and storms led to -9.5% economic growth in 2020. Local economy recovered as Covid-19 restrictions were gradually being lifted, showing a continued growth that marked 3.6% in 2023 (World Bank).; while remittances from Hondurans working in the US keep playing a vital part to the economy, reaching a new high of USD 9.2bn in 2023 (over 20% of GDP).

The government is generally open to foreign direct investment (FDI) which is viewed as crucial for resuming sustained economic growth in the future. According to Honduran Central Bank, FDI increased from USD 920.3 million in 2022 to USD 1.8 billion in 2023 due to reinvestment of foreign companies operating in the country. The largest investments in Honduras came from South America (USD 443.6 million), Europe (USD 398.7 million), Caribbean (USD 133.7 million), Central America (USD 76.5 million), Asia and Oceania (USD 26.5 million). The recent shift of the government to open relations with China will have a significant impact in the foreign direct investment and trade; as well as the measures taken by the government on tax reforms, electricity generation, partial jobs and special economic zones.

2.Politics

Honduras, Central America’s second-poorest country, has one of the world’s highest homicide rates. Despite some improvements that have been made on security, gangs and transnational crime impact communities and businesses. Its international image has also been undermined by extensive narcotics-related money laundering.

Capitalizing on a 2015 Supreme Court ruling that suspended a constitutional ban on consecutive presidential re-election, and an economy that was performing well, President Juan Orlando Hernández of the centre-right National Party was re-elected in November 2017. At the end of this term, he was deported to the US and convicted on drug trafficking charges.

In the 2021 national elections, left-winged, Xiomara Castro was elected President, becoming the first female president of Honduras and promising progressive reforms to tackle local challenges such as poverty, corruption and human rights. After two years of Castro’s government, the country remains on dire economic conditions and confrontation persists with the private sector, linked to reforms to the tax system and handling of foreign investments at special investment zones. The Government is keen to push for broader implementation of deeper institutional reforms to spurring more dynamic growth and sustainable development throughout the Honduran economy.

3.Economics

The Honduran economy is rated as low-middle income, according to the World Bank; having the fourth largest GDP of the seven Central American countries (USD 34.4 billion in 2023, World Bank). Honduras faces major challenges with more than 51.3% of the population (10.4m inhabitants, World Bank 2023) living in poverty (2023). In rural areas, approximately six out of ten households live in extreme poverty or on less than USD 2.50 per day. The unemployment rate was 8.1% and inflation 6.7% in 20223 (IMF).

The government has been trying to develop new strategies to increase employment, open markets and attract foreign investment that takes advantage of the opportunities that Honduras has, such as its strategic location, a growing industrial base, a young population, and a desire to diversify exports. However, recent legislations such as the removal of part time jobs and special economic zones, electricity generation and tax reforms have caused uncertainty for local and foreign companies. Rampant crime and violence add a major challenge. Although the number of homicides has declined recently, Honduras continues to have one of the world’s highest homicide rates; approximately 38 per 100,000 in 2022.

Honduras’ economy depends highly on international trade making it very vulnerable to external shocks. Although the light manufacturing sector has increased its productivity, the country’s economic structure has not changed substantially, depending on the agricultural sector as the major source of employment. Its main trading partners are the United States (USD 6.4bn of Honduran exports and USD 7.9bn of imports in 2023) Central American countries (mainly Guatemala) and the European Union (in particular Germany).

Honduras continues to be an exporter of agricultural products and clothing manufacturing. Its main exports in 2023 were USD 4.65 billion manufacturing industry, USD 993 million agriculture, electric equipment and other parts USD 1,377 million, and USD 96.9 million mining. While imports consist mainly of manufactured goods, fuels, energy, transport equipment and industrial materials. Total exports in 2023 were USD 11.4 billion, while imports were USD 19.3 billion.

Foreign investment in Honduras is regulated by the Investment Promotion and Protection Act. This introduced national treatment and new guarantees for foreign investors, such as stability contracts, fiscal incentives and property protection regimes. However, there are some limits for foreign companies relating to which sectors they can operate in, since the state reserves exclusive rights to operate certain basic industries and public services (for public order and public interest reasons); for example, activities related to public health, public drinking water supply, waste management, lottery, among others. There more than 30 regulations that relate to investment and which the National Council for Investment has identified in order to guide foreign investors; these include labour, energy, tourism, and other type of legislations. Despite the high level of violence and crime and high inequality, the Honduran investment climate has attracted big investors to the country, especially in the textile and tourism sector.

In 2019, when the last Doing Business report of World Bank was published, Honduras was in the 133rd position, between Niger and Guyana.

3.1Trade and investment between the UK and Honduras

Trade between the UK and Honduras has been increasing over recent years, especially since 2013 when the Association Agreement between Central America and the European Union (EUCAAA) entered into force. From 1st January 2021, trade relations with Honduras are based on the UK-Central America Association Agreement.

