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UNCLAS TEGUCIGALPA 000110 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EAGR PGOV PREL HO US
SUBJECT: EEB A/S FERNANDEZ AND LOBO TEAM DISCUSS ECONOMIC 
CHALLENGES 
 
REF: TEGUCIGALPA 0099 
 
¶1.  (SBU)  Summary:  Assistant Secretary for Economic, 
Energy, and Business Affairs Jose Fernandez met with members 
of the new Honduran government's economic team on January 26, 
the day before the inauguration of President Lobo.  Among the 
participants were William Chong Wong, who was subsequently 
named Minister of Finance for the new government, and Maria 
Elena Mondragon, who will head the central bank.  A/S 
Fernandez emphasized the importance of the Pathways to 
Prosperity initiative and encouraged Honduras, which chairs 
the Pathways pillar on small and medium enterprises, to be 
prepared to play a strong role at the Pathways ministerial in 
San Jose.  The economic team expressed interest in learning 
more about Pathways.  A/S Fernandez said that he hoped to 
work with the economic team on areas of common interest, 
including channeling remittances into investment, increasing 
agricultural productivity, and public-private partnerships. 
The economic team expressed concern about the government,s 
balance sheet, particularly the large amount of short-term 
internal debt, and pressed for resumption of economic 
assistance, including budget support and technical 
assistance.  Mondragon said that discussions on renewing 
World Bank funding are already underway.  Embassy hopes that 
the Department will be able to provide TDY support to get the 
new economic team up to speed on Pathways.  End summary. 
 
¶2.  (U)  Assistant Secretary Fernandez met with members of 
President Porfirio "Pepe" Lobo's economic team on January 26. 
 The following day, President Lobo was inaugurated and 
several participants in the meeting joined the cabinet. 
Honduran participants in the meeting included William Chong 
Wong, who was appointed Minister of Finance, Maria Elena 
Mondragon, who was named central bank president, Marlon 
Tabora, who will serve as deputy to Maria Antonieta Bogran in 
the Office of the Presidency, Jose Oswaldo Guillen, who will 
head the tax revenue service, and Camilo Atala, a prominent 
businessman who has served as an economic advisor to the Lobo 
team.  (Biographic information on Wong, Mondragon, and Tabora 
is available in reftel.)  Economic counselor Mary Grace 
McGeehan, USAID Director William Brands, and Millennium 
Challenge Corporation Director Jonathan Brooks also took part 
in the meeting. 
 
¶3.  (SBU)  Assistant Secretary Fernandez told the economic 
team that he is very interested in finding ways for the U.S. 
and Honduran governments to work together to raise the living 
standards of Honduras's poor.  He noted that it will take 
time for the U.S. to fully reengage with Honduras, but said 
it is not too early to start making plans.  A/S Fernandez 
said that he had read about the economic plan in Lobo's 
campaign platform and that many of its elements, including 
improving agricultural production, public-private 
partnerships, and finding ways for family remittances to be 
generated into investment, are of special interest to him as 
well. 
 
¶4.  (U)  Fernandez told the team that he has been very much 
involved in planning for the Pathways to Prosperity 
Ministerial, which will take place in San Jose in early 
March.  He told the economic team that he hoped that the new 
government would make Pathways an early priority.  (Note: 
Honduras chairs the first Pathways pillar on small, medium, 
and microenterprise.  End note.)  Mondragon and the other 
team members expressed interest in learning more about 
Pathways. 
 
¶5.  (SBU)  Atala told A/S Fernandez that members of the 
economic team had recently returned from Washington, where 
they had met with representatives of the Interamerican 
Development Bank (IDB), World Bank, and International 
Monetary Foundation (IMF).  He provided an overview of the 
economic troubles Honduras has faced recently, including an 8 
percent decline in remittances and a 25 percent decline in 
the textile industry.  He noted that the country was facing 
difficult challenges even before the June 28 coup d'etat that 
removed President Manuel "Mel" Zelaya from power.  These 
included the global economic downturn, the H1N1 influenza 
epidemic, and the May 28 earthquake that did significant 
 
damage in San Pedro Sula, Honduras's industrial center. 
After June 28, new investment stopped.  Atala told A/S 
Fernandez that, because of this situation, combined with 
excessive spending by the Zelaya government, the new 
government will face a considerable fiscal deficit. 
Mondragon said that internal and external debt total 25 
percent of the country's GDP and noted that an excessively 
high percentage of this is short-term domestic debt.  Atala 
told A/S Fernandez that the role of the U.S. will be very 
important as Honduras moves to reengage with the 
international financial institutions. 
 
