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

242255Z Jan 03

UNCLAS SECTION 01 OF 09 TEGUCIGALPA 000225 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EB 
 
LABOR FOR ILAB, ROBERT WHOLEY 
 
STATE PLEASE PASS TO USAID, USTR, EXIM, OPIC, USED IDB, USED 
WB, USED IMF 
 
E.O. 12958: N/A 
 
TAGS: EFIN ECON EINV ETRD ELAB EAID PGOV HO
SUBJECT: Honduras: 2002 Preliminary Macroeconomic Update 
 
 
-------- 
CONTENTS 
-------- 
1-4      MACROECONOMIC OVERVIEW 
5-6      ECONOMIC GROWTH 
7-8      PRICES AND WAGES 
9-13     MONETARY AND EXCHANGE RATE POLICY 
14-18    BALANCE OF PAYMENTS 
19-21    TRADE 
22       TOURISM 
23       UNEMPLOYMENT 
24       PUBLIC SECTOR FINANCES 
25       DEBT 
26       FOREIGN DIRECT INVESTMENT 
 
 
---------------------- 
MACROECONOMIC OVERVIEW 
---------------------- 
 
¶1. The Central Bank of Honduras estimates economic growth in 
terms of real GDP in 2002 of two percent, lower than the 
rate of growth in 2001 and lower than the rate of population 
growth.  The Consumer Price Index rose by 7.7 percent in the 
first eleven months of 2002; inflation for the year is 
projected to be 8 percent.  The exchange rate at the end of 
September 2002 was Lps. 16.6731 per one USD, with an 
accumulated nominal depreciation of 4.7 percent; total 
depreciation for the year is expected to be about six 
percent.  In September, the money supply had grown by 12.9 
percent over the year before; credit to the private sector 
was up by 5.5 percent.  The average nominal interest for new 
loans in national currency in September was 21.2 percent, 
and the average interest on new long-term deposits in 
national currency was 12.9 percent. 
 
¶2. As of July, exports (excluding textiles) were down in 
value terms by 6.3 percent, compared to the same period last 
year, with a decrease in the value of imports of 7.5 
percent.  As a result, the trade balance for merchandise 
registered a deficit of USD 912.9 million, USD 85.2 million 
less than the deficit in 2001. 
 
¶3. In the month of October 2002, income from family 
remittances was 35.2 percent higher than the year before. 
On the other hand, income from the textile industry 
(primarily apparel) declined by 4.9 percent compared to the 
same period in 2001. 
 
¶4. At the end of September 2002, net international reserves 
reached USD 1.77 billion; USD 1.18 billion were held in the 
Central Bank and USD 589.4 million in the rest of the 
financial system. 
 
 
--------------- 
ECOMOMIC GROWTH 
--------------- 
 
¶5. The rate of real GDP growth this year is the lowest in 
five years, with the exception of 1999 when Honduras 
suffered the effects of the devastation of Hurricane Mitch. 
In 2000, a significant 5.2 percent growth rate was reached, 
but last year it was only 2.6 percent.  Three important 
factors contributed to the slow economic growth of the 
economy: the economic recession in the U.S., (Honduras' most 
important commercial partner); continued declines in prices 
in the world market for the major Honduran export products; 
and delays in international financial institution 
disbursements that resulted from Honduras' problems in 
complying with its IMF Poverty Reduction and Growth Facility 
(PRGF) program. 
 
¶6. Both agriculture and manufacturing were stagnant in 2002. 
Only mining showed a significant increase, growing by 19.3 
percent in 2002, which was influenced mainly by increases in 
the production of silver (up 33.7 percent), lead (up 45.5 
percent) and zinc (up 15.2 percent). 
 
