1. The Ministry of Finance projects that the GDP will grow
by 2.5 percent in 2002 (most likely overstated) and that the
central government's fiscal deficit as a percent of GDP will
be 5.9 percent. This is higher than the GOH's earlier
estimate of 5.6 percent of GDP and far higher than its
target in its IMF program. The government is considering
further tax measures to increase government revenues.



2. In September, the Ministry of Finance presented the 2003
budget proposal to the National Congress. The central
government's budget of approximately 32.7 billion lempiras
(usd 1.97 billion) represents a 10 percent increase in
nominal terms over the 2002 levels. Spending on health,
education and security account for 65 percent of the budget,
while debt service payments (including usd 100 million for
Paris Club debt) account for 17 percent. With improvements
in tax receipts, the Ministry of Finance projects the
central government fiscal deficit could fall to four percent
of GDP; however, local economists are skeptical.

Maquila Sector: New Investment


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3. The Honduran Maquila Association (AHM) reports that the
industry is rebounding from losses incurred in 2001 and
estimates that the value added in 2002 will total usd 660
million, an increase of usd 60 million over 2001 and equal
to 2000 levels. Meanwhile, total employment in the sector
in 2002 is projected to average 110,000, the same as 2001
but still lower than 2000 when the sector registered 125,000
workers.



4. Local press reported that in October South Korean
company Woon Chun de Honduras will begin operation of an
apparel assembly plant employing approximately 1,100
workers. Total new investment is estimated to be over usd
30 million. Meanwhile, Lear Corporation, a U.S. company
producing wire harnesses for U.S. automakers, announced
plans to increase investment by usd 10 million, generating
an estimated 1,500 new jobs.

Remittances up by 38 Percent in 2002


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5. Remittances from abroad (primarily the U.S.) have become
the second largest source of national income, totaling usd
550 million in 2001, or 8.6 percent of GDP. The Central
Bank announced that remittances in 2002 are increasing at a
rate of 38 percent compared to 2001 and could total nearly
usd 800 million by the end of the year. According to the
Central Bank, an estimated usd 120 million is charged
annually by money transfer companies for transactions
between the U.S. and Honduras. The Central Bank has plans
to institute a mechanism in late 2002 allowing people
residing in the U.S. to transfer money to Honduras via
selected corresponding banks. The new system could reduce
transaction costs by 60 percent.

Banking System: Two Banks Intervened, New Laws Passed


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6. The Central Bank disbursed approximately usd 40 million
in May to intervene two undercapitalized banks, Banco
Capital and Banco Sogerin. The money was given as a
supplementary credit to Honduras' Deposit Insurance
Institution (Fosede) in order to guarantee 100 percent of
deposits. The two banks account for usd 120.7 million in
deposits. Since the intervention, the National Banking
Commission reported a six percent decline in Capital and
Sogerin deposits - much lower than the expected 15 percent.
Attorneys representing Sogerin and Capital appealed the
interventions to the Supreme Court.



7. In August, the National Congress approved a law
extending the 100 percent government deposit insurance until
September 30, 2003. At that point deposit insurance will be
capped at 150,000 lempiras (usd 9,000).



8. The National Congress approved a law in August
tightening rules regulating related lending and investment
by banks. According to the law, the cap on loans to related
entities will decline from the current limit of 120 percent
of the institution's capital to 30 percent over a three-year
period. Per the law, banks are also limited from investing
more than 20 percent of their total capital in any one
particular outside business.

New Honduran Airline Commences Operations


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9. Sol Air, the first Honduran airline to operate in nearly
a decade, began operations on July 12 with two daily flights
to Miami and an opening roundtrip fare of usd 399.00. From
Miami, Sol Air offers service to Tegucigalpa and San Pedro
Sula. TACA and American have responded to the new
competition with deeply discounted fares over the summer and
early fall. In November, the airline hopes to begin direct
flights from Dallas to Roatan on Saturdays, serving
primarily tourists interested in scuba diving and other
island tourism. The company also hopes to fly to New
Orleans (and on to Costa Rica), a routing pushed heavily by
the Mayor of the city of New Orleans during his early July
visit. Permits to fly to San Salvador and Managua are still
pending.

InterAirports Under Attack, Although Issue is Quiet for Now


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10. After a series of media attacks and complaints by
private sector groups, Congress named a special commission
in July to investigate InterAirports for possible breach of
contract. The U.S.-led Interairports consortium (51 percent
U.S. owned) took management control of Honduras' four
international airports in October 2000. Critics charge that
the San Francisco Airport Authority is not an active, full
partner in the consortium (participation of a major airport
was a requirement in the public tender and subsequent
contract) and that the company has not followed through with
investments. They have also been criticized for fee
increases. InterAirports counters that the price increases
were enacted by the National Congress and that fees for air
cargo are still the lowest in the region. In addition,
delays in contract-mandated investments, such as extending
the runway at the Tegucigalpa airport, are the result of
government delays and inaction. President Maduro and other
government officials have publicly stated that Interairports
has complied with the terms of the contract.



11. InterAirports' figures reveal that between October 2000
and May 2002, the company has invested usd 24.8 million in
the four international airports. Interairports is planning
to invest an additional usd 26.3 million in the airports
over the next year. Planned projects include building a new
hangar in Tegucigalpa and renovating and expanding the
terminal at the La Ceiba airport.

