VZCZCXYZ0000
RR RUEHWEB

DE RUEHTG #0034/01 0161848
ZNR UUUUU ZZH
R 161848Z JAN 09
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC 9141
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 0657
RUMIAAA/USSOUTHCOM MIAMI FL
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS TEGUCIGALPA 000034 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON HO
SUBJECT: REQUEST FOR ADDITIONAL REPORTING ON INTERNATIONAL 
FINANCIAL CRISIS 
 
REF: A. 08 SECSTATE 134459 
     ¶B. 08 TEGUCIGALPA 1161 
     ¶C. 08 TEGUCIGALPA 1126 
     ¶D. 08 TEGUCIGALPA 1114 
     ¶E. 08 TEGUCIGALPA 1042 
     ¶F. 08 TEGUCIGALPA 1009 
     ¶G. 08 TEGUCIGALPA 1006 
     ¶H. 08 TEGUCIGALPA 937 
     ¶I. 08 TEGUCIGALPA 930 
 
¶1. (U) Summary: Reftel requested commentary on how the 
international financial crisis is playing out in Honduras. 
Detailed reporting on the subject appears in refs B through 
¶I.  Following responses are keyed to questions posed in 
reftel.  End Summary. 
 
----------------------------------------- 
How the Crisis is Playing out in Honduras 
----------------------------------------- 
 
¶2. (U) Ref G reported that as of early November the impact of 
the crisis on Honduras had been modest but that the Honduran 
economy would suffer significantly as the recession in the 
United States became more pronounced.  Preliminary estimates 
indicate Honduran GDP growth slowed to 4 percent in 2008, 
compared with 6.3 percent in 2006 and 2007. The slowing U.S. 
economy is expected to have a negative impact on the 
important maquila industry.  For example, several export 
processing ("maqila") plants announced layoffs in 
September-October in anticipation of slowing U.S. demand. 
This negative effect in the maquila sector continued in 
response to double-digit declines in U.S. apparel sales at 
key Department stores such as Macy,s and JC Penny,s.  In 
the third and fourth quarters of 2008, layoffs reached 
15,000, or nearly 10 percent of the sector,s labor force. 
Paradoxically, exports rose in 2008.  Specifically, U.S. 
Commerce data for October showed total Honduran exports to 
the U.S. were up 11 percent in 2008, and apparel exports rose 
13 percent.  This marked a significant acceleration compared 
with the first nine months of the year, when total exports 
were up just 4 percent and apparel was nearly flat.  We 
believe this may be the result of some maquila operations 
moving to Honduras from higher-wage countries. 
 
¶3. (U) A key indicator to watch in the economic equation is 
the level of remittances that Hondurans living overseas )- 
mostly in the U.S. -- send to their families.  These 
remittances are estimated at $2.5 billion per year or 25 
percent of GDP, and are a primary driving force of consumer 
spending in the economy.  Any decline in remittances caused 
by the U.S. recession will have negative consequences for 
tens of thousands of families and make a major dent on 
consumer demand.  Again, GOH officials have taken the rosy 
view and are not projecting a decline in the level of 
remittances. 
 
¶4. (U) Looking to 2009, the Honduran government expects a 
further cooling off of the economy and is projecting growth 
to slow to 3.4 percent.  We believe this is an optimistic 
figure since the expected slowdown in maquila exports, as 
well as the decline in world prices for key exports such as 
coffee, bananas, palm oil and shrimp, will constrain growth 
prospects. 
 
¶5. (U) Certainly, credit has tightened considerably in the 
last several months.  A number of Honduran businesses are 
reporting difficulty obtaining credit since the onset of the 
global crisis.  A number of bankers have also confirmed that 
the relative decline in local currency deposits and the 
tightening of international credit lines for Honduran banks 
with correspondent bank relationships with U.S. and European 
banks has resulted in rising interest rates for both 
corporate and consumer loans.  The credit strain will no 
doubt hurt investment prospects in 2009.  Nevertheless, 
senior Honduran officials continue to put a brave face on the 
situation and have insisted that there was no "financial" 
crisis in Honduras; only the risk of an "economic" crisis. 
 
¶6. (U) On the positive side, Honduras, balance of payments 
will be strengthened by the sharp drop in the price of key 
imports, particularly oil and gas.  Also, the global collapse 
of commodity prices will likely mean lower inflation, 
possibly to single digits in 2009.  Inflation reached 11% in 
¶2008. 
---------------- 
Policy Responses 
---------------- 
 
¶7. (U) Thus far, President Zelaya and his economic team have 
failed to forcefully confront the emerging crisis and bring 
the business community, labor and civil society to coalesce 
around a cogent set of macroeconomic policies.  On the 
monetary side, the Central Bank has moved to cut the reserve 
requirement in an effort to stimulate credit.  The Central 
Bank,s monetary easing is estimated at 11 billion lempiras. 
The GOH is also preparing a major Keynesian public investment 
program aimed at generating jobs and kick-starting economic 
activity. 
 
