Honduras: 2002 Preliminary Macroeconomic Update

UNCLAS SECTION 01 OF 09 TEGUCIGALPA 000225

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EB

LABOR FOR ILAB, ROBERT WHOLEY

STATE PLEASE PASS TO USAID, USTR, EXIM, OPIC, USED IDB, USED
WB, USED IMF

E.O. 12958: N/A

TAGS: EFIN ECON EINV ETRD ELAB EAID PGOV HO
SUBJECT: Honduras: 2002 Preliminary Macroeconomic Update


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CONTENTS
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1-4 MACROECONOMIC OVERVIEW
5-6 ECONOMIC GROWTH
7-8 PRICES AND WAGES
9-13 MONETARY AND EXCHANGE RATE POLICY
14-18 BALANCE OF PAYMENTS
19-21 TRADE
22 TOURISM
23 UNEMPLOYMENT
24 PUBLIC SECTOR FINANCES
25 DEBT
26 FOREIGN DIRECT INVESTMENT


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MACROECONOMIC OVERVIEW
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1. The Central Bank of Honduras estimates economic growth in
terms of real GDP in 2002 of two percent, lower than the
rate of growth in 2001 and lower than the rate of population
growth. The Consumer Price Index rose by 7.7 percent in the
first eleven months of 2002; inflation for the year is
projected to be 8 percent. The exchange rate at the end of
September 2002 was Lps. 16.6731 per one USD, with an
accumulated nominal depreciation of 4.7 percent; total
depreciation for the year is expected to be about six
percent. In September, the money supply had grown by 12.9
percent over the year before; credit to the private sector
was up by 5.5 percent. The average nominal interest for new
loans in national currency in September was 21.2 percent,
and the average interest on new long-term deposits in
national currency was 12.9 percent.


2. As of July, exports (excluding textiles) were down in
value terms by 6.3 percent, compared to the same period last
year, with a decrease in the value of imports of 7.5
percent. As a result, the trade balance for merchandise
registered a deficit of USD 912.9 million, USD 85.2 million
less than the deficit in 2001.


3. In the month of October 2002, income from family
remittances was 35.2 percent higher than the year before.
On the other hand, income from the textile industry
(primarily apparel) declined by 4.9 percent compared to the
same period in 2001.


4. At the end of September 2002, net international reserves
reached USD 1.77 billion; USD 1.18 billion were held in the
Central Bank and USD 589.4 million in the rest of the
financial system.


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ECOMOMIC GROWTH
--------------


5. The rate of real GDP growth this year is the lowest in
five years, with the exception of 1999 when Honduras
suffered the effects of the devastation of Hurricane Mitch.
In 2000, a significant 5.2 percent growth rate was reached,
but last year it was only 2.6 percent. Three important
factors contributed to the slow economic growth of the
economy: the economic recession in the U.S., (Honduras' most
important commercial partner); continued declines in prices
in the world market for the major Honduran export products;
and delays in international financial institution
disbursements that resulted from Honduras' problems in
complying with its IMF Poverty Reduction and Growth Facility
(PRGF) program.


6. Both agriculture and manufacturing were stagnant in 2002.
Only mining showed a significant increase, growing by 19.3
percent in 2002, which was influenced mainly by increases in
the production of silver (up 33.7 percent),lead (up 45.5
percent) and zinc (up 15.2 percent).

REAL GDP GROWTH RATE
(Percent)

1997 5.1
1998 2.9
1999 -1.9
2000 5.2
2001 2.6
2002 2.0


INDEX OF ACTIVITY IN KEY PRODUCTIVE SECTORS
1999 = 100 (figures up to June 2002)
Pct change
2001 2002 2002/01

Agriculture 161.8 160.3 -0.9
Mining 157.8 188.2 19.3
Manufacturing 257.7 256.6 -0.4
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PRICES AND WAGES
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7. The monthly change in the Consumer Price Index (CPI) in
November 2002 was 0.6 percent. The accumulated growth from
January to November 2002 was 7.3 percent, and the annual
variation from November 2001 to November 2002 was 7.7
percent.


