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UNCLAS TEGUCIGALPA 001333 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV PGOV PREL HO
SUBJECT: ECONOMIC UNCERTAINTY DOGS HONDURAS 
 
¶1. (SBU) Summary: Uncertainty at home and abroad dogged the 
Honduran economy throughout 2009.  With two-thirds of its 
exports destined for the U.S., the country was hard hit by 
the U.S. recession.  On top of the crumbling international 
situation, President Jose Manual "Mel" Zelaya created a 
climate of uncertainty through erratic and populist policy 
decisions.  The June 28 coup d'etat that removed him from 
power and the ensuing political turbulence led to a cutoff of 
foreign lending and assistance and has brought foreign and 
domestic investment to a virtual halt.  It will be up to the 
government of Porforio "Pepe" Lobo to try to rebuild ties 
with international donors and lenders and restore the 
confidence of investors.  End Summary. 
 
The Beginning - Foreign Trade Takes a Hit 
----------------------------------------- 
 
¶2. (U) As a result of the global economic downturn, trade 
between the U.S. and  Honduras declined dramatically 
beginning in late 2008.  This was due at least in part to 
steep price declines, particularly in commodities such as 
oil.  2009 trade will fall to levels not seen since 2005.  On 
the positive side for Honduras, the country's trade deficit 
with the U.S. was reduced to almost zero.  Agricultural 
producers got a double whammy as both prices and volumes 
declined (although somewhat less in non-traditional exports). 
 Through September, Honduran exports to the U.S. were down 
22.1 percent, while exports to Central America as a whole 
were down only 13.1 percent. 
 
The Recession Takes Hold - Construction and Manufacturing 
--------------------------------------------- ------------ 
 
¶3. (U) By September, according to the official index of 
economic activity, construction and manufacturing were down 
34.7 percent and 8.4 percent, respectively.  The construction 
industry had taken advantage of a mini-real estate bubble in 
2006 and 2007 as it outpaced the rest of the economy only to 
show the greatest decrease when confidence collapsed in 2009. 
 (Anecdotally, since the election there appears to be a new 
burst of construction activity, although it will take several 
months for the data to confirm this trend.)  Manufacturing 
took it in the nose as declining international demand socked 
the maquila industries while falling construction reduced 
demand for cement and building products. 
 
Creating Chaos 
-------------- 
 
¶4. (U) Rather than trying to ameliorate a worsening economic 
picture, the government of President Zelaya actually made 
things worse through a series of erratic and 
counterproductive policies that further undermined 
confidence.  At the end of 2008, President Zelaya declared a 
sixty percent increase in the minimum wage, which was to take 
effect in a matter of weeks.  Not only did this increase 
unemployment in the private sector (as reported by private 
sector associations -- there are no statistics available), it 
widened the fiscal deficit of the government because many 
government salaries are linked to the minimum wage.  The 
Central Bank tried to force down interest rates and coerced 
the Ministry of Finance to issue only short term debt, 
drastically worsening the risk profile of the government debt 
portfolio. 
 
The Coup Piles it On - Or Does It? 
---------------------------------- 
 
¶5. (SBU) Conventional wisdom would say that adding a coup 
d'tat to the mounting problems of Honduras would be the coup 
de grace to the economy.  International financial 
institutions stopped disbursements (although many had been 
stopped or slowed due to the chaotic situation while Zelaya 
was in power) and the country was diplomatically isolated. 
 
¶6. (SBU) International reserves sagged in the weeks after the 
coup but the outflow has abated to a slow leakage, actually 
turning positive for three straight weeks in December. 
Although exports are down, there is little discernible 
difference between pre- and post-coup results.  The index of 
economic activity showed its sharpest declines from December 
2008 to February 2009 before bottoming out in May.  Since the 
coup, this leading economic indicator, while not in positive 
territory, has shown signs of stabilizing and improving. 
 
¶7. (SBU) Foreign Direct Investment (FDI) declined 42.3 
percent in the first half of 2009 (the most recent data 
available) due principally to a very large investment in 
telecommunications in 2008 that was not repeated in 2009. 
Most of the FDI in the first half of 2009 was in the form of 
reinvested profits, which represented 76.6 percent of all FDI 
compared to 46.7 percent in the same period in 2008 and 40.5 
percent for the same period in 2007. Anecdotal evidence 
indicates that FDI and domestic investment have declined even 
further since the coup d'tat.  However, there is no 
published data to confirm this. 
 