  REAL GDP GROWTH RATE 
     (Percent) 
 
  1997  5.1 
1998  2.9 
1999 -1.9 
2000  5.2 
2001  2.6 
2002  2.0 
 
 
 INDEX OF ACTIVITY IN KEY PRODUCTIVE SECTORS 
     1999 = 100  (figures up to June 2002) 
                                       Pct change 
                2001           2002     2002/01 
 
Agriculture    161.8          160.3     -0.9 
Mining         157.8          188.2     19.3 
Manufacturing  257.7          256.6     -0.4 
---------------- 
PRICES AND WAGES 
---------------- 
 
¶7. The monthly change in the Consumer Price Index (CPI) in 
November 2002 was 0.6 percent.  The accumulated growth from 
January to November 2002 was 7.3 percent, and the annual 
variation from November 2001 to November 2002 was 7.7 
percent. 
 
 
CONSUMER PRICE INDEX  (CPI) 
 
(December 1999=100) 
                         Percent 
          Average        Change 
 
1997       75.2          20.2 
1998       85.5          13.7 
1999       95.4          11.6 
2000      106.6          11.1 
2001      116.2           9.6 
2002*     124.7           7.6 
 
* Figures for 2002 are up to November 
 
 
MONTHLY CPI FOR 2001 AND 2002 (through NOV) 
 
     End of    Pct Change          End of    12 month 
2001 Period    Same Month     2002 Period     Percent 
               Year early                      Change 
 
JAN  111.1          10.5      JAN  120.2          8.2 
FEB  112.5          10.3      FEB  121.5          8.0 
MAR  113.5          10.2      MAR  122.2          7.7 
APR  114.2           9.5      APR  123.1          7.8 
MAY  115.6           9.8      MAY  123.7          7.0 
JUN  116.3           9.4      JUN  125.1          7.6 
JUL  116.9           9.3      JUL  126.1          7.9 
AUG  117.7           9.5      AUG  126.9          7.8 
SEP  118.6          10.1      SEP  127.1          7.2 
OCT  118.8           9.7      OCT  127.8          7.6 
NOV  119.4           9.0      NOV  128.6          7.7 
DEC  119.8           8.8 
 
 
¶8. The legal official minimum wage increased by 12 percent 
in May 2002 to USD 119.00 per month.  Negotiations to reset 
this salary for 2003 are underway and are expected to 
conclude by May 2003.  The reason the GOH can maintain 
minimum wage at this low level is their promise not to raise 
the price of the basic goods basket. 
 
--------------------------------------------- -- 
MONETARY INTEREST RATE AND EXCHANGE RATE POLICY 
--------------------------------------------- -- 
 
¶9. At the end of September 2002, money supply registered an 
annualized growth rate of 12.9 percent, similar to the one 
observed in December 2001.  This growth is explained by the 
increase of 11.7 percent in the supply of local currency and 
16.1 percent in the supply of foreign currency. 
 
¶10. Interest rates for credit from the financial system to 
the private sector reached 5.5 percent, 5.2 percentage 
points less than that registered in December 2001.  This 
growth is explained by the 7.0 percent and 0.7 percent 
growth in the loan balances of local and foreign currencies 
respectively. 
 
¶11. In September 2002, the average nominal interest rate on 
new loans in local currency reached 21.2 percent, 1.0 
percentage points less than the rate registered in December 
¶2001.  The average interest rate on new long-term deposits 
in local currency was 12.9 percent, 1.2 percentage points 
less than the rate observed at the end of 2001. 
 
¶12. The total internal credit of the financial system 
experienced a slight reduction of 0.1 percent (Lps.36.2 
million), explained by the fall of 22.6 percent (Lps. 1.78 
billion) in the Central Bank's net credit and 14.0 percent 
(Lps. 485.5 million) in the rest of the financial system's 
net credit to the non-financial public sector.  These 
downward movements were offset by the increase of 5.5 
percent (Lps.2.23 billion) in credit from the rest of the 
financial sector to the private sector, which registered a 
lower interest than that in August of 5.6 percent. 
 
¶13. The Lempira suffered an inter-annual depreciation in 
December 2002 of 6.3 percent compared to December 2001. 
 
