Central America / Politics

As Honduras Leaves World Bank Dispute Forum, US Tries to Keep Influence

Honduras’ withdrawal from the World Bank investor dispute forum could have a limited practical effect, but it is already read along ideological lines. The Biden administration has avoided a dustup, receiving top Castro officials last week to discuss an “interoceanic highway” as the U.S. competes with China for leverage in Tegucigalpa.

Orlando Sierra
Orlando Sierra

Thursday, April 25, 2024
Roman Gressier

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Honduras’ withdrawal next August 25 from the World Bank’s International Center for Settlement of Investment Disputes (ICSID), announced in early March, is President Xiomara Castro’s latest and most significant stroke away from Honduran trade and investment policy of the past four decades, an action preceded by few others in the hemisphere.

It’s hard to foresee the real effect of the decision. Honduras is facing 10 ongoing ICSID claims —nine of which were filed during her administration, in 2023 alone— totaling at least $12 billion USD, newspaper Tiempo estimates, and is subject to any additional claims filed before its scheduled exit.

That represents 40 percent of GDP, or almost three-quarters of this year’s national budget, in one of the most impoverished countries in the hemisphere, with chronically underfunded institutions, intense political gridlock, the heavy hand of the United States, its main trading partner, and pressing national debt.

Adding to the legal conundrum, the Central American Free Trade Agreement (CAFTA-DR) specifies ICSID as the investor-state dispute forum. Honduras also remains party to 19 other free-trade and bilateral investment agreements across the Americas and Europe, some of which specify other supranational dispute forums.

Former Finance Minister Rixi Moncada, an early presidential frontrunner for the ruling party Libre, last year accused ICSID of “admitting lawsuits from modern-day filibusters.” AG Johel Zelaya, appointed by Libre, has described the nine ICSID claims filed in 2023 as “litigation terrorism.”

In contrast, the E.U.-Central America Association Agreement, ratified on April 12 by the European Council, states in article 167 that “nothing in this Agreement shall be subject, directly or indirectly, to any investor-to-state dispute settlement procedures” such as ICSID, and establishes in article 310 a “bilateral dispute settlement mechanism” whereby a committee of party governments resolves “consultations in good faith with the aim of reaching a mutually satisfactory solution.”

In a move to deepen relations with China, the Honduran Foreign Ministry signed an agreement on Mar. 22 to receive around $275 million USD to be invested in school infrastructure. Photo Government of Honduras
In a move to deepen relations with China, the Honduran Foreign Ministry signed an agreement on Mar. 22 to receive around $275 million USD to be invested in school infrastructure. Photo Government of Honduras

The government has yet to officially lay out its arguments for the withdrawal from ICSID, but Foreign Minister Enrique Reina told local press on April 6 that the World Bank had wrongfully allowed the Delaware-listed firm Honduras Próspera Inc., which operates a bitcoin-using charter city along the Honduran coast, to file a claim for an astounding $10.7 billion before exhausting legal avenues in Honduras.

He omitted that the terms of CAFTA-DR allow companies to appeal directly to ICSID. Reina and presidential advisor Manuel Zelaya did not respond to requests from El Faro English for comment.

“That is why CAFTA is so detrimental: It allows companies to directly resort to international arbitration” before turning to local courts, says Manuel Pérez-Rocha of the D.C.-based Institute for Policy Studies, echoing the dozens of economists who applauded Castro’s decision and strongly criticized the ICSID in an open letter in March. “Honduran investment law says the same thing, and would have to be reformed, too.”

Private-sector groups have chafed at the announced departure. “The Executive Branch has the authority and independence to make this decision,” Alejandro Kaffati, economic analyst at the Honduran Council on Private Enterprise (COHEP), told El Faro English — even though it “was a decision made overnight, without consultation.”

COHEP, he says, has seen an increasing government “discourse against investment.” Law firm White & Case, who represents multiple of the claimants, wrote that Castro has ushered in a “return to anti-private investment politics in Honduras” and characterized the ICSID withdrawal as contributing to “uncertainty and erosion of value for investments.”

But, Kaffati added, “most of the contracts signed before this announcement include an ICSID clause… Even if Honduras is not a signatory, the government will have to go to court to defend itself, but it will be at a disadvantage relative to investors, because it will not be able to fully participate in the bodies of arbitration as it would by being a member.”

Próspera filed a complaint after the 2022 repeal of the Juan Orlando Hernández-era Special Zones for Economic Development (ZEDE) Law, a campaign pledge by Castro, under the argument of national sovereignty. It has thus far kept its properties on the island of Roatán.

Pérez-Rocha says that ICSID typically awards less money than requested by investors, who tend to inflate their calculation of damages. If it rules in favor of Próspera, he expects the same: “This [the company claim] is unpayable. If Honduras were ordered to pay it, the country would go bankrupt… It is designed to have a chilling effect.”