CONSUMER PRICE INDEX (CPI)

(December 1999=100)
Percent
Average Change

1997 75.2 20.2
1998 85.5 13.7
1999 95.4 11.6
2000 106.6 11.1
2001 116.2 9.6
2002* 124.7 7.6

* Figures for 2002 are up to November


MONTHLY CPI FOR 2001 AND 2002 (through NOV)

End of Pct Change End of 12 month
2001 Period Same Month 2002 Period Percent
Year early Change

JAN 111.1 10.5 JAN 120.2 8.2
FEB 112.5 10.3 FEB 121.5 8.0
MAR 113.5 10.2 MAR 122.2 7.7
APR 114.2 9.5 APR 123.1 7.8
MAY 115.6 9.8 MAY 123.7 7.0
JUN 116.3 9.4 JUN 125.1 7.6
JUL 116.9 9.3 JUL 126.1 7.9
AUG 117.7 9.5 AUG 126.9 7.8
SEP 118.6 10.1 SEP 127.1 7.2
OCT 118.8 9.7 OCT 127.8 7.6
NOV 119.4 9.0 NOV 128.6 7.7
DEC 119.8 8.8



8. The legal official minimum wage increased by 12 percent
in May 2002 to USD 119.00 per month. Negotiations to reset
this salary for 2003 are underway and are expected to
conclude by May 2003. The reason the GOH can maintain
minimum wage at this low level is their promise not to raise
the price of the basic goods basket.

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MONETARY INTEREST RATE AND EXCHANGE RATE POLICY
-------------- --


9. At the end of September 2002, money supply registered an
annualized growth rate of 12.9 percent, similar to the one
observed in December 2001. This growth is explained by the
increase of 11.7 percent in the supply of local currency and
16.1 percent in the supply of foreign currency.


10. Interest rates for credit from the financial system to
the private sector reached 5.5 percent, 5.2 percentage
points less than that registered in December 2001. This
growth is explained by the 7.0 percent and 0.7 percent
growth in the loan balances of local and foreign currencies
respectively.


11. In September 2002, the average nominal interest rate on
new loans in local currency reached 21.2 percent, 1.0
percentage points less than the rate registered in December

2001. The average interest rate on new long-term deposits
in local currency was 12.9 percent, 1.2 percentage points
less than the rate observed at the end of 2001.


12. The total internal credit of the financial system
experienced a slight reduction of 0.1 percent (Lps.36.2
million),explained by the fall of 22.6 percent (Lps. 1.78
billion) in the Central Bank's net credit and 14.0 percent
(Lps. 485.5 million) in the rest of the financial system's
net credit to the non-financial public sector. These
downward movements were offset by the increase of 5.5
percent (Lps.2.23 billion) in credit from the rest of the
financial sector to the private sector, which registered a
lower interest than that in August of 5.6 percent.


13. The Lempira suffered an inter-annual depreciation in
December 2002 of 6.3 percent compared to December 2001.


ANNUAL INTEREST RATES -COMMERCIAL BANKS
(weighted averages)

YEAR LENDING DEPOSIT

1998 30.61 16.00
1999 29.46 15.04
2000 24.57 12.23
2001 23.18 11.76
2002
JAN 23.13 11.44
FEB 23.08 11.36
MAR 23.11 11.35
APR 23.08 11.13
MAY 22.89 11.13
JUN 22.92 11.03
JUL 22.81 10.52
AUG 22.63 10.15
SEP pr/ 22.43 10.02

NET INTERNAL CREDIT
END OF PCT CHANGE
PERIOD
(USD MILLION)

2000 25,707.2
2001 29,775.0 15.8
2002p/ 28,795.3 -0.1 (Sep. 2002)

(Exchange rate Lps. 16.6731 = USD 1.00)


EXCHANGE RATE
(Lempiras for USD)

YEAR END OF YEAR ANNUAL
PERIOD AVERAGE DEVALUATION (PERCENT)

1998 13.92 13.54 5.4
1999 14.66 14.35 5.0
2000 15.31 15.01 4.39
2001 16.05 15.65 5.14
2002(Nov) 17.00 N/A 6.3


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BALANCE OF PAYMENTS
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14. In the period from January 1 to October 30, 2002,
foreign currency income was USD 2.25 billion, higher by 5.4
percent than the USD 2.13 billion of the last period. In
2001 it increased 5.3 percent compared to 2000.


