Two shocks and an unpaid bill

Honduras is facing two major external shocks to its economy: high oil prices and one of the worst droughts in 35 years, caused by El Niño. Both are already affecting prices, power generation costs, and public finances—and, as of August, agricultural production. The question now is: who will pay the mounting costs?

Two shocks at once, with risks through 2027

The benchmark oil price for Honduras rose more than 50% between July and September, and its volatility makes planning difficult for households, firms, and the government. At the same time, the drought hit crops hard because of a lack of rain over the country’s agricultural area in May, right at the start of the planting season, when rainfall was 45% below average. Today, nearly half the population lives in municipalities under alert, and below-normal rainfall is forecast through mid-2027.

Prices rise, driven by fuel and food

Cumulative inflation reached 5.3% as of September, higher than the full-year figures for both 2024 and 2025. For now, price increases are concentrated in transport and food, driven in part by diesel, which rose 69% in Tegucigalpa between March and September. Although inflation has not yet spread to all prices, the increases are hitting vulnerable households hardest in a country where more than 1.8 million people face severe food insecurity.

Generating electricity costs more, but power bills do not yet reflect it

With less water in reservoirs, hydroelectric generation fell 30% between June and September, and more than half of the country’s electricity came from plants burning bunker fuel and diesel—just as oil was at its most expensive. That largely explains why generation cost 52% more than projected between June and August. Passing that cost on to electricity bills would mean a 21% rate increase.

Public finances absorb part of the blow, with little room to maneuver

So far in 2026, the state has spent 66% more on fuel and transport subsidies than in 2025. And the six-month freeze on electricity rates could leave up to US$213 million in unpaid costs, with no clarity on who will cover them. As of October 12, the Empresa Nacional de Energía Eléctrica (ENEE) has already borrowed almost twice what was budgeted for the entire year. The 2027 draft budget also leaves little room to maneuver. Fuel subsidies would receive less than was spent between January and September 2026, and public debt service would consume one of every five lempiras.

Output does not yet reflect the full impact of the shocks, but there are warning signs

The economy was already losing momentum. Gross Domestic Product (GDP) grew 2.7% in the second quarter of 2026, down from 3.9% a year earlier, with growth concentrated in the financial sector, while manufacturing contracted and formal employment stalled. For now, consumption and remittances are sustaining economic activity. But the shock could hit production through two channels: by directly reducing agricultural output and weakening household consumption. In August, agricultural output was already 9.2% lower than in 2025, and the greatest impact is expected between late 2026 and early 2027. And if rising prices curb household spending, private consumption—the main engine of demand in the economy—could weaken.

In the country’s external accounts, oil drives up the cost of imports

The oil bill is also putting pressure on the external balance (the difference between dollars entering the country and those leaving). Through August, imports grew 8.6%, and for every 10 additional dollars spent on imports, six went to fuel. This helped push the trade deficit up 22% compared to 2025. Even so, there are counterweights. Exports outside the maquila (export-processing) sector continue to grow, this time with a greater share coming from products other than coffee, and remittances are rising despite a less favorable migration environment.

December will begin to provide answers

The blow to production will depend largely on El Niño, which continues to strengthen and could reach peak intensity by the end of the year, and on how interest rates respond. If the US Federal Reserve raises its rate in December, or if food and transport prices stay high for longer, pressure would mount on the Honduran Central Bank to raise the Monetary Policy Rate (MPR) again, potentially slowing the recent momentum in commercial credit, which had been expanding at a solid pace. Meanwhile, the passage of the 2027 budget and the resolution of the electricity tariff freeze will determine how much of the shock the government and the ENEE must absorb. Those decisions will help shape the final cost of these shocks for Honduras.

Honduras now faces a tougher external environment. In the third quarter of 2026, fuel prices rose sharply again, leaving the country among the most exposed economies, since it imports all the oil it consumes. Other economies have managed to offset the blow through investment and trade linked to artificial intelligence (AI)Footnote 1^[1]. Honduras, by contrast, has remained on the sidelines of that boomFootnote 2^[2].

The price of the oil that serves as a benchmark for Honduras, the West Texas Intermediate (WTI), jumped from US$70 per barrel in early July 2026 to $107 on September 15, following the escalation of conflict around Hormuz and Bab el-Mandeb straits; it closed the month near $96 as negotiations reopened between the United States and Iran.

