The Big Idea
Honduras | Election results
This material is a Marketing Communication and does not constitute Independent Investment Research.
Preliminary election results in Honduras shows a shift that may further strengthen International Monetary Fund and even US relations and finally allow for the country to move into ‘BB’ rating territory. The initial reaction has already flattened the spread premium to peers with additional upside depending on the final outcome and on specific policy proposals.
The political risk premium in Honduras has quickly unwound after a mostly uneventful election and centrist political transition. This allayed concerns about surprises that could have threatened a constitutional crisis. Preliminary results mostly line up with polls showing the incumbent in third place with only 19% support. Although the Libre candidate, Moncada, has not yet conceded, other Libre party members have recognized the defeat with no obvious recourse.
CNE election authorities have pivoted to ballot verification after declaring a 40% technical tie with leading National candidate Asfura and Liberal candidate Nasralla only 515 votes apart. The count aims to verify initial results before a full count and final verification. Results need to be finalized before a December 30 deadline and ahead of the January 27 transition.
The US role is relevant after President Trump endorsed National Party candidate Asfura and expressed distrust of Liberal Party candidate Nasralla for his former association with the Libre Party. With an orderly election outcome, there is low risk of US diplomatic retaliation especially since there were mostly normal relations under Honduras President Xiomara Castro. Consistent tweets from President Trump may also discourage any last-minute election interference.
The challenge under a potential Nasralla administration would be to solidify a centrist policy shift and disassociate from the Castro administration. There could be an instant upgrade of US bilateral relations under the alternative Asfura administration including maybe the reinstatement of the Temporary Protected Status of US-based Hondurans and preferential tariff treatment, similar to other Latin American countries with preferential diplomatic relations. The Trump endorsement may have discouraged election interference and provided a last-minute boost for Asfura as Hondurans prioritize favorable US diplomatic relations and strong economic ties.
Both candidates hope for a dominant two-thirds majority coalition in congress. This would provide a credibility shock for the Nasralla administration and strengthen relations with the markets and the US government. However, the coalition prospects are critical under any election outcome since no single party has a simple majority. The obvious tensions between the two frontrunners will have to be resolved quickly to allow power-sharing and effective governability. This would allow for a stronger reform agenda under the current IMF program with less political fragmentation and marginalization of the Libre Party. The reform agenda should focus on IMF guidelines for good governance including an AML/CFT framework and energy reform. It’s reasonable to expect a political shift as the Libre Party loses congressional seats to a more dominant centrist Liberal Party and center-right Nacional Party.
The markets did not show much conviction before elections. Returns did seem skewed to the upside since valuations looked soft for a split ‘BB/B’ credit and wide to ‘B’ credits. This already discounted significant political risk without much if any consideration of the reasonable polls that predicted the political and economic transition.
The question is how much upside is left after elections. The split rated ‘BB-/B1’ Honduras was trading wide to ‘B-‘ El Salvador and has since adjusted to trade near flat to the composite ‘BB-‘ rating of the Bahamas curve. There is still room for optimism if the most market friendly candidate, Asfura, wins. That would leverage the upside on US diplomatic relations and economic reform. If Honduras can shift towards a composite ‘BB’ rating, then current levels would still represent the widest ‘BB’ credit in Latin America without any benefit of index inclusion and scarcity demand relative to the comparison to the Bahamas and Colombia.
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