Honduras: 2003 Macroeconomic Overview

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002452

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB
STATE PASS TO USAID AND USTR
TREASURY FOR DDOUGLASS
LABOR FOR ILAB

E.O. 12958: N/A
TAGS: ECON EFIN EINV ELAB ETRD PGOV HO
SUBJECT: Honduras: 2003 Macroeconomic Overview

REF: Tegucigalpa 2435


1. SUMMARY: Post submits its annual macroeconomic summary
for Honduras for the year 2003, based on the official
economic statistics released by the GOH in the fall of 2004.
Reftel contains information on imports, exports, and the
trade deficit; this cable contains information on economic
growth, prices, wages, and employment. Unless cited
otherwise, all figures are from the Central Bank of
Honduras' annual report.


2. The rate of economic growth in Honduras increased from
2.5 percent in 2002 to 3.2 percent in 2003, with the maquila
sector, tourism, and family remittances all registering
strong growth. The inflation rate reached 6.8 percent, its
lowest level in over a decade, and flows of foreign direct
investment increased by 39 percent. However, unemployment
rose, with the broadest measure of unemployment (the
percentage of the economically active population with
"employment problems") showing a sharp increase from 33 to
42 percent. END SUMMARY.

--------------
ECONOMIC GROWTH AND ACTIVITY
--------------


3. The Honduran economy grew at a rate of 3.2 percent in
2003, up from 2.5 percent in 2002. This was the second
highest growth rate in Central America, after Costa Rica's.
However, population growth of 2.6 percent meant that per
capita GDP growth was only 0.6 percent. The expansion has
been driven by growth in the maquila industry (offshore
assembly for re-export),family remittances, and tourism.
All sectors of the economy registered growth except for
public administration and defense, which fell by 2 percent
due to the public spending austerity policy implemented by
the GOH. The sector that increased the most in percentage
terms was the construction sector (13.8 percent),which is
recovering after three years of stagnation; public
construction grew 17.2 percent while private construction
grew by 10.9 percent. The manufacturing sector grew by 3.7
percent, a similar rate to that of last year, and the
agricultural sector, which currently accounts for 12.8
percent of GDP, increased by only 1.9 percent. Within the
service sectors, telecommunications grew by 3.5 percent,
reflecting the recent expansion of cellular telephony and
increased investment in the sector.

REAL GDP GROWTH RATE
--------------
Year Percent Per capita

1997 5.1 2.5
1998 2.9 0.3
1999 -1.9 -4.4
2000 5.2 2.5
2001 2.6 0.0
2002 2.5 0.0
2003 3.2 0.6

REAL GDP BY ECONOMIC ACTIVITY:
PERCENTAGE INCREASE OVER PREVIOUS YEAR
--------------
Activity 2001 2002 2003

Agriculture -0.5 4.8 1.9
Mining -0.8 5.0 3.2
Manufacturing Industry 5.2 2.8 3.7
Construction -5.2 -14.6 13.8
Electricity, Water, Gas -1.8 5.6 7.9
Transportation, Storage 5.3 3.2 3.7
Stores, Restaurants, Hotels 3.0 2.8 3.1
Financial Institutions 3.1 2.2 1.7
Housing 3.9 3.9 4.2
Public Admin. and Defense 8.7 7.2 -2.0
Other Services 12.6 7.2 3.5
--------------
Real GDP (All Activities) 2.6 2.7 3.2
--------------


4. The GOH has given priority to increased tourism
development and hopes it will generate economic growth and
substantial employment. The key geographic areas of focus
include the Bay Islands and the northern coast, and the
"Mayan Route" from Copan to other archeological sites in
Guatemala and Mexico. The government's goal is to reach one
million tourists and USD 500 million in income in 2004.
According to data released by the Honduran Institute of
Tourism, the number of tourist arrivals rose by 12.4 percent
in 2003, to 886,600. Cruise ship visitors increased by 10.6
percent over 2002, to reach 135,000 people. The tourist
industry continues to recover following the September 11,
2001 attacks and has become the third largest economic
activity in the country after the maquila and agricultural
sectors.


5. In early 2004, the Minister of Tourism announced that
the Honduran Institute of Tourism plans to proceed with the
USD 140 million Tela Bay project, which will include a
luxury resort, golf courses, access to local Garifuna
villages, scuba diving, and (pending completion of an
airport in Copan) day trips to the Mayan ruins of Copan.
The project was given a boost in 2003 by the announcement of
the Spanish and Italian governments confirming the necessary
financing. In January 2004, Congress authorized the
transfer of 311 hectares of government land to a mixed-
equity company, in which the Honduran Institute of Tourism
will be a partner. In September 2004, President Maduro led
a senior GOH delegation to the Dominican Republic to drum up
additional private sector interest in investing in the
project.

TOURISM: VISITORS AND INCOME
--------------
Visitors Foreign Exchange
Year ('000) Income (USD Million)

1999 428.1 195.0
2000 688.4 259.8
2001 672.0 274.6
2002 788.1 341.5
2003 886.6 373.2

Source: Ministry of Tourism.

--------------
FOREIGN DIRECT INVESTMENT (FDI)
--------------


6. According to Central Bank data, FDI flows to Honduras in
2003 totaled USD 198 million, a 39 percent increase over
2002, though still well off the historical high of USD 282
million reached in 2000. The U.S. continues to be the
dominant source of FDI in Honduras; while a country
breakdown for 2003 is not yet available, 2002 figures show
that 38 percent of total FDI flows to Honduras were from the
United States.