 
ANNUAL INTEREST RATES -COMMERCIAL BANKS 
    (weighted averages) 
 
YEAR      LENDING            DEPOSIT 
 
1998      30.61               16.00 
1999      29.46               15.04 
2000      24.57               12.23 
2001      23.18               11.76 
2002 
JAN       23.13               11.44 
FEB       23.08               11.36 
MAR       23.11               11.35 
APR       23.08               11.13 
MAY       22.89               11.13 
JUN       22.92               11.03 
JUL       22.81               10.52 
AUG       22.63               10.15 
SEP pr/   22.43               10.02 
 
      NET INTERNAL CREDIT 
          END OF              PCT CHANGE 
          PERIOD 
       (USD MILLION) 
 
2000      25,707.2 
2001      29,775.0               15.8 
2002p/    28,795.3               -0.1 (Sep. 2002) 
 
(Exchange rate Lps. 16.6731 = USD 1.00) 
 
 
               EXCHANGE RATE 
             (Lempiras for USD) 
 
YEAR      END OF    YEAR           ANNUAL 
          PERIOD    AVERAGE        DEVALUATION (PERCENT) 
 
1998      13.92     13.54               5.4 
1999      14.66     14.35               5.0 
2000      15.31     15.01               4.39 
2001      16.05     15.65               5.14 
2002(Nov) 17.00     N/A                 6.3 
 
 
------------------- 
BALANCE OF PAYMENTS 
------------------- 
 
¶14. In the period from January 1 to October 30, 2002, 
foreign currency income was USD 2.25 billion, higher by 5.4 
percent than the USD 2.13 billion of the last period.  In 
2001 it increased 5.3 percent compared to 2000. 
 
¶15. Of the total 2.2 billion plus dollars received in 2002, 
foreign currency income from exports accounted for USD 438.4 
million, USD 351.0 million came from the maquila industry, 
services contributed USD 426.9 million, and USD 35.6 million 
derived from rent.  Foreign currency income from transfers 
totaled USD569.6 million (this includes USD 526.2 million 
from family remittances alone, equal to 23.4 percent of 
total 2.2 billion dollars received), USD 189.5 million in 
private sector external debt, USD 6.5 million in foreign 
investment, USD 169.1 million from other capital income, and 
USD 63.2 million from the purchase of the financial system 
by CADD's (Monetary Absorption Certificates Denominated in 
Dollars). 
 
¶16. One of the most important sources of foreign currency is 
family remittances, reaching USD 526.2 million in October 
2002, of which USD 431.3 million were received by the 
financial system, exchange houses counted for USD 91.3 
million, and lending and savings associations reported USD 
3.6 million. 
¶17.  At the end of October 2002, Net International Reserves 
were USD 1.72 billion, of which USD 1.14 billion were in the 
Central Bank and USD 0.58 billion were held in the rest of 
the financial system.  International reserves have been 
rising steadily since 1998.  They currently exceed four 
months of imports, and a visiting IMF mission in October 
2002 noted that this level is considered adequate. 
 
¶18. The Central Bank's international reserves were USD 1.13 
billion, 2.4 percent higher than at the end of 2001.  The 
16.6 percent decline in receipts from exports was offset by 
the higher decline in demand for foreign currency by 
importers.  The Central Bank continues with a system of 
public auctions of foreign currency in order to eliminate 
speculation.  At the end of May 2002, USD 615.5 million were 
appropriated through auctioning, up 8.9 percent from the 
amount appropriated in March 2001. 
 
 
 
      ACCUMULATED INCOME FROM FOREIGN CURRENCY BY ORIGIN 
                     (In USD millions) 
 
ORIGEN           2000    PCT    2001    PCT    2002p/  PCT 
 
Exports         489.6    22.8   476.4   20.9   474.4   19.7 
Maquila         369.9    17.2   391.0   17.2   379.8   15.7 
Services        428.4    19.9   515.2   22.6   445.6   18.5 
Invest. Rent     26.0     1.2    21.8    1.0    38.8    1.6 
Transfers       341.5    15.9   458.3   20.1   612.9   25.4 
Remittances     305.6    14.2   420.3   18.4   564.9   23.4 
External Debt   270.0    12.5   195.4    8.6   203.7    8.4 
For Investment   45.5     2.1    57.0    2.5     6.5    0.3 
Other Income    180.1     8.4   162.0    7.1   211.3    8.8 
CADD Bonds        0.0     0.0     0.0    0.0    39.9    1.6 
 