Total trade in goods and services (exports and imports) totalled £162 million in 2023, a decrease of 22.9% or £48 million from 2022. UK exports to Honduras amounted to £26million, while UK imports from Honduras were £136million.

3.2Potentialities of the market

The government of Honduras established a National Investment Council that promotes the development of local and foreign private investment as a mechanism to generate economic growth and employment in Hondurans. The Council focuses in five priority sectors, which are receiving different types of incentives and represent opportunities for UK companies now.

Tourism

The main goal is to become one of the top destinations in the Caribbean and Central America. This requires public (and private) investment in infrastructure, consulting services, connectivity (airports/airlines) and talented human resources. In August 2017, the National Congress of Honduras approved a new Tourism Promotion Law which includes a package of incentives for investment. In the first semester of 2023, Honduras received 1.2 million tourists, an increase of 35% compared to the same period in 2022.

Light manufacturing

Light manufacturing production represents 9% of the total exports of the country and it has the potential to make Honduras the most dynamic country in the region. Companies investing in this sector benefit from production incentives.

Infrastructure

Public investment in infrastructure is one of the priorities of the government and there are opportunities in urban planning, modernization of ports and airports, creation of smart cities, public transport, construction of highways, others; all areas of British expertise.

Agribusiness

The agricultural sector is the main motor of the country’s economy, employing 40% of the labour force and it has potential to grow. The government is focusing on improving the value chain through the adoption of better standards, technology transfer and facilitation of higher value activities. The important crops in Honduras are tubercular plants, vegetables, sugar cane, pineapple, melons, watermelons and bananas. There are two big U.S. corporations in Honduras, Chiquita and Dole, they have a disproportionate amount of the country’s agricultural land and produce a substantial part of the income of Honduras by growing the majority of the country’s banana crop (Britannica). UK companies can add extra value to the agricultural sector in Honduras with products that can support the crops mentioned before and products that improve water and soil management.

Energy

Renewable energy generation is a priority for the government, especially new technologies that can help mitigate the effects of climate change, i.e. droughts, that affect some sources of power generation. Nevertheless, this sector has challenges due to human rights and environmental issues and lack of proper legal framework (consulting processes with local communities) for the creation of energy projects.

3.3Tax and customs

As from 1 January 2017 the Honduran corporate tax system is based on the territoriality principle. Companies, whether or not resident in Honduras, are subject to tax only on Honduran-sourced income. Companies domiciled abroad that have agents or representatives in Honduras are taxed in the same manner as residents on their income derived from activities undertaken in Honduras. Honduras does not have any double taxation treaties in force. These are the key taxes in the country:

• Income Tax: companies are subject to tax of 25%, known as the income on lucrative activities regime
• VAT: a standard rate of 15% is payable on domestic and imported goods and services (some supplies are exempt)
• Alternative Minimum Tax: companies and individuals resident in Honduras are subject to this tax. As from 2020, only companies performing general activities that generate more than HNL 1bn will be subject to this tax at 1% rate; while special activities that generate more than HNL 1bn will be subject to this tax at 0.5% rate. Special activities include natural or legal persons who produce or market: cement, public services provided by state companies, pharmaceutical drugs, oil and its derivatives, bakery sector or industry, products derived from steel for construction, production, marketing and export of coffee
• Solidarity Tax: applicable only to taxpayers opting for taxes on income from lucrative activities (25% income tax scheme), they must pay 5% calculated on net taxable income exceeding HNL 1 million
• transfer pricing (TP) policies are applicable in Honduras. The government is entitled to determine differences between transactions done by related parties and others done by independent parties. If the government identifies a difference, this would not be deductible for income tax purposes and a 15% or 30% tax would be paid on such difference

Four incentive programmes operate in Honduras to certain qualifying industries and operations; some incentives are being reviewed and might change under the tax reform that the government is discussing. These are:

• free zones: tax exemptions on profit derived from sales to foreign countries are applied for 10 years to companies operating in Free Zones or under the Law of International Services, as long as the company has been approved by the Ministry of Economy. Also, they are exempt from income tax for 10-20 years and from municipal income tax for 10 years
• export and draw-back activities: exemption from import taxes, VAT, income tax for industrial and commercial outfits established under this scheme are some of the incentives available for companies dedicated to export and draw-back activities
• free-trade zone and tourist zone: exemption from import taxes, VAT, and income tax exist for industrial and commercial companies established within free-trade zones in Honduras. Also, companies operating in the Bay Islands within the free trade tourist zone benefit from these incentives
• investment in renewable energy sources: Exemption of import taxes for 10 years, income tax for 12 years, income and value-added tax for 10 years, exist as incentives to develop renewable energy projects

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