Identifier
Created
Classification
Origin
04TEGUCIGALPA2093
2004-09-20 20:16:00
UNCLASSIFIED
Embassy Tegucigalpa
Cable title:  

Honduras: President Gives Economic Overview

Tags:  PGOV ECON ETRD ELAB EINV HO 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002093 

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EB
STATE PASS AID FOR LAC/CAM
DOL FOR ILAB
TREASURY FOR DDouglass

E.O. 12958: N/A
TAGS: PGOV ECON ETRD ELAB EINV HO
SUBJECT: Honduras: President Gives Economic Overview

REF: A. Tegucigalpa 1599


B. Tegucigalpa 2057

C. Tegucigalpa 1984

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002093

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EB
STATE PASS AID FOR LAC/CAM
DOL FOR ILAB
TREASURY FOR DDouglass

E.O. 12958: N/A
TAGS: PGOV ECON ETRD ELAB EINV HO
SUBJECT: Honduras: President Gives Economic Overview

REF: A. Tegucigalpa 1599


B. Tegucigalpa 2057

C. Tegucigalpa 1984


1. Summary: On September 9, at the opening of an event to
promote DR-CAFTA, President Ricardo Maduro presented a
sweeping overview of the state of the Honduran economy. As
usual, President Maduro emphasized what he sees as the
accomplishments of his administration - reining in
government spending, improved public security, increased
investment, and accelerated economic growth - yet also spoke
frankly of the challenges that remain, specifically the need
for continued fiscal discipline and the weakness of the
financial sector. End summary.


2. Leaving his notes on the table, President Ricardo Maduro
delivered a wide-ranging extemporaneous overview of the
Honduran economy in his keynote address to the recent
Caribbean Central America Action (CCAA) conference on the DR-
CAFTA trade agreement. In his 30-minute address to the
September 9 gathering, Maduro stressed sustained growth
through continuity of policy, and highlighted his
administration's economic programs and priorities. Though
the presidential primaries are more than five months away,
the political season has already begun in earnest in
Tegucigalpa. Maduro himself is ineligible under the
Honduran Constitution to stand for another term, but his
message of continuity was clearly calibrated to support the
National Party candidate (according to recent polls likely
to be Tegucigalpa Mayor Miguel Pastor or President of
Congress Porfirio "Pepe" Lobo) as next year's elections
approach.


3. Maduro opened by saying that poverty reduction through
job creation and sustained economic growth continue to be
the organizing principles behind the GOH economic policy.
Achieving these objectives will require significant foreign
and domestic investment. Maduro estimated that to reach an
annual growth rate of 6 percent (slightly over 3 percent in
per capita terms) Honduras must attract over $3 billion of
investment per year for the next 20 years. Continued moves

toward regional integration, such as DR-CAFTA, will be
critical to attracting this investment, as will be overall
confidence in GOH economic stewardship. For example, the
GOH has been relatively successful in containing inflation,
holding it to just 6.8 percent in 2003. A spike in
annualized inflation for 2004 (year to date) to
approximately 9 percent has the GOH and IMF appropriately
concerned, though Maduro attributed much of this rise to
higher energy prices.


4. Maduro highlighted the need for stability of remittances
flows from Hondurans abroad, primarily in the United States,
calling them "fundamental" to the Honduran economy. He
estimated that current remittances total nearly $1 billion
per year, up 28 percent over last year and equivalent to
nearly 15 percent of Honduras' GDP. According to Maduro,
these flows directly or indirectly assist half of the
population of Honduras. (Note: Foreign Minister Leonidas
Rosa Bautista is conducting meetings in Washington September
16-17 to press for U.S. renewal of Temporary Protected
Status (TPS) for Hondurans who claim they cannot return to
Honduras due to the damage wrought by the 1998 Hurricane
Mitch. Estimates of the number of Hondurans currently in
the U.S. range from 650,000 to nearly 1 million, but of
those only 87,000 benefit from TPS. The continued strong
growth in total remittances is consistent with the trend in
remittances to Honduras over the last several years, and
with similar growth trends seen in other Central American
countries. This growth is variously attributed to increased
numbers of expatriate Hondurans, economic growth in the
U.S., increased social and economic stability of Hondurans
resident in the U.S., and decreasing remittance costs. End
note.)