Yet in 2026, the challenge is not just the price of oil, but its day-to-day volatility. Between 2022 and 2025, that daily swing ranged from 1% to 2.5% month after month. In 2026, it has not fallen below 1.6%, peaking at 4.8% in March and reaching 3.5% in September (Figure 1). In other words, in March the price swung by an average of nearly 5% from one day to the next. For Honduras, this volatility hits producers, consumers, and public finances alike, complicating planning and budgeting. New uncertainties compound the issue, including the possibility that the White House might restrict diesel exportsFootnote 3^[3].

In response to global conditions, several central banks have tightened policy to curb inflation. In September, the US Federal Reserve (Fed) raised its benchmark rateFootnote 4^[4], and other central banks followed suitFootnote 5^[5]. At the same time, long-term borrowing costs rose for several sovereign issuersFootnote 6^[6]. For Honduras, this means more expensive external financing and upward pressure on domestic interest rates. If Honduran rates lose their appeal relative to international returns, capital is likely to leave the country in search of higher yields.

Alongside oil pressures, Honduras now faces a very different shock. El Niño, which we highlighted in the previous Radar and which brings reduced rainfall to HondurasFootnote 7^[7], left the country with one of its driest July–September periods since 1991 (Figure 2). This August was the second driest since 1991, surpassed only by the 2015 drought. Over these three months, rainfall was 20% below the historical average since 1991 (CHIRPS)Footnote 8^[8]. In response, the contingency agency, the Comisión Permanente de Contingencias (COPECO), maintained alerts across at least 233 municipalities in early October, covering nearly 80% of the national territory and roughly 5.6 million people—almost half the population.

Although other years saw lower overall rainfall, the 2026 drought is hurting crops more than any dry spell in the last 35 years, because the rains failed precisely when they were needed most. At the start of planting in May, rainfall was 45% below the historical average across the country’s crop areaFootnote 9^[9]. During the canícula (the customary mid-year rainfall lull in July and August), the deficit reached 39% in Choluteca and 31% in Ocotepeque and Lempira. By late September, nearly a third of the country’s cultivated area showed water stressFootnote 10^[10]—the highest level recorded for that date since 1991 (Figure 3).

This already historic drought could worsen further. According to the US climate agency (NOAA), there is more than an 80% chance that El Niño will break the 1982–83 record between October and DecemberFootnote 11^[11]. In Honduras, the national weather service, the Centro de Estudios Atmosféricos, Oceanográficos y Sísmicos (CENAOS), forecasts below-normal rainfall through mid-2027, which would overlap with the start of the Primera season—the year’s first planting cycle, running from May to October. The economic toll is only beginning to ripple outward, particularly through food prices and electricity generation, as detailed below.

Between January and September 2026, cumulative inflationFootnote 12^[12] reached 5.3%—more than in all of 2024 or 2025. The shift in trajectory began in March, with the rise in fuel prices, and has strengthened in subsequent months. Since then, inflation has remained above the levels of the previous two years (Figure 4). In September, prices rose 6.3% compared to the same month in 2025. Inflation has now been above the BCH’s 5% tolerance ceiling for six consecutive monthsFootnote 13^[13], and the year is projected to close at 6.7%Footnote 14^[14].

This surge in prices stems largely from external shocks. In September, transport and food accounted for three-quarters of the monthly price increase (0.3 and 0.1 percentage points, respectively) (Figure 5). Transport costs reflect higher fuel prices; food costs increasingly reflect the impact of El Niño. Excluding fuel, basic foodstuffs, and utility tariffs, other prices rose just 2.4% over the yearFootnote 15^[15]. In other words, price pressures have not yet fully spilled over into the broader economy, but second-round effects are likely to emerge.

Because it powers freight transport, diesel transmits price hikes rapidly through the economy, filtering into freight rates, food costs, and retail pricesFootnote 16^[16]. Between March and September, diesel prices in Tegucigalpa rose 69% (Table 1). To cushion the blow, the government expanded its price-absorption subsidies, raising coverage from 50% to 65% and eventually to 70% of each increase, and suspended the tax on dieselFootnote 17^[17]. These measures have softened the price shock, but at a cost to public finances, as examined below.

Meanwhile, food prices are rising against a backdrop of severe drought, creating acute risks for agricultural production. With El Niño expected to strengthen in the coming months, the shock threatens a country where more than 1.8 million people face severe food insecurity and half of rural households live in extreme povertyFootnote 18^[18]. When families must spend a larger share of their income on food, they cut back on everything else—dragging down private consumption, the primary engine of Honduran economic growth.

