VZCZCXYZ0005
OO RUEHWEB

DE RUEHTG #1009/01 3151526
ZNR UUUUU ZZH
O 101526Z NOV 08
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8857
INFO RUEHRC/DEPT OF AGRICULTURE USD WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS TEGUCIGALPA 001009 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA AND EEB 
TREASURY FOR SARAH SENICH AND ANA JEWELL 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EAGR HO
SUBJECT: AMBASSADOR'S COURTESY CALLS WITH IMF AND CENTRAL 
BANK PRESIDENT 
 
REF: TEGUCIGALPA 1006 
 
 ¶1.  (SBU) Summary: Ambassador Llorens continued economic 
courtesy calls this week with visits from IMF 
Resrep Mario Garza and Central Bank (BCH) President Edwin 
Araque.  Both meetings focused on the probable 
effects of the financial crisis (reftel), further 
complication to the Honduran economy because of massive 
flood damage in the past month, and the need for an IMF 
agreement in 2009 as an anchor of stability for 
potential foreign investors.  Araque and Garza agreed that 
the increasingly complicated economic 
situation increases the need for monetary discipline, and 
Araque acknowledged that the BCH has downwardly 
revised the GDP growth projection to 4.1 percent in 2008, 
down from 6.5 percent.  End Summary. 
 
¶2. (SBU) In separate meetings with the Ambassador November 5, 
Araque and IMF ResRep Mario Garza both 
attested that liquidity was not a current problem in 
Honduras.  Garza said bank credit was still 
growing at a 20 percent annual rate, which he said was too 
fast.  Growth of deposits, meanwhile, are 
slowing, he said.  As a result, the excessive bank lending is 
coming out of reserves.  Araque maintained 
that the growth of bank lending had reached the level agreed 
to in the IMF Standby Agreement -- 18 percent, 
down from 36 percent in 2007. 
 
¶3.  (SBU) Araque spoke about the effects of commodity prices 
shocks this year, saying the increase in oil 
prices alone would likely reduce growth this year by 0.7 
percent.  The external price shocks have also 
driven the current account deficit this year to around 14-15 
percent of GDP -- twice what the IMF considers 
the maximum safe level.  The decline in commodity prices in 
the wake of the crisis will provide some relief.  Araque 
predicted cheaper oil would save Honduras about USD 300 
million on its fuel import bill this year. 
Araque also said falling fuel prices would help moderate 
inflation, which had been running at more than a 
15-percent annual rate, to around 12 percent for the year. 
 
¶4. (SBU) Before the global credit crisis hit, economic 
analysts here were warning that lax monetary policies 
threatened to fuel inflation and instability with a negative 
impact on growth over the next two years 
(reftel).  Although the recent drop fuel prices has slowed 
the inflation rate somewhat, food prices, which 
have hit the poorest Hondurans especially hard this year, are 
not falling as quickly, if at all. 
 
¶5. (SBU) Garza said the GOH should take advantage of the 
current breathing space provided by falling fuel 
prices to move on permitting more flexibility in the exchange 
rate, which has been effectively fixed since October 2005. 
He said the IMF was pushing for a gradual devaluation of 4-5 
percent over the course of a 
year, utilizing the Central Bank's currently authorized 
flexibility within its existing band.  Garza 
argued that a gradual devaluation now is referable to a more 
drastic devaluation imposed by the markets 
later.  (Araque said he had already devalued the Lempira in 
April, but the move was "neutralized" by 
external price shocks.)  Garza also called for a further 
increase of 2-3 percent in the mandatory investment 
requirement (reserve requirement) on commercial banks. 
 
¶6.  (SBU) The Central Bank reported an 89 percent rise in the 
demand for foreign currency in the month of September, a 
clear indicator that the Lempira is overvalued.  While GOH 
officials continue to maintain 
publicly that even the slightest devaluation is both 
unnecessary and unacceptable, President Zelaya told 
the Ambassador that he would consider some modest move toward 
greater exchange rate flexibility in December, after primary 
elections to select candidates for next year's election to 
choose his successor. 
 
------ 
Comment 
------ 
 
¶7.  (SBU) The Ambassador encouraged Araque to seek to 
conclude an IMF agreement since it would 
 
send a clear message to international investors, in turbulent 
economic times, of the Zelaya Government,s commitment to 
macroeconomic stability.  Araque said that President 
Zelaya,s priority is to maintain growth 
and employment at the highest possible levels.  He therefore 
agreed that the argument that investment would 
be reduced if no agreement was reached with the Fund was a 
powerful one likely to influence President 
Zelaya.  Unfortunately, Araque has so far not shown the 
backbone to eschew political expedience and press 
for forceful economic policies.  On the positive side, Resrep 
Garza says the Fund is willing to show 
flexibility in most areas of the agreement except being the 
exchange rate. 
 
¶8. (SBU) The outcome of the internal elections, now scheduled 
for November 30, will give us a better idea 
of the likely direction of economic policy beyond 2009.  We 
will urge both major candidates and their 
prospective economic teams to visit Washington early in 2009 
to meet with the international financial institutions with 
the hope of forging consensus positions in advance of the 
general election on strategies 
to cope with the likely emerging global slowdown.  End 
Comment. 
LLORENS