Standard & Poor's Honduras Downgrade

08/14/2013 11:02 am ET | Updated Oct 14, 2013

On June 7, 2012, Standard & Poor's Ratings Services of New York raised its long-term foreign and local-currency sovereign credit ratings on Honduras to B+ from B. Back then, S&P said that the upgrade followed "the Honduran government's ability to restore good ties with external donors and reduce domestic political tensions, thereby creating an environment for recent progress in fiscal and pension reform and gradual exchange rate flexibility".

S&P specifically noted that "the political environment in Honduras has stabilized since the ouster of former President Zelaya, enabling the government to implement reforms and focus on long-term problems." S&P cautioned, though, that it "could lower the ratings if political stability deteriorates, resulting in a poorer fiscal outlook and a rising burden of public-sector debt. An unexpectedly precipitous fall in foreign exchange reserves would weaken confidence in the currency, undermining economic prospects and leading to a lower rating."

On August 7, 2013, S&P did precisely what it said it might do: it downgraded Honduras' credit ratings back down to B. So what has happened in the past 14 months to make Honduras a less attractive credit risk? Well, first of all it is now more widely known that the Lobo administration has not been able to competently manage its finances. Honduras is broke, and it is desperately begging for a bail out. Its annual budget deficits are on the rise, as is its public debt, while its foreign currency reserves are fading.

Serious problems with paying public employees have become painfully apparent, and state-run enterprises such as Hondutel (telephone) and the ENEE (electricity) are on the verge of collapse. Strikes by the teachers, hospital workers, police, taxi and bus drivers, and others have grown in frequency. Worse, the political situation has become more unstable due to the continuing high rates of crime and violence, despite the growing presence of soldiers patrolling the streets. Seems like nothing the Lobo administration is doing to address the security crisis in Honduras is having any effect.

In the meantime, we're in a presidential election year -- meaning the government is in super-wasteful spending mode. No one expects anything meaningful to get done to try and resolve critical financial and security problems until after the next president is in office in January. Right now, it's all about campaigning and making promises, kissing babies.

It's party time again in Honduras... you know, mañana.

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