Halfway through 2026: less momentum, more pressure

The second quarter closed with signs of relief. The oil shock highlighted in the Q1 Radar began to rebound: after a ceasefire stabilized conditions in the Strait of Hormuz, WTI — which had surpassed $110 per barrel in April — fell by 36% by mid-June.

Even so, the oil price surge left a global burden. The International Monetary Fund (IMF) now expects global inflation to rise to 4.7% in 2026, reversing the downward trend of recent years, although the decline in oil prices toward the end of June eased some of the pressure. In Honduras, the inflationary spike was among the sharpest in the region, while the subsequent decline has been relatively modest (Figure 1).

Regulatory developments in the United States put greater pressure on migrants. Executive Order 14406 instructed financial institutions to treat immigration status and work authorization as financial risk factors, while a Supreme Court ruling on Temporary Protected Status (TPS) closed the legal path to challenge the cancellation of Honduran TPSFootnote 1^[1]. Both measures threaten remittance flows — Honduras's main source of foreign exchange — and the end of TPS raises the challenge of reintegrating returning migrants.

Climate risks are also intensifying. Honduras ranks third globally in climate risk vulnerability and there is a 90% probability that El Niño will strengthenFootnote 2^[2] toward the end of 2026. In the Dry Corridor in southwest Honduras, El Niño has historically produced prolonged droughts, heightening the risk of food insecurity Footnote 3^[3] and raising domestic food and energy pricesFootnote 4^[4].

Overall, external conditions offer mixed signals heading into the second half of the year: geopolitical tensions have eased somewhat, but pressures related to migration, remittances, and climate shocks are rising. Honduras cannot influence these factors, but they will shape its outlook.

Growth slowed noticeably in early 2026, and the composition raises concerns. GDP expanded 3.6% year-on-yearFootnote 5^[5] in the first quarter, down from 4.3% a year earlier. This value remains within Honduras’ typical growth range, but the underlying drivers warrant a closer look.

On the demand side, private consumption remained the main anchor of activity, supported by remittances equivalent to nearly one third of GDP. Gross capital formationFootnote 6^[6] also strengthened aggregate demand contributing 4.5 percentage points (pp) to year-on-year GDP growth in the first quarter of 2026. The increase, however, was driven largely by public infrastructure projects and private sector inventory accumulation (BCH, 2026a). Public consumption contracted and subtracted 1.8 pp from growth, unsurprisingly given that the government budget was not approved until April. Most strikingly, external balance dragged growth 3.5 pp as import volumes outpaced exports, a sharp contrast from 2025 (Figure 2).

On the supply side, the strongest push came, as usual, from financial intermediation, which grew 12.1% year-on-yearFootnote 7^[7]. This alone accounted for roughly 90% of Honduras’ year-on-year growth. Other sectors with higher jobs impacts also posted positive results, but more modest ones: commerce (5.0%), agriculture (4.2%), and industryFootnote 8^[8] (2.8%).

Quarterly GDP data run only through March. For a more recent reading of the economy’s pulse, it is useful to look at the Monthly Economic Activity Index (IMAE)Footnote 9^[9], which is available through May. The reading has two sides. The cumulative change through to May was 3.3% (relative to the same period of 2025), which is in line with the quarterly GDP figure. But the unadjusted series can be volatile from month to month — it grew 5.7% year-on-year in March and only 1.8% in May — so it is better look at the smoothed trend-cycleFootnote 10^[10]. That indicator confirms that output growth decelerated for the sixth consecutive month, from 4.5% in December 2025 to 2.1% in May (Figure 3).

This loss of momentum casts doubt on optimistic readings for the coming months. It is no surprise that the multilateral agencies’ 2026 growth projections have been revised downward: the IMF cut its forecast to 3.3% (from 3.8%) and the World Bank to 3.4%. That puts Honduras below the projected Central American average (which is 3.6%), as one of the region's least dynamic economiesFootnote 11^[11] — and is consistent with the suggestion of our previous (Q1) Radar Económico.

Although the country keeps growing, that growth remains dependent on a limited set of drivers, in an environment where new challenges are emerging. The recent uptick in gross capital formation is a positive signal, but it remains to be seen whether that can be consolidated into a sustained increase in productive investment.

Between April and June 2026, the cost of living rose faster than it did in the first quarter. Year-on-year inflation reached 5.83% in June, standing above the “tolerance band”Footnote 12^[12] for the third consecutive month (Figure 4). The good news is that inflationary momentum seems to be cooling: prices rose just 0.18% between May and June 2026, which is a positive sign.

