This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002660 
 
SIPDIS 
 
STATE FOR DRL/LEA/IL, WHA/PPCP, AND WHA/CEN 
USDOC FOR 3134/USFCD/IOI/WH/RD/DLUTTER 
USDOC FOR 4320/IEF/WH/OMCB 
USDOC FOR 4322/ITA/MAC/WH/OLAC/EJAFFEE 
GUATEMALA FOR COMMATT DTHOMPSON AND AGAH FCOOLIDGE 
 
STATE PLEASE PASS TO USAID, OPIC, EXIM, USTR 
STATE PLEASE PASS TO USED IDB, USED WB, USED IMF 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EAIR ELTN PGOV PREL KPRV KTDB KPWR HO ENGR
SUBJECT: HONDURAN ECON HIGHLIGHTS: SEPTEMBER 2002 
 
REFS:  A) TEGUCIGALPA 2563, B) TEGUCIGALPA 2207 
 
TOPICS: 
-Finance Ministry Unveils 2003 Budget Proposal 
-Maquila Sector: New Investment 
-Remittances up by 38 Percent in 2002 
-Banking System: Two Banks Intervened, New Laws Passed 
-New Honduran Airline Commences Operations 
-InterAirports Under Attack, Although Quiet for Now 
-Administrative Simplification Law Passed 
-Prequalification Contract for Cellular Contract Underway 
-Energy Sector Update: ENEE Opens Bids for 210 MW Contract 
-Coffee Export Revenues Continue to Fall 
-Chiquita Resumes Banana Production After Strike 
-Mangos Exported to the U.S. for the First Time 
-USG Donates Equipment to Benefit Small Dairy Farmers 
 
Finance Ministry Unveils 2003 Budget Proposal 
--------------------------------------------- 
 
¶1.  The Ministry of Finance projects that the GDP will grow 
by 2.5 percent in 2002 (most likely overstated) and that the 
central government's fiscal deficit as a percent of GDP will 
be 5.9 percent.  This is higher than the GOH's earlier 
estimate of 5.6 percent of GDP and far higher than its 
target in its IMF program.  The government is considering 
further tax measures to increase government revenues. 
 
¶2.  In September, the Ministry of Finance presented the 2003 
budget proposal to the National Congress.  The central 
government's budget of approximately 32.7 billion lempiras 
(usd 1.97 billion) represents a 10 percent increase in 
nominal terms over the 2002 levels.  Spending on health, 
education and security account for 65 percent of the budget, 
while debt service payments (including usd 100 million for 
Paris Club debt) account for 17 percent.  With improvements 
in tax receipts, the Ministry of Finance projects the 
central government fiscal deficit could fall to four percent 
of GDP; however, local economists are skeptical. 
 
Maquila Sector: New Investment 
------------------------------ 
 
¶3.  The Honduran Maquila Association (AHM) reports that the 
industry is rebounding from losses incurred in 2001 and 
estimates that the value added in 2002 will total usd 660 
million, an increase of usd 60 million over 2001 and equal 
to 2000 levels.  Meanwhile, total employment in the sector 
in 2002 is projected to average 110,000, the same as 2001 
but still lower than 2000 when the sector registered 125,000 
workers. 
 
¶4.  Local press reported that in October South Korean 
company Woon Chun de Honduras will begin operation of an 
apparel assembly plant employing approximately 1,100 
workers.  Total new investment is estimated to be over usd 
30 million.  Meanwhile, Lear Corporation, a U.S. company 
producing wire harnesses for U.S. automakers, announced 
plans to increase investment by usd 10 million, generating 
an estimated 1,500 new jobs. 
 
Remittances up by 38 Percent in 2002 
------------------------------------ 
 
¶5.  Remittances from abroad (primarily the U.S.) have become 
the second largest source of national income, totaling usd 
550 million in 2001, or 8.6 percent of GDP.  The Central 
Bank announced that remittances in 2002 are increasing at a 
rate of 38 percent compared to 2001 and could total nearly 
usd 800 million by the end of the year.  According to the 
Central Bank, an estimated usd 120 million is charged 
annually by money transfer companies for transactions 
between the U.S. and Honduras.  The Central Bank has plans 
to institute a mechanism in late 2002 allowing people 
residing in the U.S. to transfer money to Honduras via 
selected corresponding banks.  The new system could reduce 
transaction costs by 60 percent. 
 