Skirting confrontation

Other ICSID claimants against Honduras include the Paiz family, one of the wealthiest in Guatemala, the U.S. bank JPMorgan Chase, and others from Honduras, Panama, Mexico, Chile, Norway, and the Caymans. Several electrical firms filed claims after Castro’s 2022 reforms to classify electricity a public utility and human right, declare a national emergency and —to the chagrin of the U.S. Embassy— expand the public-sector role in electricity production.

In 2012, Argentina’s failure to pay U.S. investors hundreds of millions of dollars ordered by ICSID led to their suspension from a U.S. tariff-waving program by the Obama administration. Argentina was reinstated in 2017.

Honduran President Xiomara Castro speaks next to Colombia
Honduran President Xiomara Castro speaks next to Colombia's President Gustavo Petro (left) and UN Secretary-General Antonio Guterres (right) during the CELAC Summit in Buccament Bay, Saint Vincent and the Grenadines on March 1, 2024, Castro's first session as president pro tempore of CELAC, which Honduras will hold until 2025. Photo Randy Brooks/AFP

But those days seem to be over. The Biden administration has yet to position itself on Honduras’ withdrawal, and progressives in Congress have been particularly receptive on the issue of ICSID. On March 21, four-dozen House Democrats stressed their “eagerness” to remove ICSID provisions from CAFTA-DR and similar dispute resolution forums from “all other trade or investment agreements in Central America.”

Pérez-Rocha notes that North American and European countries have begun to remove supranational dispute clauses from their trade agreements, and thinks Central America should follow suit. “Honduras, which just assumed the presidency of CELAC, should take this issue to CELAC so that, with the help of Brazil, Latin America can start to dismantle the system of [supranational] investor protections at a hemispheric level.”

The others in the hemisphere to leave the World Bank dispute forum are Venezuela, Nicaragua, and Bolivia, who departed in the past decade. Ecuador exited in 2009, under Rafael Correa, but returned in 2021. The investment giant Brazil, whose multipolarism is a muse for the Honduran presidential couple, never joined; its constitution prohibits it.

U.S. Ambassador Laura Dogu’s meetings with the ZEDEs, and public support for U.S. investors, has in recent years drawn Castro’s ire, as has the last State Department human rights report, which chiefly criticized the 16-month state of exception.

“Most of the problems we face as a country are structural and were caused by the narco-dictatorship,” tweeted Reina on Wednesday, referring to the National Party governments from 2009 to 2022. “This partial and unilateral report does not reflect the important advances… of President Xiomara Castro to institute the rule of law in Honduras.”

The Castro and Biden administrations are, however, readily discussing a future “Honduran Interoceanic Railway.” Last week the White House received Reina and Manuel Zelaya Castro, the president’s son and private secretary, to discuss the plans.

Honduran President Xiomara Castro, her husband and advisor Manuel Zelaya (left) and her son and private secretary Hector Manuel Zelaya (right) greet supporters during a demonstration to celebrate the second anniversary of Castro
Honduran President Xiomara Castro, her husband and advisor Manuel Zelaya (left) and her son and private secretary Hector Manuel Zelaya (right) greet supporters during a demonstration to celebrate the second anniversary of Castro's inauguration, outside the Universidad Nacional Autonoma de Honduras in Tegucigalpa, on January 27, 2024. Photo Orlando Sierra/AFP

Even on Wall Street there is skepticism about how far Castro will push before the Honduran elections in November 2025. “It is clear how close the Honduran administration is to the Maduro line, but I doubt they will do anything atypical in the next two years,” says an analyst at a U.S. investment bank. “They have plenty of international reserves at the Central Bank, and that will keep them afloat. Honduras is far from an economic crisis.”

“I think the so-called investment climate in Honduras could be weakened [by their exit], as well as their credit ratings and others,” asserts Pérez-Rocha. “The exit from ICSID is more politically symbolic, but does not solve Honduras’ problems. And the Castro administration is making a strong bet on China.”

March 26 marked one year since Honduras broke off relations with Taiwan. In March, the Chinese invested some $275 million USD in Honduran public school infrastructure, all while talks with Castro toward a free-trade agreement —like with the Bukele administration in El Salvador— are moving quickly, potentially culminating this year.

“There is no better way to protect public finances and national sovereignty than respecting contracts that have been signed, the existing laws, and public institutionality,” says Kaffati of COHEP. Ironically, “we have heard that in the negotiations for the Chinese free-trade agreement, the Chinese side is studying the possibility of including an ICSID clause.

*Additional reporting from José Luis Sanz

This article first appeared in the April 25 edition of the El Faro English newsletter. Subscribe here.

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