¶8. (U) On the international side, President Zelaya, in his 
capacity as rotating head of the Central American Integration 
System (SICA), convened an emergency summit on the financial 
crisis in October (ref H). That meeting issued an appeal to 
the Central American Bank for Economic Integration 
(CABEI/BCIE) to provide USD 200 million lines of credit to 
each SICA-member central bank, at least part of which we 
understand was disbursed, and an additional USD 200 million 
to each country's commercial banks. 
 
¶9. (U) Unfortunately, the GOH has been unwilling to commit to 
serious negotiations with the IMF to get their Stand By 
Arrangement back on track.  The main policy difference has 
been the unwillingness of the GOH to agree to  devalue or 
"introduce more flexibility" to the exchange rate.  A number 
of prominent bankers and even manufacturers who have major 
dollar-denominated obligations are strongly  backing the 
GOH,s position. 
 
--------------------------- 
Internal Political Dynamics 
--------------------------- 
 
¶10. (SBU) President Zelaya is entering the last year of his 
four-year term.  There is no re-election in Honduras. 
Primaries for candidates to succeed him were held November 
¶30.  Zelaya has adopted an increasingly populist/leftist 
approach to governing over the past year, including 
affiliating with the Venezuelan-led Bolivarian Alternative 
for the Americas (ALBA) in August 2008.  It is apparent that 
he wants his legacy to be one of having fought for the poor 
(poverty did decline 2005-07 according to household surveys, 
although some of that progress appears to have been erased 
2007-08 by increases in food and fuel costs), opposed the 
"oligarchs" and resisted the anti-poor prescriptions of 
neoliberals" and the international financial community.  This 
will color his approach to the global economic crisis as it 
develops during 2009. 
 
¶11. (SBU) On Christmas Eve, Zelaya issued a decree raising 
the statutory minimum wage for Honduran workers 60 percent, 
effective January 1 (ref B).  Because the bulk of Hondurans 
employed in the formal sector earn at or near the minimum, 
and salaries of higher-paid workers in both the public and 
private sectors are often determined by a multiple of the 
minimum wage, the impact of this decree on payrolls could be 
enormous.  Employer groups have strongly denounced the wage 
hike and filed injunctions against it in court.  Massive 
layoffs and/or violent street confrontations by workers are 
possible as a result of this measure. 
 
¶12. (SBU) Shortly after the wage hike, Zelaya's Energy 
Minister, Rixi Moncada, relented to public pressure and 
agreed to rescind part of the electricity rate increases 
(justified on the basis of higher fuel oil prices, which had 
since come down) imposed during 2008.  Before the rate 
increases, the National Electric Company was estimated to be 
running operating losses of as much as 3 percent of GDP.  The 
rate rebates, on closer inspection, turned out to be less 
than initially implied, opening Moncada and the GOH to 
further criticism.  Zelaya's Trade and Industry Minister, 
Fredis Cerrato, has made repeated threats to impose/enforce 
price controls on various products.  His ability to do so is 
limited, but his rhetoric has dampened business sentiment. 
 
¶13. (SBU) On January 9, Zelaya replaced Gustavo Alfaro, head 
of the National Banks and Insurance Commission, with his 
Legal Adviser and political loyalist, former Foreign Minister 
Milton Jimenez.  According to press reports, Alfaro was 
forced out because Zelaya was angry that funds made available 
to the banks as a result of the BCH lowering reserve 
requirements had been deposited overseas rather 
than invested in Honduras. 
 
---------------------------------------- 
Impact on Relations with Third Countries 
---------------------------------------- 
 
 
¶14. (SBU) The crisis initially gave fuel to internal 
arguments in favor of pursuing closer economic and diplomatic 
relations with Venezuela.  For example, BCH President Araque 
appeared confident that the easing of balance of payments 
pressures and  sufficient  external financing from Venezuela 
would allow Honduras to avoid an IMF-recommended devaluation. 
The GOH subsequently signed onto resolutions calling for the 
establishment of a monetary union among the ALBA countries. 
However, the appeal of Venezuelan-led financial schemes has 
greatly diminished with the decline in the price of oil. 
Most Venezuelan assistance schemes -- through Petrocaribe, 
Petroalimentos and ALBA -- are linked directly to Venezuelan 
oil sales, and others depend on the ability of the GOV to 
fund them from oil revenues.  The GOH is now projecting it 
will receive USD 68 million through Petrocaribe this year, 
down from USD 200 million projected before.  No funds are 
flowing through Petroalimentos.  The USD 100 million in bonds 
Venezuela committed last August to purchase from the GOH has 
not aterialized, and neither have the 100 Iranian tractors it 
committed to provide.  To date, the tangible benefits to 
Honduras from joining ALBA appear to be limited to a USD 30 
million loan to the Honduran agricultural development Bank 
(Banadesa) and some energy-saving light bulbs from Cuba 
(actually made in China and Vietnam). 
LLORENS