As in Q1, the cause of high inflation is global fuel price increases linked to the U.S.-Iran war. The scale of the first-round effects in Honduras is among the highest in the regionFootnote 13^[13]. In May, tradable goodsFootnote 14^[14] accounted for 4.26 of the 6.09 percentage points of Honduran inflation (almost 70% of the total). Transport costs took a direct hit, rising 17% year-on-year and accounting for about half of second-quarter inflation (Figure 5).

The full impact did not reach people's pockets, because the government absorbed part of itFootnote 15^[15]. Up to May, 661.2 million lempiras had been allocated in energy and fuel subsidiesFootnote 16^[16]. But the government has limited fiscal space and there is a risk that the long-term consequence of cushioning these shocks will be a permanent fiscal deterioration.

In any case, the relief is partial. The benefit of the subsidies given to hold down transport costs has already been offset by a 12.5% increase in the July electricity tariff. And even that adjustment was only about half of the increase that would have been warranted by higher fuel costs; the difference remains pending for future quartersFootnote 17^[17]. This confirms the knock-on effects which we anticipated in our Q1 Radar. Honduras's high dependence on thermal generation remains an important vulnerability (Table 1).

IMF currently projects Honduras's year-end inflation at 5.7% — still above the target band — and doesn’t anticipate it reaching 4% until late 2028. In sum: the fuel price shock has already worked its way through the “first-round” sectors of transport and energy. But its knock-on effect on costs and prices in sectors that depend on these inputs remains to be seen.

Even though inflation has moved above the target range, BCH has held its Monetary Policy Rate stable (TPM). The TPM has now been unchanged at 5.75% for 18 consecutive months. Since the inflationary impulse came from abroad, increasing credit costs could only offset it by triggering a severe reduction in aggregate demand. Neither did the BCH cut the TPM in an effort to offset the negative impact of the fuel price shock on demand. The TPM needs to stay above United States interest rates (currently 225 basis points higher) so lempira savings yield more than dollar savings to protect Net International Reserves (NIR)Footnote 18^[18].

Even with the TPM on hold, borrowing became cheaper: the interest rate on a new loan in lempiras fell to 12.3% in June 2026, down from nearly 16% a year earlier. The reason was not the price of money but its quantityFootnote 19^[19]. Dollars from remittances flowed into the country and were absorbed by the financial system. This swelled bank deposits — growing 12.9% over the year — and reactivated creditFootnote 20^[20]. Increased borrowing was driven more by businesses (up by 10.1% year-on-year) than by households (up by 3.3% year-on-year) (BCH, 2026c).

But the benefit was not evenly spread. Liquidity made credit cheaper, but it benefited the banks more than the savers, whose deposits earn increasingly less: the deposit rate in lempiras fell from 11.41% to 6.9% in a year, and the financial intermediation spread rose to 5.4% (Figure 6).

The financial system's dynamics are rooted in the foreign exchange market, which is managed by the BCH. For now, more dollars are entering Honduras — through remittances and exports — than the domestic economy demands. Without intervention, that surplus would lead to appreciation of the lempira. To prevent that, BCH buys the surplus dollars — USD 1.6 billion net in 2026 — paying with lempiras. That has ensured that the exchange rate depreciated 1.37% (in line with the planned trajectory). But it also increases lempira funds in the financial system that are potentially available for lending. To offset that, the BCH re-absorbs some of those lempiras by selling BCH bills and bonds, whose outstanding balance is now 71.9 billion lempiras at an average interest rate of 5.75%. The goal is to counter the potential inflationary effect of the growth in the lempira money supplyFootnote 21^[21]. The process of withdrawing available money through open market bond sales is known as “sterilization”.

This interplay explains why retail bank lending rates fell, even though the TPM remained stable. The change reflected the greater availability of lempiras — resulting in more liquidity. This is a fragile balance: if remittances slow or exports fall, there will be fewer dollars, fewer reserves, and fewer lempiras to lend. Credit could become more expensive again, and BCH would have to choose between sustaining reserves, containing inflation, or preserving liquidity.

The trade flows and foreign exchange that drove the economy in 2025 are starting to unravel. While coffee is holding up quite well, remittances are slowing and the maquila sector’s decline is intensifying. On the positive side, coffee exports accumulated USD 1.67 billion between January and May, 8% more than a year earlier (Figure 7). Unlike last year, the advance came from higher export volume (24.6%)Footnote 22^[22] that offset a 13.3% fall in the international price (Figure 8), which has now declined for five consecutive monthsFootnote 23^[23].

But the bonanza is showing signs of exhaustion: mercancías generalesFootnote 24^[24] (general merchandise) grew 12% through May, less than half the rate of a year earlier, and the maquila sector deepened its decline amid weaker demand and tariff uncertaintyFootnote 25^[25], from -1.4% to -8.2%, contributing to a trade deficit of USD 2.97 billion (12.8% higher than in May 2025).