¶6.  (SBU)  Asked by A/S Fernandez about tax collection, Chong 
Wong said that it has gone down, adding that the 2009 budget 
had underestimated expenditures and will have to be revised. 
(Note:  The Zelaya government failed to pass a 2009 budget, 
and the de facto government hastily put together a budget 
based on the 2008 budget.  The Zelaya government's 
off-the-books expenditures are still being reconciled.  End 
note.)  Mondragon noted that international isolation during 
the political crisis had complicated matters; for example, 
the IMF had denied the de facto government access to 
Honduras's allotment of special drawing rights issued to 
member states in August 2009.  This, combined with a lack of 
budget support over the last two years, has, she said, 
created a grave situation.  (Note: Discussions on the renewal 
of the IMF stand-by arrangement for Honduras broke down in 
early 2009 due to the Zelaya government's unwillingness to 
either devalue the country's currency or make budget cuts. 
End note.)  Mondragon said that, although it has been widely 
reported that Honduras will not be eligible for lending from 
the World Bank and IDB until the country negotiates a new 
stand-by arrangement with the IMF, this is not in fact the 
case.  She told A/S Fernandez that resumption of budget 
support from the World Bank could take place through a less 
formal mechanism, and that discussions on this were underway. 
 Mondragon said she also hoped the Treasury Department's 
technical assistance program could be restarted as soon as 
possible.  She commented that reactivating the economy is not 
only important in terms of economic well-being, it is also 
the key to avoiding another political crisis. 
 
¶7.  (SBU)  A/S Fernandez said that channeling some 
remittances toward investment rather than consumption is a 
promising possibility.  He noted that studies show that five 
to ten percent of remittances are typically available for 
investment.  Ideally, the investment funds would be used for 
infrastructure projects, but remittance recipients typically 
do not have the experience to carry out such projects.  Atala 
said that, when remittances are used for investment, this is 
usually for housing.  He noted that the housing sector has 
experienced a severe contraction during the crisis and said 
that the new government hopes to revive it. 
 
¶8.  (SBU)  Atala noted that energy, and particularly 
renewable energy, will be another government priority.  He 
told A/S Fernandez that energy generation in Honduras is 
currently 78 percent non-renewable and 22 percent renewable. 
The new government will aim to raise the proportion of 
renewable energy generation to 50 percent and eventually 
above.  Many new renewable energy projects will be 
public-private partnerships.  He said that dam construction 
has the potential to generate not only energy but also 
employment, for example through tilapia farming. 
 
¶9.  (SBU)  Mondragon told A/S Fernandez that the incoming 
government plans to put in place a conditional cash transfer 
program for families, to improve the educational system, and 
tackle the poor security situation.  Without improvements in 
security, she said, it will be difficult to create a positive 
investment climate.  Atala noted that the conditional cash 
transfer program would reach 600,000 families, and that the 
new government's plan also includes a "laptop for every 
child."  A/S Fernandez asked how the USG could help with this 
ambitious agenda.  Atala said that a new Millennium Challenge 
Corporation pact would be very important.  Chong Wong 
commented that the original program had been very successful, 
particularly the program for small and medium enterprises, 
which had brought families out of poverty. 
 
 
¶10.  (SBU)  A/S Fernandez noted that anti-corruption was 
another important issue for the new government to address. 
The economic team agreed, and Tabora noted that combating tax 
evasion would be another key goal.  Fernandez stated that the 
USG would work with the new government and look further into 
the initiatives discussed in the meeting, and once again 
stressed the importance of strong Honduran engagement on 
Pathways to Prosperity. 
 
¶11.  (SBU)  Comment:  It is fortunate that A/S Fernandez was 
able to meet with the economic team, and in particular to 
highlight the importance of Pathways to Prosperity, just as 
the team was about to take office.  Embassy staff members 
have discussed Pathways with the team on several occasions, 
beginning before the election.  The team is interested in 
learning more but did not have time to focus on Pathways in 
detail during the busy transition period.  Department and 
Embassy representatives have met in the past with civil 
service employees about Pathways, but this dialogue came to a 
halt with the June 28 coup d'etat, and those civil servants 
who remain are not up to date on recent developments.  For 
Honduras to be able to engage effectively at the San Jose 
ministerial, the new government will need to be brought up to 
speed quickly.  Discussions will need to be detailed and 
should be at the working level on the U.S. side.  The Embassy 
has requested TDY support from WHA for this purpose and hopes 
that this can be arranged quickly.  End comment. 
 
¶12.  (U)  A/S Fernandez has cleared on this report. 
LLORENS