Market Darling Status Threatened by Honduras Election Chaos

(Bloomberg) -- A week ago, Honduras was the darling of foreign investors, with its market-friendly president seemly assured of a comfortable election victory and bonds near record highs. Today, the nation is shaken by riot and disorder as the much-questioned vote count drags on for a sixth day and memories of the country's turbulent past return to haunt the market.

Pro-U.S. President Juan Orlando Hernandez is leading by 42.9 percent to 41.4 percent for the opposition's Salvador Nasralla, with 94 percent of ballots tallied, after trailing earlier in the week. Amid apparent irregularities by the electoral authority, Nasralla said he won't recognize the result and called on his supporters to take to the streets. Something they quickly did.

“Violence is likely to escalate in the upcoming weeks since there is still no clear winner and the opposition its mobilizing its supporters,” said Sofia Martinez, an analyst with International Crisis Group. “Honduras is one of the most unstable countries in Latin America- this is evidenced by the current crisis.”

Hernandez, a 49-year-old conservative former congressman, has been popular with foreign investors after slashing the fiscal deficit, helping the country earn upgrades from Moody's Investors Service and S&P Global Ratings. Yet, the latest election comes just eight years after a spike in murders following a 2009 coup that led to the ousting of Manuel Zelaya.

The U.S. is watching the latest turbulence with concern. The Central American nation is one of the biggest sources of illegal migration reaching the U.S. and a main transit point for South American drugs. Local TV showed scenes of looting and protesters clashing with security forces.

"If violence and unrest escalate and the authorities respond with more repression it may drive Hondurans to migrate to the US and elsewhere,” said Adriana Beltran, analyst for the Washington Office on Latin America.

Election Surprise

Nasralla confounded polls and gained a five percentage point lead in the early hours of Monday with 58 percent of votes counted. When, after a lengthy silence, the electoral authority began publishing updates, the results swung in Hernandez's favor, leading to widespread skepticism.

The confusion led Honduran bonds to fall the most in emerging markets after the first results were announced -- a drop that has been only partially reversed as Hernandez moved back into the lead. Authorities said they would publish the final result Friday evening, but have already missed other deadlines.

“The Hernandez administration's economic policy is well understood by investors, it is fiscally responsible and likely to be under the assistance of the IMF,” Andrew Stanners, a money manager at Aberdeen Asset Management PLC who holds the nation's dollar bonds. “The future for bondholders is clearer and easier to forecast under a Hernandez administration.”

Hernandez inked a three-year program with the International Monetary Fund in 2014 and cut the fiscal deficit to 2.6 percent of gross domestic product last year, from 7.9 percent in 2013.

Even after this week's sell-off, the nation's dollar bonds -- it has $1.7 billion outstanding -- have returned 77 percent since October 2013 when Hernandez took a lead in polls ahead of his election, the most among all the countries in Bloomberg's sovereign bond indices over the period.

Honduras isn't the only Latin American nation whose institutions have coming under fire in recent weeks. The U.S. this week said it was “deeply concerned” by Bolivia's ending of term limits, while in Ecuador President Lenin Moreno has clashed with the constitutional court.

Honduras growth will accelerate to 4 percent this year from 3.6 percent in 2016, according to the IMF. The country has benefited from cheaper energy prices for its fuel imports, higher remittances from Hondurans in the U.S., and a record coffee harvest. The government is hoping that tourism can become a major foreign currency earner if it can cut violence enough so that foreign visitors feel safe visiting its beaches, forests and Mayan ruins.

The chaotic election, which has brought clouds of tear gas and roadblocks of burning tires to the capital city, won't do anything to help that strategy.

To contact the reporter on this story: Michael McDonald in Guatemala City at mmcdonald87@bloomberg.net.

To contact the editors responsible for this story: Matthew Bristow at mbristow5@bloomberg.net, Philip Sanders

©2017 Bloomberg L.P.