Foreign Direct Investment (FDI) continues to rest mainly on reinvested earnings, rather than new capital inflows. In the first quarter it totaled USD 213.4 million, 27% less than a year earlier. The activities that contributed most to FDI were financial intermediation (USD 156 million) and commerce, restaurants, and hotels (USD 92 million), while the maquila sector recorded a negative balance of USD 140 million, linked largely to exports still pending collection rather than an actual capital outflow.

The most important pillar — remittances — is also losing momentum. Between January and June remittances totaled USD 6.5 billion, 12.3% more than in 2025 (Figure 9). The increase remains considerable, but the pace cools each month: 12.3% in April, 9.9% in May, and 8.7% in June. Consistent with that trajectory, BCH and the IMF expect a further deceleration toward year-endFootnote 26^[26]. Adding to that is the future effect of Executive Order 14406 on the financial system and the TPS cancellation reviewed in the international section.

A sustained deceleration in remittances would not be a problem of income or liquidity alone. These transfers sustain consumption for at least a quarter of all households — especially lower-income onesFootnote 27^[27]. So as well as supplying foreign exchange to the economy, they function in practice as a social safety net. When migrants return, pressure falls on a labor market that is not ready to absorb them.

With exports moderating and imports rising due to fuel costs, BCH projects a return to a current account deficit after the exceptional 2025 surplus. The IMF projects it at 2.7% of GDP for 2026 and expects it to be as high as 3.9% over the medium term as remittances moderate. The return to a deficit is simply the normalization of a short-lived surplus, and for now, international reserves are more than sufficient to support the currency.

The power sector enters the second quarter trapped in a vicious cycle that consumes public resources rather than contributing. The ENEE carries a debt of over USD 4.5 billion — roughly 11% of GDP — (Figure 10) and it fails to charge for around 38% of the energy entering the system due to technical failures and (mainly) unbilled electricity. The unrecovered share of Honduran generation is roughly USD 500 million per year, or approximately 1.3% of GDP.

The cost is not only fiscal — it affects the whole economy. In 2025 the average user went nearly seven full days without electricity, spread across roughly 82 outages. The outages impose a cost on the average business equal to between 16% to 21%, compared to Guatemala and El Salvador, undermining Honduras's competitive standing in the region. Meanwhile, some 830,000 Hondurans remain without an electricity service, mainly those in rural areas and lower-income groups (Sendas, 2026).

The second quarter saw important developments in the electricity sector. The government narrowed the subsidy, with 600,000 subscribers returned to billing, and CREE approved a 12.5% tariff increase for the third quarter in response to rising global prices. ENEE, for its part, issued bonds totaling 5.36 billion lempiras at rates between 11.05% and 13.50%, mainly to settle its debt with generators. This operation buys time by swapping one debt for anotherFootnote 28^[28] but it also competes with the BCH’s open-market operations and adds pressure to public finances.

Meanwhile, the reform of ENEE remains pending. In early June, the executive sent to Congress a draft law to restructure the sector: it would split the ENEE into three companies and create a System and Market Operator. The initiative has backing from multilateral organizations and the United States. However, the bill did not reach the required 65 votes. The debate was rescheduled, but without any clarity on the final content of the law or certainty regarding its eventual approval.

The power sector is a well-known and costly problem area for public finances, households, and businesses alike. Many actors recognize that reform is urgently needed, but it hasn’t materialized. This inaction carries a very high cost which is paid by multiple sectors, and piecemeal fixes don’t offer a lasting solutionFootnote 29^[29]. The challenge, as we argue in our recent policy note, lies not just in passing a new law but also in executing a complex reform on the ground. This entails clearing the debt, slashing losses, guaranteeing supply continuity, promoting new investment and competition, insulating management from political interference, and setting a roadmap with clear leadership.

Public accounts remain in good order: Honduras has a fiscal surplus, a stable debt level, and the lowest country risk rating in years. Up to April, the Central AdministrationFootnote 30^[30] recorded a global surplus of 1.8% of GDP (2.4% for the NFPSFootnote 31^[31]), well above the 0.6% of a year earlier. This is due to stable revenues (around 5.9% of GDP). The target of a 1% NFPS deficit target anchors the Medium-Term Macro-Fiscal Framework (MMFMP) 2027-2030.

Public debt accounted for 46.4% of GDP at the end of May, almost identical to the 2025 level, split roughly evenly between domestic and external debt. Sovereign bonds now represent 23.5% of total debt as financing has shifted to be more dependent on international markets.