FOREIGN DIRECT INVESTMENT BY COUNTRY OF ORIGIN
-------------- -
(USD '000s)

1999 2000 2001 2002

United States 113,855.1 64,240.6 52,600.0 54,500.0
Canada 55,099.6 36,057.9 15,057.0 18,115.0
El Salvador 13,907.7 7,878.8 9,240.0 11,798.0
Costa Rica 6,442.5 21,186.6 24,106.6 9,831.5
Panama 19,474.8 15,099.7 18,088.0 8,795.0
Italy -3,606.0 13,624.8 7,624.0 6,175.0
Guatemala 3,354.5 11,084.8 10,847.0 6,046.0
Spain 5,884.3 7,784.5 9,784.5 5,390.0
United Kingdom 2,567.4 14,956.7 4,289.0 4,790.0
Japan 124.0 0.0 1,150.6 1,188.2
Switzerland 6,948.1 -4,050.9 -1,250.0 543.0
Germany 156.7 218.6 188.6 219.0
Mexico 4,612.9 -138.8 207.0 223.0
Other countries 8,515.6 94,056.3 43,068.9 15,246.9

Total 237,337.2 281,999.6 195,001.2 142,860.6

Country breakdown for 2003 not yet available.

--------------
PRICES AND WAGES
--------------


7. Inflation, as measured by the Consumer Price Index, rose
by 6.8 percent in 2003, the lowest annual inflation rate in
over a decade, and 1.3 percentage points lower than the rate
in 2002. (Note: Sharp rises in energy inputs have led to a
spike in inflation in 2004, with rates currently estimated
at nearly 9 percent annualized - higher than in 2003, but
still moderate by recent historical standards. End note.)
Factors contributing to the low inflation rate included the
stability of the real exchange rate (carefully maintained
through a crawling peg nominal exchange rate that devalues
at approximately 6 percent per year),the application of
prudent monetary policy, and an increased domestic supply of
basic grains due to increases in national production.


8. Prices of telecommunications and cement fell due to
increased competition in both sectors: specifically, the
launching in November of Megatel, a Swedish-Honduran company
in the telecommunications sector, and in September of
Cemento Uno, a Honduran partner with Taiheyo Cement, the
leading Japanese cement manufacturer. (Note: By mid 2004,
unfair competition and predatory pricing practices had
driven Cemento Uno out of business, with a resultant sharp
rise in cement prices. Lacking an effective competition
law, the GOH has had to resort to setting prices for cement
to restrain monopoly rent-seeking by the surviving firm.
End note.) However, increases in the prices of gasoline and
public transportation partially offset the low inflation
rates in other parts of the economy.


9. The latest revision of the minimum wage (an increase of
12 percent for workers in agriculture and approximately 9
percent for most other workers) was implemented in spring
2004, and more than compensated for the annual rate of
inflation. Wage and benefits packages for other
professions, notably teachers and doctors, grew far faster
than inflation, since they are based on multiples of the
minimum wage. New negotiations are expected to start in
November of this year for the 2005 minimum wage increase.

INFLATION
--------------
Year Percent

1994 29.1
1995 26.9
1996 25.2
1997 12.7
1998 15.7
1999 11.0
2000 10.1
2001 8.8
2002 8.1
2003 6.8

--------------
EMPLOYMENT
--------------


10. Employment data is collected by the National Institute
of Statistics (INE) through a household survey conducted
each May and September. INE calculates four measures of
unemployment: open unemployment, visible sub-unemployment,
invisible sub-unemployment, and, most broadly, the
percentage of the economically-active population with
employment problems. On all four measures, unemployment
increased from 2002 to 2003, and early figures from 2004
show the increase continuing. By the most narrow
definition, open unemployment rose from 3.8 percent in
September 2002 to 5.1 percent in 2003, and to 5.9 percent in
May 2004, with the majority of the unemployed living in
urban areas and belonging to the younger segment of the
labor force. The broadest measure of unemployment, the
percentage of the economically active population with
employment problems, showed a significant increase of 8.6
percentage points in 2003, from 33.2 percent to 41.8
percent. Employment in the maquila sector, however,
continued to rise, growing 8.2 percent to 114,237 employees
in 2003.

EMPLOYMENT INDICATORS
-------------- 2002 2003

Economically Active Population (million) 2.44 2.56
Open Unemployment (percent) 3.8 5.1
Visible Sub-employment (percent) 4.8 7.1
Invisible Sub-employment (percent) 26.6 29.6
Economically-Active Population with
Employment Problems (percent) 33.2 41.8

Source: National Institute of Statistics (INE).

OPEN UNEMPLOYMENT
--------------

Year Percent of Labor Force

September 1998 3.0
September 1999 3.3
September 2000 N/A
September 2001 3.9
May 2002 4.1
September 2002 3.8
May 2003 5.4
September 2003 5.1
May 2004 5.9

Source: National Institute of Statistics (INE).

MAQUILA SECTOR EMPLOYMENT
--------------

Year Employees Pct Change

1998 98,905 18.5%
1999 103,271 4.4%
2000 106,530 3.2%
2001 94,416 -11.4%
2002 105,556 11.8%
2003 114,237 8.2%

Palmer