The Situation Facing the Lobo Government 
---------------------------------------- 
 
¶8. (SBU) The incoming administration will be faced with a 
weak, but not moribund, economy.  The financial system was 
isolated from the international financial crisis because the 
country had little external private debt and local banks do 
not tend to invest overseas.  The system is relatively well 
capitalized and able to support new loan growth.  (Increasing 
doubtful loans, now at around 6 percent, are a concern but 
not out of line given the stage of the economic cycle). 
Commodity prices have recovered, which, combined with a 
recuperating U.S. economy should help Honduran exports. After 
a 2009 decline that the de facto government estimates at 
about 1.5 percent, consensus opinion estimates that Honduras 
will grow about 2-3 percent in 2010. 
 
¶9. (SBU) The greatest concern for the incoming Lobo 
administration is the state of public finances, which were in 
complete disarray at the time of the coup.  The de facto 
regime, with the help of a strong economic team, has improved 
transparency and met the most important obligations, but has 
been unwilling to take the hard decisions to get public 
finances back under control.  (A proposed tax package to 
generate needed revenue was withdrawn without a fight when 
objections were raised.)  The de facto regime also failed to 
address the issue of the increasingly non-competitive 
exchange rate, leaving this somewhat distasteful task to its 
successors. 
 
¶10. (SBU) Tax revenues in 2009 are expected to close the year 
at L40.1 billion (USD 2.1 billion), down only 5.5 percent 
from 2008.  If this projection proves accurate, it will be an 
impressive accomplishment, given the overall state of the 
economy.  As of September, the de facto government was 
projecting a central government deficit of 4.2 percent for 
¶2009.  In order to close the budget deficit in 2010, the 
government is forecasting collections of L46.6 billion (USD 
2.5 billion), an increase of over 16 percent.  In addition, 
the Lobo transition team is counting on domestic markets for 
more government bonds and the return of funding from the 
international community.  Both of these assumptions are 
optimistic, given the limited capacity of domestic markets to 
absorb debt and uncertainty over how quickly the 
international community will resume funding. 
 
¶11. (SBU) The Zelaya administration never submitted a 2009 
budget, allowing the misappropriation of a huge amount of 
funds.  After President Zelaya's ouster, the de facto regime 
slapped together a budget based on the 2008 budget, which 
helped get spending a bit under control but did not adjust 
for the waste and pilferage they eventually encountered.  The 
de facto government announced that it was reviewing 7 billion 
Lempiras (approximately USD 370 million) in unbudgeted claims 
from government creditors.  The 2010 budget does not address 
the serious imbalances of the previous budgets and will need 
to be revised by the Lobo team as soon as possible.  As with 
other recent budgets, the vast bulk of costs go to current 
expenses, especially salaries, which are excessively high. 
As 2009 ended, private sector discussions over the next 
year's minimum wage had begun, and the de facto government 
had pledged to have a new minimum wage negotiated by the end 
of the year.  The Supreme Accounts Tribunal was reviewing a 
large number of invoices to determine whether they represent 
actual government commitments.  However, the Lobo transition 
team recognized that it would have to honor most of the 
previous government's commitments, however questionable, in 
order to maintain the government's credibility as a borrower. 
 
¶12. (SBU) The de facto regime has had better luck getting 
debt under control by refinancing and extending most of the 
short term debt incurred at the end of the Zelaya 
administration (although not without a lot of arm twisting). 
Nevertheless, the proposed 2010 budget will require even more 
domestic debt in addition to longer-term external debt of USD 
264 million. 
 
Comment 
------- 
 
¶13. (SBU) The incoming Lobo administration faces a daunting 
task.  They have a budget that is growing inexorably, with 
ever mounting current expenses that must be funded by 1) an 
increase in taxes many times the increase in the underlying 
economy, 2) mounting domestic debt in a very small market 
with few investors, and 3) reliance on donor flows and 
external finance in spite of uncertainty over whether donors 
will be willing to reengage quickly.  The hard decisions that 
the Lobo administration must make will likely foster street 
protests, strikes and other resistance tactics.  The teachers 
have already announced that they will be undertaking a series 
of actions to pressure the new government beginning in 
January and the union negotiators at the minimum wage talks 
are (unrealistically) demanding an increase of 55 percent on 
top of last year's 60 percent increase.  With the honeymoon 
for the new Lobo Administration likely to end before its 
inauguration, uncertainty will continue to dog Honduras in 
¶2010. End Comment. 
LLORENS