Banking System: Two Banks Intervened, New Laws Passed 
--------------------------------------------- -------- 
 
¶6.  The Central Bank disbursed approximately usd 40 million 
in May to intervene two undercapitalized banks, Banco 
Capital and Banco Sogerin.  The money was given as a 
supplementary credit to Honduras' Deposit Insurance 
Institution (Fosede) in order to guarantee 100 percent of 
deposits.  The two banks account for usd 120.7 million in 
deposits.  Since the intervention, the National Banking 
Commission reported a six percent decline in Capital and 
Sogerin deposits - much lower than the expected 15 percent. 
Attorneys representing Sogerin and Capital appealed the 
interventions to the Supreme Court. 
 
¶7.  In August, the National Congress approved a law 
extending the 100 percent government deposit insurance until 
September 30, 2003.  At that point deposit insurance will be 
capped at 150,000 lempiras (usd 9,000). 
 
¶8.  The National Congress approved a law in August 
tightening rules regulating related lending and investment 
by banks.  According to the law, the cap on loans to related 
entities will decline from the current limit of 120 percent 
of the institution's capital to 30 percent over a three-year 
period.  Per the law, banks are also limited from investing 
more than 20 percent of their total capital in any one 
particular outside business. 
 
New Honduran Airline Commences Operations 
----------------------------------------- 
 
¶9.  Sol Air, the first Honduran airline to operate in nearly 
a decade, began operations on July 12 with two daily flights 
to Miami and an opening roundtrip fare of usd 399.00.  From 
Miami, Sol Air offers service to Tegucigalpa and San Pedro 
Sula.  TACA and American have responded to the new 
competition with deeply discounted fares over the summer and 
early fall.  In November, the airline hopes to begin direct 
flights from Dallas to Roatan on Saturdays, serving 
primarily tourists interested in scuba diving and other 
island tourism.  The company also hopes to fly to New 
Orleans (and on to Costa Rica), a routing pushed heavily by 
the Mayor of the city of New Orleans during his early July 
visit.  Permits to fly to San Salvador and Managua are still 
pending. 
 
InterAirports Under Attack, Although Issue is Quiet for Now 
--------------------------------------------- -------------- 
 
¶10.  After a series of media attacks and complaints by 
private sector groups, Congress named a special commission 
in July to investigate InterAirports for possible breach of 
contract.  The U.S.-led Interairports consortium (51 percent 
U.S. owned) took management control of Honduras' four 
international airports in October 2000.  Critics charge that 
the San Francisco Airport Authority is not an active, full 
partner in the consortium (participation of a major airport 
was a requirement in the public tender and subsequent 
contract) and that the company has not followed through with 
investments.  They have also been criticized for fee 
increases.  InterAirports counters that the price increases 
were enacted by the National Congress and that fees for air 
cargo are still the lowest in the region.  In addition, 
delays in contract-mandated investments, such as extending 
the runway at the Tegucigalpa airport, are the result of 
government delays and inaction.  President Maduro and other 
government officials have publicly stated that Interairports 
has complied with the terms of the contract. 
 
¶11.  InterAirports' figures reveal that between October 2000 
and May 2002, the company has invested usd 24.8 million in 
the four international airports.  Interairports is planning 
to invest an additional usd 26.3 million in the airports 
over the next year.  Planned projects include building a new 
hangar in Tegucigalpa and renovating and expanding the 
terminal at the La Ceiba airport. 
 
Administrative Simplification Law Passed 
---------------------------------------- 
 
¶12.  In August, the National Congress approved the 
Administrative Simplification Law which reduces the 
bureaucratic hurdles in establishing a business in Honduras. 
The law, which was drafted by the Competitiveness Council, 
is part of the government's plan to make Honduras a more 
attractive place for foreign investment.  Some of the 
benefits of the law include simplifying procedures involved 
in establishing a new business and placing time limits on 
issuing government permits. 
 
Prequalification Process for Cellular Contract Underway 
--------------------------------------------- ---------- 
 
¶13.  On September 9, Honduras' telecommunications regulatory 
agency (CONATEL) held an open pre-qualification process for 
companies planning to bid on the Honduran cellular service 
contract.  Two U.S. companies, Bell South Honduras and 
Digicel Honduras (U.S. partners with Salvadoran and Italian 
investment) participated.  Other potential contenders 
include Telmex, TelGuat, Entel Chile and Megatel (Honduran). 
Conatel will officially announce which companies qualify by 
October 8, 2002.  The final bid opening is forecast for 
sometime in January 2003.  There is currently one cellular 
service provider in Honduras, U.S. led consortium Celtel. 
(See ref a for more on the prequalification process.) 
 