Finally, in September, the BCH raised its monetary policy rate (MPR), the benchmark rate that anchors the cost of domestic credit, for the first time in nearly two years, from 5.75% to 6.00%. The primary goal was not to reverse price increases that have already occurred, but to prevent inflation from gaining further momentumFootnote 19^[19]. First, the BCH aims to preserve a prudent spread between the Fed’s policy rate and the MPR to avoid depreciation pressures on the lempira, which would drive up import costs and accelerate inflation. Second, the move seeks to contain second-round effects—preventing higher fuel and food prices from bleeding into broader domestic prices. The immediate consequence will likely be higher borrowing costs, at a time when lending has been one of the fastest-growing indicators this year.

The Honduran economy is slowing, according to the two main output measures. Through August 2026, economic activity, as measured by the Monthly Economic Activity Index (IMAE), grew by 3.8%, just below the 3.9% recorded over the same period in 2025Footnote 20^[20]. The slowdown is more pronounced in gross domestic product (GDP), which grew 2.7% in the second quarter compared to 3.9% in the second quarter of 2025Footnote 21^[21].

The financial sector continues to drive most of the growth, while manufacturing keeps losing steam. Through August 2026, financial intermediation (the activity of banks and other institutions that take deposits and lend money) accounted for more than 90% of IMAE growthFootnote 22^[22] (Figure 6), while manufacturing and other services subtracted from growthFootnote 23^[23]. As previous editions of the Radar highlighted, manufacturing remains weak. GDP figures show manufacturing value added fell 2.3% in the second quarter of 2026. A rebound in the sector is critical, as it is the country’s third-largest source of employmentFootnote 24^[24], employing 12% of the workforce.

The latest formal employment figures reinforce this assessment. Formal job creation, measured by the number of workers contributing to the Instituto Hondureño de Seguridad Social (IHSS), has slowed sharply. In August 2026, formal employment rose by just 3,111 workers year-on-year (+0.4%), compared with an increase of 28,212 (+3.5%) in August 2025. Manufacturing, particularly the maquila sector, has taken the hardest hit, with formal employment shrinking 7.9% over the same period (Figure 7).

The impact of the El Niño phenomenon and the drought on production is beginning to show in agriculture. In August 2026, agricultural production fell 9.2% compared to the same month in 2025. Although we do not yet have more detailed data, preliminary assessments report losses near 30% in maize from the Primera cycle and drops of 35% to 40% in milk production. The Instituto Hondureño del Café (IHCAFE) also projects that the drought could reduce coffee production by more than one million quintals compared with what the country would have produced under favorable conditions. And the largest impact has not yet been seen. During the previous El Niño episode, the effect arrived with a lag, when agricultural production continued to grow during 2023 and fell in 2024. If that pattern repeats, the highest cost to production would arrive between the fourth quarter of 2026 and the first quarter of 2027.

The second shock, rising oil prices, could squeeze household spending in the months ahead. Thus far, private consumption has propped up the economy: it grew 4.4% year-on-year in the second quarter, contributing 3.6 percentage points to GDP growth of 2.7% in the quarter. The critical vulnerability is investment, the driver of future productive capacity. It contracted by 1.2% in the second quarter as a modest 1.3% gain in private investment failed to offset a 17.7% collapse in public investment. If higher consumer prices curb household spending, domestic demand will be left with virtually no support.

As previously discussed, financial intermediation continues to anchor much of the growth in Honduras. And unlike productive sectors, financial activity is gaining momentum. Financial system credit to households grew 5.3% year-on-year through August 2026, while lending to firms surged 15.2%. Two years ago the pattern was reversed: in August 2024, household credit was expanding at 20.0% and business credit at 10.9% (Figure 8). This shift is equally visible in new loan disbursements, which reached 362.426 billion lempiras between January and July 2026—up 20.1% year-on-year, compared to just 2.4% growth over the same period in 2025. Agriculture led the turnaround: new lending to the sector swung from a 0.3% contraction in 2025 to 83.6% growth in 2026, followed by services (62.2%) and real estate (36.8%), three segments where borrowers are predominantly corporate.

Credit expanded in part because bank lending became cheaper. The average interest rate on new lempira loans fell from 15.9% in July 2025 to 12.1% in July 2026, while rates on agricultural loans fell from 17.1% to 11.5%—the sharpest decline across any economic sector. Borrowing became cheaper largely because bank funding costs fell: the deposit rate dropped from 9.8% to 6.9%Footnote 25^[25]. This reflects a shift in deposit composition. While total deposits expanded 12.5%, growth was concentrated in demand accounts that pay minimal interest, and higher-yielding term deposits declined. As a result, the interest rate spreadFootnote 26^[26] widened from 6.6 to 7.1 percentage points.