15. Of the total 2.2 billion plus dollars received in 2002,
foreign currency income from exports accounted for USD 438.4
million, USD 351.0 million came from the maquila industry,
services contributed USD 426.9 million, and USD 35.6 million
derived from rent. Foreign currency income from transfers
totaled USD569.6 million (this includes USD 526.2 million
from family remittances alone, equal to 23.4 percent of
total 2.2 billion dollars received),USD 189.5 million in
private sector external debt, USD 6.5 million in foreign
investment, USD 169.1 million from other capital income, and
USD 63.2 million from the purchase of the financial system
by CADD's (Monetary Absorption Certificates Denominated in
Dollars).


16. One of the most important sources of foreign currency is
family remittances, reaching USD 526.2 million in October
2002, of which USD 431.3 million were received by the
financial system, exchange houses counted for USD 91.3
million, and lending and savings associations reported USD
3.6 million.

17. At the end of October 2002, Net International Reserves
were USD 1.72 billion, of which USD 1.14 billion were in the
Central Bank and USD 0.58 billion were held in the rest of
the financial system. International reserves have been
rising steadily since 1998. They currently exceed four
months of imports, and a visiting IMF mission in October
2002 noted that this level is considered adequate.


18. The Central Bank's international reserves were USD 1.13
billion, 2.4 percent higher than at the end of 2001. The
16.6 percent decline in receipts from exports was offset by
the higher decline in demand for foreign currency by
importers. The Central Bank continues with a system of
public auctions of foreign currency in order to eliminate
speculation. At the end of May 2002, USD 615.5 million were
appropriated through auctioning, up 8.9 percent from the
amount appropriated in March 2001.



ACCUMULATED INCOME FROM FOREIGN CURRENCY BY ORIGIN
(In USD millions)

ORIGEN 2000 PCT 2001 PCT 2002p/ PCT

Exports 489.6 22.8 476.4 20.9 474.4 19.7
Maquila 369.9 17.2 391.0 17.2 379.8 15.7
Services 428.4 19.9 515.2 22.6 445.6 18.5
Invest. Rent 26.0 1.2 21.8 1.0 38.8 1.6
Transfers 341.5 15.9 458.3 20.1 612.9 25.4
Remittances 305.6 14.2 420.3 18.4 564.9 23.4
External Debt 270.0 12.5 195.4 8.6 203.7 8.4
For Investment 45.5 2.1 57.0 2.5 6.5 0.3
Other Income 180.1 8.4 162.0 7.1 211.3 8.8
CADD Bonds 0.0 0.0 0.0 0.0 39.9 1.6

(p/ preliminary Sep. 2002)



FAMILY REMITTANCES

YEAR TOTAL (In USD Millions)

2000 283.4
2001 390.6
2002p/ 526.2

(Year 2002 amount is preliminary to October)


NET INTERNATIONAL RESERVES
(Billions of Dollars)

1998 (Dec) 0.90
1999 (Dec) 1.37
2000 (Dec) 1.49
2001 (Dec) 1.64
2002 (Oct) 1.72


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TRADE
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19. The merchandise trade balance for the period of January
to August 2002 showed a deficit of USD 1.06 billion, USD 99
million less than the trade deficit during the same period
in 2001. The value of exports FOB in 2002 of USD 857.5
million represented a decrease of 4.9 percent in relation to
the same period last year. The value in imports CIF of USD
1.92 billion was 7.0 percent less than the level during the
same period in 2001.


20. The reduction in exports is mainly due to the decrease
in the export value of coffee and bananas, Honduras'
traditional export commodities. Coffee exports declined by
30.4 percent as a result of both low international coffee
prices and decreased production. Banana exports dropped
33.7 percent compared to the first trimester of 2001; the
main reason was the 19.3 percent price decrease for a 40 lb.
box. Other exports like zinc, shrimp and wood also declined
in value terms in 2002. Exports of gold and sugar
experienced an increase in 2002. Sugar exports rose because
of the opening of new markets in the U.S. and Europe.


21. Imports declined by USD 79.7 million. The most
significant decreases occurred in the food industry (22.1
percent),metals (25.8 percent),and mineral products (14.0
percent). Some imports that increased during the first
quarter of 2002 are machinery and electronic products and
vegetables.