Energy Sector Update: ENEE Opens Bids for 210 MW Contract 
--------------------------------------------- ------------ 
 
¶14.  The National Electric Company (ENEE) opened bids on 
July 26 for a 210 MW contract to begin in 2004.  AES is the 
only U.S. competitor along with five other major energy 
companies including local investors.  AES and national 
thermal energy producer Lufussa submitted the lowest bids 
(just over usd 0.05 per KWH).  AES has plans to build a usd 
650 million 750 MW liquid natural gas-fired power plant in 
Puerto Cortes. (See ref b for more on the bid.) 
 
¶15.  In response to environmental concerns voiced by local 
environmental groups and government authorities, local 
energy company HydroHonduras revamped plans to build a 
hydroelectric project on the Cangrejal River near La Ceiba. 
The new design reduces the planned capacity from 50 MW to 40 
MW and reduces total investment to usd 71 million.  U.S. 
energy company Alaska Power and Telephone reportedly has a 
32 percent share of the project.  The Cangrejal river forms 
the eastern boundary of Pico Bonito, Honduras' second 
largest national park.  Proponents of tourism in the area 
are concerned that the plan to build an 11 km. diversion 
canal will effectively end white water rafting on the 
Cangrejal and thus jeopardize efforts to attract additional 
tourism to nearby La Ceiba. 
 
Coffee Export Revenues Increase Slightly 
---------------------------------------- 
 
¶16.  According to the Honduran Coffee Institute (Ihcafe), 
coffee export revenues for the 2001-2002 coffee harvest 
totaled approximately usd 179 million, an increase of usd 10 
million compared to the 2000-2001 harvest.  Honduras 
exported an estimated 3.5 million quintals (1 quintal = 100 
lbs.) during the 2001-2002, an increase of 300,000 quintals 
compared to the 2000-2001 season. 
 
¶17.  In response to the dismal international market for 
coffee, hundreds of small coffee farmers demonstrated in 
Tegucigalpa in August.  The demonstrators demanded financial 
assistance to help defray losses suffered during this year's 
coffee harvest.  Maduro, bowing somewhat to pressure, agreed 
to have the state banks small producers 100 lempira (about 
usd six) loans per quintal produced up to 100 quintals.  The 
15-year loans have a three-year grace period. 
 
Chiquita Resumes Banana Production After Strike 
--------------------------------------------- -- 
 
¶18.  Chiquita's 2,200 employees returned to work following 
the resolution of a nine-day strike during May.  Union 
leaders took issue with Chiquita's use of pesticide-treated 
bags to combat the cochinilla insect.  Chiquita reports that 
the cochinilla insect affects 30% of the crop.  Union 
leaders also presented a list of demands regarding job 
security, salary and medical care.  Workers returned to work 
after an international scientific commission certified that 
Chiquita's pesticides are safe.  Chiquita has publicly 
stated that, in light of the strike, high absenteeism and 
low productivity rates, it is considering reducing its 
presence in Honduras and selling some of its farms to 
independent producers. 
 
Mangos Exported to the U.S. for the First Time 
--------------------------------------------- - 
 
¶19.  A USDA-built hot water treatment plant for mangos began 
operating in April, permitting Honduran mango producers for 
the first time to meet U.S. med-fly phytosanitary 
requirements.  A total of 18 containers were exported during 
April and May at a value of approximately usd 500,000. 
Reportedly 45 percent of the fruit brought to the plant for 
treatment was rejected, primarily for being undersized, 
damaged during shipment or for being too ripe.  Between 700 
and 800 hundred hectares of mango are cultivated in the 
Comayagua valley in central Honduras.  Honduras is projected 
to export approximately 30 containers of mangos in 2003 
worth nearly usd two million.  Legislation creating the 
cooperative (which will own and manage the facility) has 
been moving slowly through Congress.  The GOH is looking 
into ways to use the plant during other times of the year, 
for papaya and other fruits. 
 
USG Donates Equipment to Benefit Small Dairy Farmers 
--------------------------------------------- ------- 
 
¶20.  In May, 12 dairy farmer cooperatives were given the 
titles to dairy refrigeration tanks valued at over usd 
300,000.  The tanks were donated by the USG as a result of 
cooperation between USAID and the U.S. firm Land O'Lakes. 
USAID will provide another usd 5.5 million in technical 
assistance, training and equipment with the goal of 
modernizing Honduras' dairy sector.  Nearly 500,000 
Hondurans rely upon the dairy sector for their livelihood. 
 
Pierce