This lending cycle could stall in the fourth quarter following the recent MPR hike. The BCH estimates that for every 100-basis-point increase in the policy rate, lending rates rise 0.71 percentage points in the short term and by up to 1.4 points over 16 months. Indeed, average lending rates have already ticked up to 12.25% in August and 12.29% in September. For now, ample bank liquidity is cushioning the impact: available lempira fundsFootnote 27^[27] are up 28.8% year-on-year, though that is down from a 52% expansion in June. If buoyant business credit finances productive investment, it could help offset external headwinds. With interest rates heading higher, however, that momentum is set to cool toward late 2026.

The latest available data show that the drought has not yet translated into higher non-performing loans (NPLs), which continue to fall. The bank NPL ratio declined from 2.6% to 2.3% between August 2025 and August 2026, and the agricultural delinquency rate dropped from 4.0% to 3.7% as of June. Warning signs, however, are mounting. The banking system’s portfolio at risk rose 12.8% between June 2025 and June 2026, and agricultural lending is the only segment exhibiting “increasing” risk. By June 2026, restructured agricultural loans were 29.4% higher than a year earlier. In September, the Comisión Nacional de Bancos y Seguros (CNBS) approved relief for borrowers in the 75 municipalities under a state of emergency, allowing loan restructuring requests through February 28, 2027, and freezing risk ratings at their August 31 level to prevent automatic downgrades. This should help buffer producers as cash flows deteriorate.

The drought has also strained the power grid. Lower reservoir levels cut hydroelectric generation by 30% between June and September, forcing the country to generate more than half its electricity from bunker- and diesel-fired plantsFootnote 28^[28] just as oil prices peaked (Figure 9). This explains why electricity generation cost 52% more than projected between June and August 2026. The pressure is equally clear in the spot market for uncontracted electricity, which averaged $250/MWh between June and September—more than double its level during the same period in 2025.

So far, these higher generation costs have not shown up on electricity bills. Had they been passed through, average electricity rates would have had to increase by 21% in the fourth quarter (Figure 10). The Comisión Reguladora de Energía Eléctrica (CREE) had already deferred collection on $124 million in generation costs, and the Ley de Justicia Energética, in effect since September, froze electricity tariffs for six months, renewable for another six. If costs remain at current levels, the freeze would add another $213 million in deferred liabilities. These costs, however, do not simply vanish. The $124 million works like a purchase on credit: consumers will eventually have to repay it through future electricity bills, carrying an interest rate of 2.5% per quarter. As for the additional $213 million, the law does not specify who will foot the bill. It could be consumers, through future tariff hikes; the government, with no dedicated funds identified; or the ENEE, which would have to take on more debt and further strain public finances.

Households are paying part of the oil shock out of pocket, while the government is absorbing the rest through subsidies. Through the end of September, spending on fuel and urban transit subsidies was 66% higher than in the same period of 2025. This surge was partly offset by better targeting of the electricity subsidy: narrowing eligibility to a smaller group of households cut spending by 32% (Figure 11). Across all three programs, subsidy spending was down 8% compared to 2025Footnote 29^[29]. Thus far, the administration has accommodated these costs through internal reallocations without increasing the overall budget. As of September, the modified budget showed no net expansion over the approved budgetFootnote 30^[30].

The proposed 2027 budget rises by just 2.5%, even as state obligations mount. Debt service payments are set to rise 14%, driven largely by a $700 million sovereign bond maturing in January 2027. Debt service will consume one of every five lempiras in the budget—nearly matching the combined allocations for the ministries of Education, Health, and Infrastructure. Meanwhile, public payroll spending increases 8%, with half that rise going to Education under the agreement with teachers concluded in 2026. Capital expenditures, by contrast, are slashed by 28% (Figure 12).

The government argues that this adjustment focuses investment on projects with greater implementation capacity and development impact, particularly in highways and healthcareFootnote 31^[31]. Even so, the budget leaves virtually no fiscal space to absorb new shocks. For all of 2027, the draft budget allocates 716 million lempiras to fuel subsidies—well below the 1.009 billion lempiras already spent through September this year—while establishing a climate emergency fund with an initial allocation of just 50 million lempirasFootnote 32^[32].

The ENEE remains the primary fiscal risk. Drought and costlier fuel have inflated utility expenses: through September, the ENEE spent 13% more on power purchases than over the same period in 2025. Under this financial strain, the state utility has borrowed nearly 13 billion lempiras from domestic commercial banks, almost twice its budgeted borrowing for all of 2026Footnote 33^[33]. With electricity tariffs frozen, these mounting costs threaten to erode the ENEE’s financial standing and jeopardize compliance with the statutory fiscal deficit ceiling established under the LawFootnote 34^[34].