Banana Exports

Value Volume Avg. Unit Price
(USD Millions) 40 lb. Boxes in USD

2000 81.5 11,865.0 6.87
2001 140.0 15,939.6 8.78
2002* 105.7 14,054.0 7.52

* 2002 figures up to August


Coffee Exports

Value Volume Price Volume Price
(USD Millions) 60kg bags USD 46kg bags USD

2000 319.9 2,643.0 121.05 3,447.0 92.80
2001 151.0 2,234.6 67.58 2,915.3 51.80
2002* 156.3 2,348.6 66.53 3,063.3 51.01

*2002 figures up to August


Other Important Exports

Wood (Ft)

Value
USD Millions Volume (ft) Unit Price (USD)

2000 20.3 26,738.0 0.76
2001 21.6 28,070.2 0.77
2002 19.2 25,329.6 0.76


Refrigerated Meat (Kgs)

Value
USD Millions Volume (Kgs) Unit Price (USD)

2000 1.19 677.0 1.75
2001 0.57 311.9 1.82
2002 0.25 115.4 2.14

(2002 figures up to August)


Gold (Oz. T)

Value
USD Millions Volume (Oz.T) Unit Price (USD)

2000 2.15 8.3 258.83
2001 34.42 131.8 261.11
2002 53.29 178.7 298.32

(2002 figures up to August)


Silver (Oz. T)

Value
USD Millions Volume (Oz.T) Unit Price (USD)

2000 2.96 611.0 4.85
2001 3.14 724.6 4.33
2002 2.05 464.3 4.41

(2002 figures up to August)


Zinc (Lbs)
Value
USD Millions Volume (Lbs) Unit Price (USD)

2000 28.98 50,920.0 0.57
2001 21.48 50,704.5 0.42
2002 21.12 66,928.5 0.32

(2002 figures up to August)


Sugar (Kgs)

Value
USD Millions Volume (Kgs) Unit Price (USD)

2000 5.76 15,342.0 0.38
2001 28.37 148,083.1 0.19
2002 16.97 93,088.1 0.18

(2002 figures are up to August)


IMPORTS (CIF USD Millions)

Total

1999 2.68
2000 2.85
2001 2.98
2002 0.94

(Figures do not include fuel imports; 2002 figures are up
to August)


MAQUILA INDUSTRY (In USD Billion)
Exports

1999 2.16
2000 2.36
2001 2.34
2002 1.74

(Figures for 2002 are up to September)


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TOURISM
--------------


22. In the last few years, there has been slow growth at the
national level in the tourism sector, primarily because of
the effects of Hurricane Mitch and then the events of
September 11 and the world economic downturn. The Maduro
Government has initiated a process to strengthen this sector
with various projects and activities to consolidate and
diversify what the sector has to offer, especially to its
principal customers: the U.S. and Europe. The increase in
the number of visitors this year is mainly the result of
cruise ships that dock at the Bay Islands. Around 850
thousand visitors are projected to have visited Honduras in
2002, yielding an expected revenue for 2002 of USD 350
million.


Total Visitors Foreign Foreign
Exchange Exchange
(thousands) Income Outflow
(USD million) (USD million)

1999 428.1 195.0 94.0
2000 688.4 259.8 106.7
2001 809.8 256.2 156.6
2002* 850.0 350.0 N/A

*Figures for 2002 are estimates


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UNEMPLOYMENT
--------------


23. The May 2002 survey showed unemployment in Honduras to
be 4.1 percent, a little bit higher than the rate in
September 2001. The fact that only a few hours a week of
work means a person can qualify as employed under the ILO
definition used in Honduras. Hidden underemployment is
considered to better reflect changes in the employment
situation in the country and is believed to be far higher
than the reported unemployment figures.

