HONDURAS AND TEXTILES - DIVERSIFICATION WILL NOT BE

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002647

SIPDIS

FOR EB/TPP/ABT, WHA/EPSC, WHA/CEN
PASS TO USTR FOR ANDREA GASH DURKIN
PASS TO OPIC, EX-IM, TDA

E.O. 12958: N/A
TAGS: ETRD EINV EFIN EAGR EAID KTEX HO
SUBJECT: HONDURAS AND TEXTILES - DIVERSIFICATION WILL NOT BE
EASY

REFS: A) SECSTATE 160692, B) TEGUCIGALPA 1391


1. Summary. Ref a requested that Post discuss the impact
of the elimination of import quotas in 2005 on Honduras'
textile and apparel industry and plans in the government and
private sector to diversify into other industrial sectors.
Embassy has been carrying on a dialogue with the GOH and
Honduran private sector for the past year on the subject.
The Honduran textile industry will try to survive through
vertical integration and duty free status in the U.S.
market. The government hopes to attract new investment in
other light manufacturing, tourism, agribusiness and
forestry. There is limited awareness of U.S. financing
programs. End summary.

Textile and Apparel Industry Gearing Up for 2005
-------------- ---


2. As reported in ref b, Honduran maquila industry leaders
recognize that quota elimination in 2005 presents a major
challenge to the Honduran industry. Unrestrained by quotas,
companies operating in Asia (generally considered much more
competitive) will drive down prices for textiles and apparel
tremendously. Industry leaders are gambling that Honduras'
industry will survive based on duty free treatment in the
U.S. and its close proximity to the U.S.


3. Companies are working to improve Honduran
competitiveness by installing more efficient machinery and
moving away from cut and sew operations to full package
regimes. Due to a lack of affordable financing in the
Honduran banking system, U.S. companies (with access to
financing from U.S. banks) are largely responsible for the
implementation of full package operations in Honduras.


4. The rapid growth of the Honduran maquila sector over the
last decade is due in part to an incentives program the GOH
provides for apparel assembly plants operating in designated
export processing zones. Companies are exempt from paying
import duties on goods and capital equipment and from state
and municipal taxes. The GOH will continue to provide
incentives until 2010 per WTO rules allowing countries with
GDP per capita under USD 1,000 to maintain free trade zones.
The general manager of the Honduran Maquila Association
(AHM) commented that in anticipation of the WTO-prohibition
on government incentives programs, the AHM is already
engaging the GOH on alternative ways to attract (and
maintain) investment in the sector.


5. To date, Honduras has had limited success in
diversifying its textile and apparel production. One
industry contact decried the poor job the sector has done in
shedding the image of Honduras as primarily a t-shirt
manufacturing center. The contact suggested that the GOH
and private sector make a more concerted effort to attract
companies producing higher-value finished products like
fashion wear and women's attire.

Hopes Rest on U.S.-Central American Free Trade Agreement
-------------- --------------


6. Industry representatives argue that a U.S.-Central
American free trade agreement (USCAFTA) is essential for the
sector to be able to compete in 2005 and beyond. They hope
that a USCAFTA will give Honduras NAFTA-like parity and at
the very least, solidify the unilateral trade preferences
Honduras now enjoys under the CBTPA. Industry contacts
report that Honduras, which is the largest manufacturer of
knit apparel and t-shirts among CBTPA beneficiary countries,
expects to benefit the most from recent provisions in the
Trade Act of 2002 increasing the caps on quotas for these
categories.

Plans for Diversification
--------------


7. The Maduro government's recently published economic plan
focuses on the need to create an attractive climate for
foreign investment. The GOH's plan recognizes the need to
facilitate the incorporation of a business in Honduras, seek
out new trade and investment opportunities through free
trade agreements, strengthen the judicial system and resolve
land tenancy problems that hinder investment (especially
along Honduras' Caribbean coast). Septel will discuss
current plans to attack the land tenure issues.