5. Maduro stressed the need to continue to advance in
improving the investment climate, noting that if this
process is done badly, the resulting growth will not be
sustainable in the long term. He said there is a continuing
need for meaningful civil service reform, to promote the
formation of a cadre of experienced technical staff within
the GOH ministries. The current trend, to replace the
entire staff right down to the char force after each
election, robs the GOH of institutional memory, setting back
the pace of progress and undermining hard-won reforms put in
place by previous administrations. (Note: The exception to
this rule appears to be the Central Bank, which, largely
because it is outside the existing civil service system,
manages to retain a significant portion of its technical
staff from administration to administration. The 18 month-
old Supreme Accounts Tribunal (TSC),roughly equivalent to
the U.S. GAO, has internalized this lesson and in its
recently completed hiring and retention guidelines has
instituted protections for its staff (septel, forthcoming).
Other ministries are looking for models they can adopt that
would provide their senior technical staff with similar
stability (septel, forthcoming). The Maduro Administration,
however, has not made it a priority to pass a new civil
service law to end this problem throughout the GOH. End
note.)


6. Maduro, elected on a law-and-order platform, also
recognized that public security remains a concern for
investors. He cited the dramatic drop under his
administration in bank robberies and carjackings, and vowed
to continue to improve public safety. His government
enacted anti-gang ("maras") legislation over a year ago, he
said, and Honduran police and military forces now recognize
local and transnational criminal gangs as a genuine and
significant threat to social stability and sustained
economic growth.


7. Fiscal discipline, a centerpiece of the GOH agreement
with the IMF, will continue to challenge a government
struggling to balance development needs with a stable and
welcoming investment climate. Maduro noted that a primary
GOH goal is to reduce the portion of the federal budget
dedicated to government employee salaries from its current
11 percent to below 8 percent over the next four years.
(This has sparked protests from the powerful teachers'
unions, including a six-week walkout in June and July
(reftel A) and a protest march held on September 15, which
precipitated the recent change in Ministers of Education
(reftel B)). The 2005 budget, submitted on September 14 and
totaling approximately $2.1 billion, remains faithful to
these goals, according to Vice Minister of the Presidency
Rocio Tabora. Post has not yet had an opportunity to review
the proposed budget, but notes that in real terms the total
represents only modest growth over last year's $1.92 billion
budget. On September 14, Tabora told EconOff that much of
this apparent growth is actually an artifact of accounting
changes, with bilateral and multilateral donations for the
first time being accounted for within the budget.


8. Turning briefly to the revenue side of the budget,
Maduro underscored progress to date in improving tax
collection and expanding the tax base, with the intent of
using those additional revenues to reduce the deficit
without having to raise taxes on the Honduran public.
(While Maduro did not cite the USG in this speech, Post
notes that this success is largely the result of efforts by
a Treasury and USAID-sponsored technical advisory program
which includes a taxation resident advisor in the Honduran
tax authority (the DEI). The August 20 signing ceremony for
that program's annual renewal, usually conducted at the
working level, became instead a Presidential signing
ceremony at Maduro's request, with extensive press coverage
of Maduro's remarks praising the program.)


9. The greatest vulnerability, the President said, is the
weakness of the financial sector. While Honduras has been
successful in attracting investment into the energy and
telecommunications sectors, continued future investment
inflows will require increased confidence in the financial
system. To move in this direction, as well as to comply
with IMF program requirements, the GOH is in the process of
passing four key financial laws, covering reforms of the
Central Bank, the bank regulator (the CNBS),the bank
insurance system (FOSEDE),and a sweeping reform of the
financial sector. The first three have been approved by
Congress and once printed in the GOH federal register will
become law (reftel C). The fourth and key reform is
currently in mark-up (the third of three required
congressional debates),but is making progress, according to
banking sector contacts.


10. Comment: Maduro's remarks, broadly consistent with the
priorities laid out in the GOH poverty reduction strategy
and the IMF agreement, hit many of the right notes for both
his domestic and international audiences. There was little
new here, but in some ways the medium was the message - the
consistency of his message reinforced his message of
consistency. However, his almost one hour late arrival at
the conference, as well as the long and sometimes unfocused
extemporaneous speech, detracted from the message he was
trying to get across. As a Stanford-educated economist,
Maduro is well aware of the steps he must take to bring his
ambitious plan to fruition. He is also clearly aware that
this process will extend well beyond the end of his term in

2005. Vigilance and discipline in adhering to these goals
as we head into the electoral season and beyond will be
Maduro's great challenge. Post is reassured by his words,
but will watch with interest to see if the GOH can marshal
the necessary political will to put those words into action.
End comment.

Palmer