(p/ preliminary Sep. 2002) 
 
 
 
               FAMILY REMITTANCES 
 
          YEAR         TOTAL (In USD Millions) 
 
          2000 283.4 
2001 390.6 
          2002p/      526.2 
 
  (Year 2002 amount is preliminary to October) 
 
 
NET INTERNATIONAL RESERVES 
(Billions of Dollars) 
 
1998 (Dec)      0.90 
1999 (Dec)      1.37 
2000 (Dec)      1.49 
2001 (Dec)      1.64 
2002 (Oct)      1.72 
 
 
----- 
TRADE 
----- 
 
¶19. The merchandise trade balance for the period of January 
to August 2002 showed a deficit of USD 1.06 billion, USD 99 
million less than the trade deficit during the same period 
in 2001.  The value of exports FOB in 2002 of USD 857.5 
million represented a decrease of 4.9 percent in relation to 
the same period last year.  The value in imports CIF of USD 
1.92 billion was 7.0 percent less than the level during the 
same period in 2001. 
 
¶20. The reduction in exports is mainly due to the decrease 
in the export value of coffee and bananas, Honduras' 
traditional export commodities.  Coffee exports declined by 
30.4 percent as a result of both low international coffee 
prices and decreased production.  Banana exports dropped 
33.7 percent compared to the first trimester of 2001; the 
main reason was the 19.3 percent price decrease for a 40 lb. 
box.  Other exports like zinc, shrimp and wood also declined 
in value terms in 2002.  Exports of gold and sugar 
experienced an increase in 2002.  Sugar exports rose because 
of the opening of new markets in the U.S. and Europe. 
 
¶21. Imports declined by USD 79.7 million.  The most 
significant decreases occurred in the food industry (22.1 
percent), metals (25.8 percent), and mineral products (14.0 
percent).  Some imports that increased during the first 
quarter of 2002 are machinery and electronic products and 
vegetables. 
 
 
                  Banana Exports 
 
         Value           Volume         Avg. Unit Price 
     (USD Millions)    40 lb. Boxes        in USD 
 
2000      81.5           11,865.0          6.87 
2001     140.0           15,939.6          8.78 
2002*    105.7           14,054.0          7.52 
 
* 2002 figures up to August 
 
 
                 Coffee Exports 
 
       Value        Volume    Price   Volume      Price 
  (USD Millions)  60kg bags    USD   46kg bags     USD 
 
2000   319.9       2,643.0    121.05  3,447.0      92.80 
2001   151.0       2,234.6    67.58   2,915.3      51.80 
2002*  156.3       2,348.6    66.53   3,063.3      51.01 
 
*2002 figures up to August 
 
 
           Other Important Exports 
 
                    Wood (Ft) 
 
          Value 
        USD Millions     Volume (ft)    Unit Price (USD) 
 
2000      20.3           26,738.0             0.76 
2001      21.6           28,070.2             0.77 
2002      19.2           25,329.6             0.76 
 
 
            Refrigerated Meat (Kgs) 
 
          Value 
       USD Millions    Volume (Kgs)     Unit Price (USD) 
 
2000       1.19          677.0               1.75 
2001       0.57          311.9               1.82 
2002       0.25          115.4               2.14 
 
(2002 figures up to August) 
 
 
               Gold (Oz. T) 
 
          Value 
       USD Millions    Volume (Oz.T)    Unit Price (USD) 
 
2000       2.15            8.3               258.83 
2001      34.42          131.8               261.11 
2002      53.29          178.7               298.32 
 
(2002 figures up to August) 
 
 
                  Silver (Oz. T) 
 
          Value 
       USD Millions    Volume (Oz.T)    Unit Price (USD) 
 
