Macroeconomic and financial risks transmitted by the European Union Deforestation Regulation: a focus on the coffee value chain in Honduras

Case studies can illustrate and explore nature-related transition risks, providing vital real-world evidence. To date, they have not been used extensively within the central banking community to study this topic. In this paper, a case study concerning the effects of the European Union’s Deforestation Regulation (EUDR) on the coffee value chain in Honduras investigates some of these risks, providing valuable evidence and insights.

The EUDR poses nature-related transition risks for countries exporting to the EU market. The coffee value chain in Honduras provides an excellent context in which to study this, in view of the country’s extreme economic dependence on this highly relevant sector and the overwhelming reliance on smallholder and household producers.

This paper finds that the overall risks of exclusion for Honduran producers remain extremely high because of the legality and traceability requirements of the EUDR, putting approximately 20% of the country’s exports and 7% of its foreign exchange at risk. The general exposure of banks through loans to the coffee sector, as a share of total lending portfolios, is low. However, at the individual level, some banks are highly exposed to credit risks arising from default, with potential for regional spillovers. Finally, the interaction of nature-related transition and climate risks deserves greater attention, given the potential for both financial and trade-related exclusion.

This paper is part of the CETEx Discussion Paper Series: Land and Ocean, which aims to support financial and economic policymakers as they contend with and make considerations for environmental degradation issues, in addition to climate change. The papers have been written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research.