However, budget execution is sluggish. By May, it reached just 28.6% of the approved budget, well below the 30.6% average recorded in the 2022–2025 period (Figure 11). However, there is an important rebalancing underway in the structure of expenditureFootnote 32^[32]: up to May, construction, infrastructure, and equipment budgets were being executed at a rate well above the four-year average — up from 11.5% to 22.3% — while personnel costs held steady and transfers and debt service lagged (Figure 12).

The main medium-term structural risk remains the ENEE, whose financing requirements fall on the central government. The MMFMP projects financing needs for the company of 9.8 billion lempiras in 2026 (0.9% of GDP) and between 8.3 and 8.8 billion lempiras (0.7% of GDP) between 2027 and 2030, to be covered by government-guaranteed borrowing.

Alongside that structural cost, the government faces contingent liabilitiesFootnote 33^[33] from domestic and international litigation. According to SEFIN, at the close of 2025 there were more than 28,000 active judicial proceedingsFootnote 34^[34], with a maximum exposureFootnote 35^[35] estimated at 42.1% of GDP and a contingent liability — already weighted by probability of loss — of 30% of GDP. Most involve labor claims, but the total also includes international arbitrations and contractual disputes. These are potential liabilities, not certain debt: they would only materialize if the government loses the cases. In addition, on a smaller scale, the fuel subsidy threatens to over-run the allocated budget.

On the plus side, improved external conditions have made financing easier. The Emerging Market Bond Index (EMBI)Footnote 36^[36] spread for Honduras fell to 167 basis points, one of the lowest levels on record and well below the Latin American average (251 bp) (Figure 13), and Standard & Poor's adjusted the outlook for Honduras from negative to stable. That was quickly reflected in the market: in July Honduras issued a sovereign bondFootnote 37^[37] for USD 815.7 million at a rate of 6.4%, compared with 8.6% on a 2024 placement.

The IMF endorsed Honduras’s economic policy stance by completing the fourth and fifth reviews of their programFootnote 38^[38], which provided access to USD 242 million (USD 725 million cumulative). More importantly, completing an IMF review confirms that the country is meeting its policy commitments and sends positive signals for new financing, building confidence among international investors and multilateral organizations. Of the agreed targetsFootnote 39^[39], the only one not to be met was the reduction of ENEE's arrears, which received a waiver. The improvement in the EMBI is likely to be supported by the continuation of the IMF program, together with the continued accumulation of international reserves, the maintenance of prudent fiscal policy, and the strengthening of external liquidity.

On the regulatory front, Congress unanimously approved the Transparency and Centralized Beneficial Ownership Registry Law, which mandates the creation of a registry — administered by the Comisión Nacional de Bancos y Seguros (CNBS, the banking and insurance regulator) — of the real owners of companies and legal structures operating in the country; in other words, it allows identification of who is behind each entity. The measure fulfills two recommendations of the Financial Action Task Force (FATF)Footnote 40^[40] on ownership transparencyFootnote 41^[41] and forms part of the government’s commitments to the IMF. It also reduces the risk of Honduras being placed on the FATF "grey list"Footnote 42^[42]. By contrast, Honduras’ accession to the International Centre for Settlement of Investment Disputes (ICSID), which was approved by the executive at the start of the year, still awaits legislative approval.

Overall, the quarter generated several favorable institutional reform signals, but it remains to be seen whether they translate into a concrete boost to the economy.

Our review underlines that Honduras faces important challenges: growth is slowing, inflation remains above the target range, and the external sector is weakening.

Risks and opportunities coexist. Among the risks, some are short term or cyclical — such as slowing remittances growth; migrant returns; and adverse geopolitical and climate trends. Others are structural policy challenges: above all, ENEE’s ongoing dysfunction, which raises production costs, undermines supply reliability, and drains public resources. Among the opportunities, Honduras’s low and declining country risk rating; the positive advances with the IMF program; and progress on FATF compliance are important positive signals, showing that Honduras is capable of attracting scarce capital.

Honduras's prospects for the coming months will depend on how those positive and negative factors play out — and above all, on whether the favorable signals can be translated into effective action.

For the second half of the year, the following are worth watching closely:

• The El Niño phenomenon and its impact on agriculture, prices, and food security.
• The performance of the external sector, given the fall in some export prices, rising import costs, tariff uncertainty, and geopolitical tensions.
• The trajectory of remittances and migrant returns, in light of regulatory changes in the United States.
• The pass-through of the fuel price increase to the electricity tariff and to other prices, along with the fiscal cost of subsidies.
• Honduras’s ability to convert better financial conditions into investment and reforms, especially in the power sector.