The last few years have been tumultuous for Honduras, politically, economically and socially. In 2020, the country was hit hard by the dual blows of the Covid-19 pandemic and two Category Four hurricanes, Eta and Iota, with GDP contracting by 9% that year.
Almost a million people were displaced during the storms and thousands of acres of crops were destroyed, which was devastating for an economy traditionally reliant on the export of agricultural products such as bananas, sugar and coffee. The export manufacturing (maquila) industry, another important segment of the Honduran economy, was also badly affected by the drop in demand from the US as a result of the pandemic.
Since then, however, the economy has rebounded, thanks in part to the recovery of the maquila sector and a steady stream of remittances from Hondurans living in the US, which reached a record high of $8.7bn in 2022 (accounting for over 20% of GDP). Most recently, figures from Honduras’ Central Bank showed that GDP expanded by 4% in 2022, while the World Bank predicts growth of 3.5% in 2023.
Honduras has also been affected by a turbulent political climate. Former president Juan Orlando Hernández, whose administration was surrounded by allegations of electoral fraud, money laundering and drug trafficking, left office in January 2022 after serving two terms, and that April was extradited to New York on drugs and firearms charges.
His left-wing successor, Xiomara Castro – Honduras’ first woman president – has quickly taken steps to tackle corruption in the country, including requesting support from the UN to establish an international anti-corruption commission (CICIH). The new government has also introduced various reforms aimed at improving the investment climate by increasing transparency, raising labour standards and increasing the efficiency of the electricity system.
The sweeping changes to laws on tax incentives, electricity generation, hourly employment and special economic zones have created some challenges for Honduras’ law firms. The uncertain legal environment has meant that firms – and their clients – remain in wait-and-see mode until the effects of the reforms become clear. As a result, the demand for advice on large-scale projects and transactions has dropped off significantly.
In the corporate sphere, while foreign direct investment (which decreased drastically during Hernández’s second term) has begun to recover since the change in government, the M&A market has been affected by investors’ wariness to become involved in projects.
In particular, in April 2022 Congress repealed the law on the creation of semi-autonomous Zones for Employment and Economic Development (ZEDEs), which were exempt from certain taxes in order to attract foreign investment (the zones also raised serious concerns both inside and outside Honduras over their lack of transparency and constitutionality, and their environmental impact). This has left the status of the three current ZEDEs – Ciudad Morazán, Orquídea and Próspera – in limbo and has already led to legal action; in December 2022, US company Honduras Próspera launched an ICSID claim against the Honduran government over the repeal of the zones, seeking eye-watering damages of nearly $11bn.
Then, in April 2023, the Bill on Tax Justice was submitted to Congress. This aims to improve transparency and fairness in the tax system, including by removing various tax exemptions previously offered to investors in the free trade zone, export manufacturing, renewable energy and tourism sectors. Private businesses and the Honduran Council of Private Enterprise (COHEP) have criticised the measures for creating instability and raising the possibility that foreign companies may move their operations elsewhere in Central America.
On the other hand, law firms expect that the government’s decision to establish diplomatic relations with China in March 2023 will boost the economy and open up further investment opportunities.
Turning to the energy sector, although firms are still active in advising on regulatory and environmental issues, the need for advice on project financing and development has stalled due to a lack of investment in projects for a number of reasons, including the proposed tax reforms and changes to the law on electricity generation.
In May 2022, the government brought in a new energy law, seeking to address serious problems in the electricity sector – frequent blackouts, high tariffs and the deficit of the National Electric Energy Company (ENEE), which amounts to 10% of Honduran GDP.
The dramatic reforms include giving powers to ENEE and the government to renegotiate power purchase agreements with renewable energy generators and, if negotiations fail, nationalise their assets in exchange for “fair compensation”. The law also strictly limits private investment in energy projects and, as a consequence, many foreign investors have paused planned developments in Honduras.
This has added to ongoing uncertainty in the sector. The requirement under ILO Convention 169 to consult with indigenous populations affected by the development of energy and mining projects, in addition to protests by indigenous communities, human rights activists and environmentalists, has also led to the suspension and closure of many projects (as well as violent reprisals against protestors). Finally, in February 2022, the government announced the cancellation of environmental permits for open-pit mining due to the harmful impact of the industry.
The other area of law to have seen significant changes is the labour sphere, following the repeal of the law on part-time employment in April 2022, meaning all Honduran employees must now be salaried. Firms have seen a significant uptick in demand for advice from clients in the retail, tourism and food service industries, which are particularly reliant on hourly workers.
In contrast to the current legislative situation, the legal market in Honduras remained stable in 2022 and 2023. Most firms operate two offices in the country, in the political and administrative capital of Tegucigalpa and the industrial centre of San Pedro Sula, in northern Honduras.
The landscape continues to be dominated by major Central American firms Aguilar Castillo Love, Arias and Consortium Legal, while other key regional players include BLP, García & Bodán, Lexincorp, CENTRAL LAW and Latamlex / Matamoros Batson y Asociados. Guatemala-founded firm Mayora & Mayora, S.C. is also continuing to grow its presence in the country, recently expanding its San Pedro Sula office into new premises.
Alta Melara & Asociados has also joined the ranks of the full-service regional outfits in Honduras, following the merger of domestic practice Melara & Asociados with firms in Guatemala, El Salvador and Costa Rica in 2021.
Among the most prominent and well-established domestic names are Gufa Law and López Rodezno & Asociados, as well as a number of IP boutiques – Bufete Casco, Bufete Durón, Bufete Mejía & Asociados and Casco & Casco – and litigation specialists Galeano & Garcia.
Among the recent entrants to the ranking this year are domestic firm Ulloa & Asociados, which is particularly well regarded for its labour expertise, and the Honduras office of Caribbean and Latin American IP specialist Eproint.