Honduras Credit Rating May Be Cut on Political Risk, S&P Says

By Eric Sabo and Sam Nagarajan

July 1 (Bloomberg) -- Honduras’ sovereign rating may be cut should a prolonged political crisis and strained public finances erode foreign-exchange reserves, Standard & Poor’s said.

The credit assessor yesterday placed the nation’s foreign- and local-currency debt on creditwatch “with negative implications” after the Honduran military ousted President Manuel Zelaya in a coup on June 28. Police used tear gas and water canons to break up protesting backers of Zelaya the following day, while thousands rallied to support the newly installed interim President Roberto Micheletti.

“The current political crisis comes at a time of economic contraction at home and abroad, weakening the government’s ability to adjust fiscal and monetary policies,” S&P’s New York-based analysts Joydeep Mukherji and Roberto Sifon Arevalo said in a statement.

The $12.3 billion economy, the third smallest in Central America, may expand 1.5 percent in 2009, according to the International Monetary Fund, compared with a forecast for a 1.5 percent contraction for all of Latin America. The nation’s international reserves have dropped 13 percent from a record $2.7 billion reached in June 2006, according to data compiled by Bloomberg.

New Finance Minister Gabriela Nunez said the country will honor its international debt obligations. The local currency, the lempira, has been pegged at around 18.9 against the U.S. dollar since 2005.

S&P rates Honduran long-term debt B+, or the fourth-lowest non-investment grade, and short-term debt B, a level lower. Debt equivalent to more than 3 percent of gross domestic product will mature in three batches later this year and early 2010, and a potential loss of external liquidity could hurt the government’s ability to roll over the payment, S&P said.

Policy Paralysis

“Potential policy paralysis due to political uncertainty could raise the country’s vulnerability to a sudden external shock,” Mukherji and Arevalo wrote. “This could undermine confidence in the fixed exchange rate and weaken creditworthiness.”

The economy would be devastated should Central American neighbors extend a trade ban implemented after the coup, Roque Rivera, president of the Honduran banking association said yesterday. No U.S. banks have shut lines of credit with local lenders and it’s unlikely they will, Rivera said.

Honduran bonds are rated “so low” that there are no immediate plans to downgrade them following the ouster of President Manuel Zelaya, said Gabriel Torres, an analyst at Moody’s Investors Service.

Moody’s rates the nation’s foreign and local debt B2 due to a weak economy dependent on slumping remittances from Hondurans working abroad, according to a June 8 report.

“It’s the impact of the crisis in the U.S. more than the government crisis in Honduras that’s affecting the ratings right now,” Torres said yesterday in a phone interview.

To contact the reporter on this story: Eric Sabo in Panama City at esabo1@bloomberg.net; Sam Nagarajan in New Delhi at samnagarajan@bloomberg.net