2000      2.96           611.0               4.85 
2001      3.14           724.6               4.33 
2002      2.05           464.3               4.41 
 
(2002 figures up to August) 
 
 
                   Zinc (Lbs) 
          Value 
       USD Millions    Volume (Lbs)     Unit Price (USD) 
 
2000      28.98          50,920.0            0.57 
2001      21.48          50,704.5            0.42 
2002      21.12          66,928.5            0.32 
 
(2002 figures up to August) 
 
 
                   Sugar (Kgs) 
 
          Value 
       USD Millions    Volume (Kgs)     Unit Price (USD) 
 
2000       5.76            15,342.0          0.38 
2001      28.37           148,083.1          0.19 
2002      16.97            93,088.1          0.18 
 
(2002 figures are up to August) 
 
 
IMPORTS (CIF USD Millions) 
 
          Total 
 
  1999 2.68 
2000 2.85 
2001 2.98 
2002 0.94 
 
  (Figures do not include fuel imports; 2002 figures are up 
  to August) 
 
 
MAQUILA INDUSTRY (In USD Billion) 
            Exports 
 
  1999    2.16 
2000    2.36 
2001    2.34 
2002    1.74 
 
  (Figures for 2002 are up to September) 
 
 
------- 
TOURISM 
------- 
 
¶22. In the last few years, there has been slow growth at the 
national level in the tourism sector, primarily because of 
the effects of Hurricane Mitch and then the events of 
September 11 and the world economic downturn.  The Maduro 
Government has initiated a process to strengthen this sector 
with various projects and activities to consolidate and 
diversify what the sector has to offer, especially to its 
principal customers: the U.S. and Europe.  The increase in 
the number of visitors this year is mainly the result of 
cruise ships that dock at the Bay Islands.  Around 850 
thousand visitors are projected to have visited Honduras in 
2002, yielding an expected revenue for 2002 of USD 350 
million. 
 
 
               Total Visitors      Foreign        Foreign 
                                   Exchange       Exchange 
               (thousands)         Income         Outflow 
                              (USD million)  (USD million) 
 
  1999         428.1              195.0            94.0 
  2000         688.4              259.8           106.7 
  2001       809.8              256.2           156.6 
  2002*           850.0              350.0             N/A 
 
  *Figures for 2002 are estimates 
 
 
------------ 
UNEMPLOYMENT 
------------ 
 
¶23. The May 2002 survey showed unemployment in Honduras to 
be 4.1 percent, a little bit higher than the rate in 
September 2001.  The fact that only a few hours a week of 
work means a person can qualify as employed under the ILO 
definition used in Honduras.  Hidden underemployment is 
considered to better reflect changes in the employment 
situation in the country and is believed to be far higher 
than the reported unemployment figures. 
 
UNEMPLOYMENT (PERCENT OF LABOR FORCE) 
 
  1997 Sep.  4.3 
1998 Sep.  3.0 
1999 Sep.  3.3 
2000 N/A 
2001 Sep.  3.9 
2002 May   4.1 
 
 
---------------------- 
PUBLIC SECTOR FINANCES 
---------------------- 
 
¶24. In 2002, government fiscal policy was aimed at trying to 
lower the fiscal deficit of approximately 6.1 percent of GDP 
that the previous government left in 2001.  Given the 
growing increase in government expenditures, resulting 
primarily from the mandated increase in public wages and 
payments to cover defaults in the banking sector, the 
incoming government had to find new ways to increase tax 
revenues.  In May 2002, the financial balance registered a 
surplus in net terms of Lps. 407.9 million (USD 24.8 
million) or 0.9 percent of GDP, due mainly to low capital 
expenditures.  Tax collection has increase by 8.5 percent 
compared to last year.  Running expenses were determinant 
especially due to increments in the salaries of teachers and 
health care providers, which increased 11.6 percent. 
Payments for interest on debt, on the other hand, were less 
than 11.1 percent due to negotiations with the Paris Club to 
reprogram expired debt payments. 
 