8. President Maduro created an entity called the
Competitiveness Council to tackle investment climate issues
in Honduras. The Council, which is headed by Vice President
Vicente Williams and includes private sector, labor,
Congress representatives and local government officials, is
charged with reviewing and drafting modifications to
Honduras' existing legal framework to encourage new business
development. The Council recently succeeded in pushing
through the National Congress the Administrative
Simplification Law which reduces some bureaucratic hurdles
to establishing a business in Honduras.


9. Maduro appointed Camilo Atala to a new position of
Minister without Portfolio for Investment. Atala (who is
also the president of Bank Ficohsa) is responsible for
promoting large investment projects with potential to create
substantial numbers of jobs. He is the point of contact for
large international companies seeking meetings with the
President and charged with clearing bureaucratic obstacles
for these projects.


10. As advocated by consultant Michael Porter (a recent
speaker in Tegucigalpa),the Maduro administration will
concentrate on developing clusters - sectors with high
potential to create jobs and related economic activity.
This includes the attraction of other light industry
(including electronics),developing Honduras' tourism
potential, strengthening the agro-industry and exploiting
Honduras' natural resources (primarily forestry and mining).


11. There has been limited success in attracting non-
textile light assembly operations. The ZIP Calpules
industrial park (located in San Pedro Sula),for example, is
already home to a biotechnology firm that propagates
cultivars (primarily banana) for export and businesses
producing wire harnesses and high-end doors and furnishings
made from Honduran mahogany for export, among others.
Recently, a U.S. company manufacturing wire harnesses for
U.S. automakers announced plans to hire 1,500 new employees.
The company has also expanded into building high cost mail
sorters for major U.S. buyers and has plans to expand into
other high-value assembly operations.


12. USAID has enjoyed success with its agricultural
diversification program run by FINTRAC, an U.S. company
working with small farmers to diversify into profitable
nontraditional agriculture exports (primarily vegetables).
Through the use of improved production and processing
technologies, FINTRAC has helped many participating small
farmers access the U.S. agricultural market.


13. A USDA-funded hot water treatment plant for mangos
began operating in April 2002, permitting Honduran mango
producers for the first time to meet U.S. med-fly
phytosanitary requirements. USDA expects the use of the
plant to be expanded to include papayas during the mango
growing season. USDA has also worked with Honduran cheese
producers to meet U.S. sanitary restrictions and qualify to
export ethnic cheese products to the U.S.

Challenges to Diversification
--------------


14. The challenges to improvement of the investment climate
are formidable. The judicial system continues to be weak
and inefficient; the courts are easily manipulated and it is
difficult to enforce contracts. An August 2001 law
permitting arbitration led to the creation of Honduras'
first arbitration center in the Tegucigalpa Chamber of
Commerce; however, only one case has been submitted for
arbitration.


15. The GOH has been unable to envision a solution to
existing land disputes and the greater problem of land
tenancy in Honduras. The Agrarian Reform Law, which
resulted in the titling of land for hundreds of thousands of
Honduras' landless poor, has encouraged land invasions in
some cases. The Maduro administration is in the process of
developing a law to consolidate Honduras' land registries
and modify the Agrarian Reform Law; however, it may be a
long time before any progress is made on land issues.


16. A fragile Honduran banking system and high interest,
short-term loans continue to stifle new investment.
Attempts to privatize the electricity distribution system
and telecom sectors have been met with resistance in the
private sector and National Congress. Meanwhile,
electricity prices and telephone rates are among the highest
in the region.

17. Recent minimum wage hikes, the implementation of double
salary payments in June and December, high severance payment
requirements and a government mandated increase in employer
social security contributions have all contributed to an
increase in the cost of doing business in Honduras.

Role of USG Financing Programs
--------------


18. There is limited awareness of USG financing programs
such as the Oversees Private Investment Corporation (OPIC),
the Export-Import Bank and the Trade Development Agency
(TDA). The TDA is working with Honduras' telecom regulatory
agency (CONATEL) on studies to strengthen and liberalize the
telecom sector. We are aware of little OPIC or Ex-Im
financing at this time. USDA recently put on a well-
attended seminar on its agricultural financing programs. A
similar seminar on opportunities for OPIC, Ex-Im Bank and
TDA opportunities would be welcome.

Pierce