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UNCLAS SECTION 01 OF 03 TEGUCIGALPA 000903 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EXIM/MICHELE WILKINS 
 
E.O. 12958: N/A 
TAGS: BBSR ECON EFIN HO KDEM PGOV
SUBJECT: TFHO1: DE FACTO REGIME'S POSITION ON PUBLIC 
FINANCES 
 
REF: A. TEGUCIGALPA 808 
     ¶B. TEGUCIGALPA 771 
     ¶C. TEGUCIGALPA 697 
 
¶1.  (U) Summary: On August 28, the Ministry of Finance of the 
de facto regime published an advertisement in the major 
dailies describing the current conditions of public finances 
in the country and actions the de facto regime is taking to 
manage public finance during the rest of the year.  The 
announcement details the impact of the financial crisis and 
criticizes the Zelaya administration for mismanagement.  It 
describes actions taken by the de facto regime to restructure 
government finances and measures to control future 
disbursements.  The announcement closes with the statement 
that the 2010 budget will be delivered no later than 
September 15th (a dig at the Zelaya administration, which 
failed to deliver a 2009 budget).  End Summary. 
 
Impact of the International Financial Crisis 
--------------------------------------------- 
 
¶2.  (U) On August 28, the Ministry of Finance of the de facto 
regime published a two-page advertisement in major dailies 
under the title, "What did we receive (i.e. inherit)? Where 
are we? Where are we going?" The announcement describes the 
impact of the crisis on Honduras's already weak economy, 
noting that the regime inherited an economy that was 
suffering from reduced remittance flows, lower exports and 
falling investment.  This had obligated the Central Bank of 
Honduras (BCH) to lower its growth estimate for 2009 to only 
2 percent. (Note: The de facto regime later revised the GDP 
estimate downward to a loss of 1 to 2 percent.  End note.) 
The announcement asserts that although the Zelaya 
administration prepared a plan to address the financial 
crisis, this plan was never implemented.  It states that 
although the de facto regime has prepared a 2009 budget that 
addresses the major challenges facing the economy, the future 
remains uncertain and Honduras remains at risk in the face of 
the financial crisis. 
 
¶3.  (U) The announcement asserts that policies of the Zelaya 
administration made matters worse, increasing unemployment 
and reducing investment.  This lower level of economic 
activity has translated into less income for families and 
businesses, affecting the government's tax collections.  The 
one bright spot was inflation of only 4 percent, which is 
attributed to the private sector's decision not to raise 
prices of the basic food basket.  (Comment: Lower inflation 
was more likely caused by lower prices for key imported 
commodities such as energy.  End comment.) 
 
What They Received 
------------------ 
 
¶4.  (U) The announcement states that public finances began to 
weaken in 2006 (at the start of the Zelaya administration) 
due to deterioration of the finances of state-owned 
businesses as a result of the increase in the number of 
employees combined with high energy and fuel subsidies.  As a 
result of these practices, public savings were diminished, 
which greatly impacted public investment and poverty 
reduction programs.  Salaries and wages in the first half of 
2009 increased 19 percent compared to the first half of 2008, 
while several institutions, such as the National Institute of 
Statistics and Presidential Palace (both highly involved in 
President Zelaya's effort to conduct a constitutional 
survey), spent their entire 2009 budget in the first six 
months of the year. 
 
¶5.  (U) The announcement cites a tremendous increase in 
domestic public debt from approximately USD 317 million as of 
December 2007 to USD 847 million on April 2009.  Due to 
Zelaya administration strategies, almost USD 400 million of 
debt was coming due in the second half of 2009 while the 
National Treasury had unpaid bills of USD 185 million.  The 
announcement further states that the Zelaya administration 
withdrew almost USD 300 million from the National Treasury 
without any budget allocation to control the use or 
destination of the funds.  This amount, the announcement 
states, does not include salaries with no budget allocation 
 
TEGUCIGALP 00000903  002 OF 003 
 
 
that would increase the amount to almost USD 800 million, nor 
does it include large withdrawals of cash from BCH by 
employees of the Office of the Presidency. 
 
Where They Are 
-------------- 
 
¶6.  (U) After congratulating itself on passing the 2009 
budget and providing greater transparency to the Honduran 
people, the de facto regime notes that it expects the 
consolidated fiscal deficit to reach 2.4 percent of GDP.  The 
announcement highlights new controls the regime has placed on 
the use of public funds, including requiring two signatures 
for each withdrawal, no transfers between public sector 
institutions and limiting cash withdrawals to about USD 
10,000.  Further, the regime plans to retain an audit firm 
with an international reputation to perform a forensic audit 
of 2008 and first half 2009 results.  Expenses for the 
central government will be cut 10 percent for the remainder 
of the year, while the decentralized institutions will be cut 
20 percent. 
 
¶7.  (SBU) The new budget contemplates the issuance of USD 340 
million in government bonds, of which USD 140 million was 
placed in the first quarter of the year.  (Comment: Sources 
note that an additional USD 143 million was placed privately 
to banks in August after the Central Bank increased 
obligatory investments.  End comment.)  In addition, about 
USD 200 million of short term debt held by the central bank 
was converted to a 10-year loan, while over USD 180 million 
of maturing debt will be rolled over, saving a cash outflow 
of USD 380 million.  (Note: Most of this debt is held by 
government pension funds.  End Note.) 
 
¶8.  (U) The announcement states that revenues for the central 
government are expected to decline 7.0 percent, equivalent to 
1.7 percent of GDP, while the sharp use of the budget axe 
will keep expenses flat, resulting in a fiscal deficit of 4.2 
percent of GDP compared to the original projection of 2.5 
percent. 
 
Where They Are Going 
--------------------- 
 
¶9.  (U) The announcement closes by stating that the new 2010 
budget will be presented no later than September 15, as 
required by law.  The regime asserts that this new budget 
will be highly compromised by the expansionist decisions 
taken by the Zelaya administration, but pledges to be honest 
with the public about the state of public finances.  The 
National Congress and the people, the regime asserts, will 
recognize that it is telling the truth. 
 
Comment 
------- 
 
¶10.  (SBU) Although this is a self-serving document, most of 
the factual assertions appear to be correct (to the extent 
they can be verified).  In strictly technical terms, the de 
facto regime has put together a strong economic team to 
address the crisis, including Gabriela Nunez as Minister of 
Finance (former Minister of Finance in the Flores 
administration, former president of the central bank in the 
Zelaya administration and presidential candidate in the 2005 
primaries) and Sandra Midence as president of the central 
bank (vice minister of finance in the Flores administration 
and vice president of the central bank in the Zelaya 
administration), plus Hugo Castillo, who has stayed on as 
vice minister of finance, and Angel Arita, a senior central 
bank official who was promoted to vice president of the 
central bank.  They appear to have successfully addressed the 
looming liquidity crisis created by short-term overhang of 
maturing debt in excess of USD 500 million, but USD 158 
million maturing in February 2010 still remains a potential 
concern.  Additional financing may be required to close the 
budget gap due to the lack of budget support from the 
international community, although the amount is not large 
(under USD 100 million).  The announcement is obviously an 
attempt to build credibility with the domestic audience, but 
with an eye to the broader international audience as well. 
 
TEGUCIGALP 00000903  003 OF 003 
 
 
 
¶11.  (U) An informal English translation of the original 
document, which includes graphs and tables, can be obtained 
from Embassy Tegucigalpa Treasury Officer Victor Bolles at 
bollesvc@state.gov. 
LLORENS