Administrative Simplification Law Passed


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12. In August, the National Congress approved the
Administrative Simplification Law which reduces the
bureaucratic hurdles in establishing a business in Honduras.
The law, which was drafted by the Competitiveness Council,
is part of the government's plan to make Honduras a more
attractive place for foreign investment. Some of the
benefits of the law include simplifying procedures involved
in establishing a new business and placing time limits on
issuing government permits.

Prequalification Process for Cellular Contract Underway


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13. On September 9, Honduras' telecommunications regulatory
agency (CONATEL) held an open pre-qualification process for
companies planning to bid on the Honduran cellular service
contract. Two U.S. companies, Bell South Honduras and
Digicel Honduras (U.S. partners with Salvadoran and Italian
investment) participated. Other potential contenders
include Telmex, TelGuat, Entel Chile and Megatel (Honduran).
Conatel will officially announce which companies qualify by
October 8, 2002. The final bid opening is forecast for
sometime in January 2003. There is currently one cellular
service provider in Honduras, U.S. led consortium Celtel.
(See ref a for more on the prequalification process.)

Energy Sector Update: ENEE Opens Bids for 210 MW Contract


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14. The National Electric Company (ENEE) opened bids on
July 26 for a 210 MW contract to begin in 2004. AES is the
only U.S. competitor along with five other major energy
companies including local investors. AES and national
thermal energy producer Lufussa submitted the lowest bids
(just over usd 0.05 per KWH). AES has plans to build a usd
650 million 750 MW liquid natural gas-fired power plant in
Puerto Cortes. (See ref b for more on the bid.)



15. In response to environmental concerns voiced by local
environmental groups and government authorities, local
energy company HydroHonduras revamped plans to build a
hydroelectric project on the Cangrejal River near La Ceiba.
The new design reduces the planned capacity from 50 MW to 40
MW and reduces total investment to usd 71 million. U.S.
energy company Alaska Power and Telephone reportedly has a
32 percent share of the project. The Cangrejal river forms
the eastern boundary of Pico Bonito, Honduras' second
largest national park. Proponents of tourism in the area
are concerned that the plan to build an 11 km. diversion
canal will effectively end white water rafting on the
Cangrejal and thus jeopardize efforts to attract additional
tourism to nearby La Ceiba.

Coffee Export Revenues Increase Slightly


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16. According to the Honduran Coffee Institute (Ihcafe),
coffee export revenues for the 2001-2002 coffee harvest
totaled approximately usd 179 million, an increase of usd 10
million compared to the 2000-2001 harvest. Honduras
exported an estimated 3.5 million quintals (1 quintal = 100
lbs.) during the 2001-2002, an increase of 300,000 quintals
compared to the 2000-2001 season.



17. In response to the dismal international market for
coffee, hundreds of small coffee farmers demonstrated in
Tegucigalpa in August. The demonstrators demanded financial
assistance to help defray losses suffered during this year's
coffee harvest. Maduro, bowing somewhat to pressure, agreed
to have the state banks small producers 100 lempira (about
usd six) loans per quintal produced up to 100 quintals. The
15-year loans have a three-year grace period.

Chiquita Resumes Banana Production After Strike


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18. Chiquita's 2,200 employees returned to work following
the resolution of a nine-day strike during May. Union
leaders took issue with Chiquita's use of pesticide-treated
bags to combat the cochinilla insect. Chiquita reports that
the cochinilla insect affects 30% of the crop. Union
leaders also presented a list of demands regarding job
security, salary and medical care. Workers returned to work
after an international scientific commission certified that
Chiquita's pesticides are safe. Chiquita has publicly
stated that, in light of the strike, high absenteeism and
low productivity rates, it is considering reducing its
presence in Honduras and selling some of its farms to
independent producers.

Mangos Exported to the U.S. for the First Time


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19. A USDA-built hot water treatment plant for mangos began
operating in April, permitting Honduran mango producers for
the first time to meet U.S. med-fly phytosanitary
requirements. A total of 18 containers were exported during
April and May at a value of approximately usd 500,000.
Reportedly 45 percent of the fruit brought to the plant for
treatment was rejected, primarily for being undersized,
damaged during shipment or for being too ripe. Between 700
and 800 hundred hectares of mango are cultivated in the
Comayagua valley in central Honduras. Honduras is projected
to export approximately 30 containers of mangos in 2003
worth nearly usd two million. Legislation creating the
cooperative (which will own and manage the facility) has
been moving slowly through Congress. The GOH is looking
into ways to use the plant during other times of the year,
for papaya and other fruits.

USG Donates Equipment to Benefit Small Dairy Farmers


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20. In May, 12 dairy farmer cooperatives were given the
titles to dairy refrigeration tanks valued at over usd
300,000. The tanks were donated by the USG as a result of
cooperation between USAID and the U.S. firm Land O'Lakes.
USAID will provide another usd 5.5 million in technical
assistance, training and equipment with the goal of
modernizing Honduras' dairy sector. Nearly 500,000
Hondurans rely upon the dairy sector for their livelihood.

Pierce