UNEMPLOYMENT (PERCENT OF LABOR FORCE)

1997 Sep. 4.3
1998 Sep. 3.0
1999 Sep. 3.3
2000 N/A
2001 Sep. 3.9
2002 May 4.1


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PUBLIC SECTOR FINANCES
--------------


24. In 2002, government fiscal policy was aimed at trying to
lower the fiscal deficit of approximately 6.1 percent of GDP
that the previous government left in 2001. Given the
growing increase in government expenditures, resulting
primarily from the mandated increase in public wages and
payments to cover defaults in the banking sector, the
incoming government had to find new ways to increase tax
revenues. In May 2002, the financial balance registered a
surplus in net terms of Lps. 407.9 million (USD 24.8
million) or 0.9 percent of GDP, due mainly to low capital
expenditures. Tax collection has increase by 8.5 percent
compared to last year. Running expenses were determinant
especially due to increments in the salaries of teachers and
health care providers, which increased 11.6 percent.
Payments for interest on debt, on the other hand, were less
than 11.1 percent due to negotiations with the Paris Club to
reprogram expired debt payments.

CENTRAL GOVERNMENT FINANCES*
(in billions of Lempiras)
Pct
2001 2002 Increase

Total Revenues 7.60 8.24 8.5
Current Income 7.55 7.79 3.2
Direct Taxes 6.71 6.71 0.1
Indirect Taxes 0.84 1.07 28.3
Others 0.05 0.45 781.2

Current Expend. 5.62 6.22 10.7
Current Savings 1.93 1.57 -18.6

Capital
Expenditures 2.40 1.62 -32.6

Net Total
Expenditures 8.02 7.83 -2.3

Net Global
Balance -0.42 0.41 197.5
Debt Payments 0.86 0.83 97.4

Gross Global
Balance -1.27 -0.42 -66.7

*(Figures for 2002 are up to June)


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DEBT
--------------


25. In 2002, the Government of Honduras missed the principal
targets of the IMF's Poverty Reduction and Growth Facility
(PRGF) program and did not receive the disbursements from
the final year of the three-year PRGF. The government hopes
to reach an agreement on a new three-year PRGF with the IMF
by June 2003, in order to reach the completion point for
HIPC debt relief (an estimated USD 900 million over fifteen
years).

STOCK OF FOREIGN DEBT
(USD Billions)

Year Value

1997 4.07
1998 4.40
1999 4.73
2000 4.71
2001 4.75

(Current exchange rate is Lps.17.00 X USD 1.00)

DOMESTIC DEBT BALANCE
(Billions of Lempiras)

Year Value

1997 1.40
1998 1.34
1999 1.27
2000 0.96
2001 0.94


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FOREIGN DIRECT INVESTMENT
--------------


26. According to Central Bank data, foreign direct
investment (FDI) flows in Honduras in 2001 totaled USD 186
million. The U.S. continues to be the dominant source of
FDI in Honduras, with U.S. investment in 2001 reaching an
estimated USD 84 million, (or 45 percent of total FDI in
Honduras). Post informally calculates U.S. FDI stock in
Honduras to be approximately USD 750 million, based
primarily in the apparel-assembly and agriculture sector
(especially bananas).

ANNUAL FOREIGN DIRECT INVESTMENT BY COUNTRY OF ORIGIN
(USD Millions)

1998 1999 2000 2001

United States 33.05 113.86 117.90 83.75
Canada 12.00 55.10 58.69 41.69
Panama 0.97 19.47 21.50 15.27
El Salvador 7.65 13.91 15.35 10.91
Switzerland 3.75 6.95 7.67 5.45
Costa Rica 5.59 6.44 7.11 5.05
Spain 1.65 5.88 6.50 4.61
Italy 11.88 -3.61 5.24 3.72
Mexico 1.18 4.61 5.09 3.62
Guatemala 5.19 3.35 3.70 2.63
England 6.61 2.57 2.83 2.01
Japan 1.90 0.12 0.68 0.48
Germany 4.19 0.16 0.17 0.12
Other countries 3.71 8.52 9.40 6.68

Total 99.32 237.33 261.83 186.00

Accumulated Investment in Textile Industry 2001
(Information for 2002 is not available yet)

Amount Percent of
(USD Millions) Total

Honduras 670.1 47.1
U.S. 370.2 26.0
Korea 145.5 10.2
Hong Kong 43.8 3.1
Taiwan 55.2 3.9
China 33.8 2.5
Singapore 18.8 1.3
Canada 49.2 3.5
Colombia 2.0 .1
Barbados .1 0.0
Co-investment 32.9 2.3
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Total 1421.6 100.0



PALMER