                CENTRAL GOVERNMENT FINANCES* 
                 (in billions of Lempiras) 
                                      Pct 
                       2001     2002      Increase 
 
  Total Revenues 7.60      8.24        8.5 
  Current Income 7.55      7.79        3.2 
  Direct Taxes        6.71      6.71        0.1 
  Indirect Taxes 0.84      1.07       28.3 
  Others              0.05      0.45      781.2 
 
  Current Expend.  5.62      6.22       10.7 
  Current Savings  1.93      1.57      -18.6 
 
   Capital 
   Expenditures     2.40      1.62      -32.6 
 
   Net Total 
   Expenditures     8.02      7.83       -2.3 
 
   Net Global 
   Balance         -0.42      0.41      197.5 
   Debt Payments    0.86      0.83       97.4 
 
   Gross Global 
   Balance         -1.27     -0.42      -66.7 
 
*(Figures for 2002 are up to June) 
 
 
---- 
DEBT 
---- 
 
¶25. In 2002, the Government of Honduras missed the principal 
targets of the IMF's Poverty Reduction and Growth Facility 
(PRGF) program and did not receive the disbursements from 
the final year of the three-year PRGF. The government hopes 
to reach an agreement on a new three-year PRGF with the IMF 
by June 2003, in order to reach the completion point for 
HIPC debt relief (an estimated USD 900 million over fifteen 
years). 
 
    STOCK OF FOREIGN DEBT 
      (USD Billions) 
 
  Year          Value 
 
  1997 4.07 
1998 4.40 
1999 4.73 
2000 4.71 
2001 4.75 
 
(Current exchange rate is Lps.17.00 X USD 1.00) 
 
  DOMESTIC DEBT BALANCE 
  (Billions of Lempiras) 
 
   Year           Value 
 
  1997 1.40 
1998 1.34 
1999 1.27 
2000 0.96 
2001 0.94 
 
 
------------------------- 
FOREIGN DIRECT INVESTMENT 
------------------------- 
 
¶26. According to Central Bank data, foreign direct 
investment (FDI) flows in Honduras in 2001 totaled USD 186 
million.  The U.S. continues to be the dominant source of 
FDI in Honduras, with U.S. investment in 2001 reaching an 
estimated USD 84 million, (or 45 percent of total FDI in 
Honduras).  Post informally calculates U.S. FDI stock in 
Honduras to be approximately USD 750 million, based 
primarily in the apparel-assembly and agriculture sector 
(especially bananas). 
 
ANNUAL FOREIGN DIRECT INVESTMENT BY COUNTRY OF ORIGIN 
                 (USD Millions) 
 
                    1998       1999      2000     2001 
 
United States       33.05     113.86    117.90    83.75 
Canada              12.00      55.10     58.69    41.69 
Panama               0.97      19.47     21.50    15.27 
El Salvador          7.65      13.91     15.35    10.91 
Switzerland          3.75       6.95      7.67     5.45 
Costa Rica           5.59       6.44      7.11     5.05 
Spain                1.65       5.88      6.50     4.61 
Italy               11.88      -3.61      5.24     3.72 
Mexico               1.18       4.61      5.09     3.62 
Guatemala            5.19       3.35      3.70     2.63 
England              6.61       2.57      2.83     2.01 
Japan                1.90       0.12      0.68     0.48 
Germany              4.19       0.16      0.17     0.12 
Other countries      3.71       8.52      9.40     6.68 
 
Total               99.32     237.33    261.83   186.00 
 
  Accumulated Investment in Textile Industry 2001 
   (Information for 2002 is not available yet) 
 
                    Amount           Percent of 
                 (USD Millions)          Total 
 
Honduras            670.1               47.1 
U.S.                370.2               26.0 
Korea               145.5               10.2 
Hong Kong            43.8                3.1 
Taiwan               55.2                3.9 
China                33.8                2.5 
Singapore            18.8                1.3 
Canada               49.2                3.5 
Colombia              2.0                 .1 
Barbados               .1                0.0 
Co-investment        32.9                2.3 
                    -----               ---- 
Total              1421.6              100.0 
 
 
 
PALMER