Exports of general merchandiseFootnote 35^[35] (excluding the maquila sector) reached $5.433 billion between January and August—up 8.9% compared to the same period in 2025. This expansion was less reliant on coffee than in past cycles: while coffee export volumes rose 16.3%, prices fell 14.2%, leaving total coffee export earnings essentially flat. Growth instead came from smaller export products, including bananas, palm oil, recycled materials, metals, and shrimp. The drivers varied across commodities: some saw both price and volume increases, while in others, a rise in one offset a fall in the other (Figure 13). The maquila sector, by contrast, contracted 9.6% over the same periodFootnote 36^[36].

Imports grew 8.6% through August, driven by fuel. For every 10 additional dollars spent on imports, six went to refined petroleum products, whose bill swelled by $743 million year-on-yearFootnote 37^[37](Figure 14). This surge pushed the trade deficit to $6.009 billion—a 22% widening compared to the same period in 2025. Over the past five years, only the 2022 price shock produced a steeper deterioration in the trade balanceFootnote 38^[38].

At the same time, more foreign direct investment (FDI) entered the country, although its composition calls for nuance. Through June, FDI inflows reached $676 million—up 67% from 2025—concentrated mainly in commerce and financial intermediation. Most of this came from foreign companies already established in Honduras, which reinvested earnings or borrowed from parent companies. Fresh equity capital totaled just $15 millionFootnote 39^[39].

Remittance inflows round out the external picture, sustaining double-digit growth. Remittances reached $10.099 billion through September—up 11.2% over the same period in 2025 (Figure 15). While that pace is less than half the expansion seen a year ago, flows have proven resilient despite a hardening immigration climate in the United States, which included the termination of TPS in SeptemberFootnote 40^[40]. Thus far, the end of TPS has not visibly dampened remittance volumes.

As a result, the current account swings back into deficit following 2025’s surplus. The BCH projects the deficit at between 0% and 1% of GDP, while the International Monetary Fund (IMF) forecasts 2.0%. The lempira also faces a more demanding environment shaped by higher oil prices and rising global interest rates. Even so, international reserves stood at $11.538 billion at the end of September—sufficient to cover 6.6 months of imports. Supported by that buffer, the BCH is preparing a gradual return to the interbank foreign exchange marketFootnote 41^[41]. Last year’s twin tailwinds, high coffee prices and record remittances, have softened, leaving higher oil import costs to weigh more heavily on the external accounts.

The oil and drought shocks are already testing the economy. The government absorbed part of the blow through subsidies and frozen electricity tariffs, but the remainder has merely been postponed. The open question is the eventual cost. Honduras maintains its credit ratings from Moody’s and S&P, and its sovereign bond spread (measured by J.P. Morgan’s EMBI) remains well below historical norms. Even so, market borrowing is more expensive today because 10-year US Treasury yields—the global pricing benchmark for sovereign debt—have reached their highest level since 2007.

On November 1, the Government and the IMF reached a staff-level agreement on the sixth and final review of the program launched in 2023. This progress strengthens fiscal credibility and paves the way for negotiating a new program for 2027–2030 (a support facility Honduras could draw on if needed). Looking ahead, the same statement identifies two imperatives: reducing ENEE’s burden on public finances and advancing the transformation of the energy sector.

Key developments to watch as the year draws to a close:

• El Niño’s peak intensity (October to December). During the last episode, the damage to agriculture materialized with a one-year lag. A repeat would push up food prices and thermal generation costs, and could increase arrears on agricultural loans.
• The US midterm elections. Remittances currently cushion the impact of higher oil imports on the current account. Following the termination of TPS and with a 1% tax on cash-funded remittances, the incoming Congress will shape whether US immigration policy hardens further.
• The Federal Reserve meeting (December 8–9). On October 28, the Fed left its policy rate unchanged, though two voting members favored a hike. A rate hike in December would increase pressure on the BCH to raise its MPR again, directly raising borrowing costs for commercial credit—the sole segment of the economy currently accelerating.
• Congressional approval of the 2027 budget (mid-December). The draft budget earmarks less for fuel subsidies than the amount already spent through September, and offers no solution for funding the electricity tariff freeze that expires on March 29.
• The Millennium Challenge Corporation selection decision (December). Honduras is among 91 candidate countries eligible for investment compacts from the US agency in 2027, though candidacy does not guarantee selection. A new compact would provide non-reimbursable investment grants, just as the proposed 2027 national budget cuts capital spending by nearly one-third.