Honduras: 2003 Monetary and Financial Overview

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002458

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EB
STATE PASS TO USAID AND USTR
TREASURY FOR DDOUGLASS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ELAB ETRD EINV HO
SUBJECT: Honduras: 2003 Monetary and Financial Overview

REF: A: Tegucigalpa 2435

B: Tegucigalpa 2452


1. SUMMARY: Post submits its annual monetary and financial
overview for Honduras for the year 2003, based on the
official economic statistics released by the GOH in the fall
of 2004. Ref A contains information on imports, exports,
and the trade deficit, and ref B contains information on
economic growth, prices, and wages; this cable contains
information on balance of payments, currency, money supply,
interest rates, and government spending. Unless cited
otherwise, all figures are from the Central Bank of
Honduras' annual report.


2. Honduras' current account deficit increased by 18
percent in 2003, as a growing trade deficit was only
partially offset by growth in net transfers, mainly family
remittances. The capital account and overall balance of
payments were also negative. Interest rates continued their
decline of recent years, while the monetary position
remained stable and the GOH continued its policy of a
gradual, controlled devaluation of the lempira. END
SUMMARY.

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BALANCE OF PAYMENTS
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3. Honduras ran a current account deficit in 2003 of USD
258.3 million, 18 percent higher than in 2002, as an
increase in net transfers was not sufficient to offset a
growing trade deficit. The trade deficit increased by 14
percent in 2003 to USD 1,349.9 million, and net transfers -
mostly family remittances from Hondurans living abroad -
increased by 13 percent to USD 1,091.6 million. Remittances
rose by 21 percent in 2003, to account for 12.8 percent of
GDP.


4. Long term direct foreign investment increased by 39
percent over 2002, to reach USD 198.0 million. However, a
net outflow of USD 110.2 million in short term investment,
coupled with an increase in private sector loans, combined
to create a capital account deficit of USD 32.5 million.
Honduras' total balance of payments in 2003 was therefore a
deficit of USD 231.2 million, and net international reserves
fell by USD 88.2 million.

CONDENSED BALANCE OF PAYMENTS (USD MILLIONS)
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2001 2002 2003

Exports 2,510.7 2,570.6 2,711.1
Imports 3,742.2 3,757.9 4,060.9
Trade Balance -1,231.6 -1,187.4 -1,349.9
Net Transfers 929.2 968.7 1,091.6
Current Account -302.4 -218.7 -258.3
Capital Account 228.7 232.7 -32.5
Balance of Payments -0.3 63.5 -231.2
Change in Int. Reserves
(Decrease +, Increase -) -147.3 -214.0 88.2

REMITTANCES, IN USD AND AS SHARE OF GDP
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Remittances As percent
Year in USD million of GDP

1999 319 5.9
2000 409 6.9
2001 533 8.5
2002 711 11.1
2003 860 12.8
2004 (est.) 1075 15.5

Note: 2004 figures based upon estimates through September
2004: 3.75 percent annual rate of GDP growth and 25 percent
growth in remittances.

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CURRENCY AND MONEY SUPPLY
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5. The Central Bank continued its policy of a controlled
depreciation of the nominal exchange rate of the lempira,
using an auction system to regulate the allocation of
foreign exchange. The lempira fell from a rate of 16.88 to
the dollar at the end of 2002, to 17.95 at the end of 2003,
a 6.4 percent devaluation, practically unchanged from the
6.5 percent devaluation of the previous year. The minimum
wage increased by an average of 9.7 percent, more than
compensating for the rate of inflation.
EXCHANGE RATE (LEMPIRAS/USD)
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End of Devaluation
Period in Percent

1998 13.95 5.7
1999 14.62 4.8
2000 15.02 2.8
2001 15.85 5.6
2002 16.88 6.5
2003 17.95 6.4


6. Domestic liquidity, as measured by M1, rose from 13.1
billion lempiras at the end of 2002 to 15.8 billion lempiras
at the end of 2003, a 16.5 percent increase in nominal terms
(and 9.7 percent in real terms) over the previous year. The
money supply shrank in real terms over the first half of the
year and grew in the second half of the year, though the
rise in the second half failed to spark an increase in bank
lending, apparently due to caution exercised by bankers.

MONETARY INDICATORS
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(December of each year, in millions of Lempiras)
% var % var
2001 2002 2003 01/02 02/03

Money (M1) 11,514.8 13,191.6 15,806.8 14.6 19.8
In circulation 5,118.7 5,487.8 6,415.5 7.2 16.9
In deposits 6,396.2 7,703.8 9,391.3 20.4 21.9

Broad Money 36,314.1 40,444.9 46,422.7 11.4 14.2
Supply (M2)

Deposits in Foreign
Currency 13,801.2 16,288.1 18,654.4 18.0 14.5

Money Supply 50,115.3 56,733.0 65,077.1 13.2 14.7
(M3)

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INTEREST RATES AND CREDIT
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7. Nominal interest rates on lempira-denominated loans
averaged 20.24 percent in 2003, compared with 22.06 percent
in 2002. In early 2004, interest rates fell below 20
percent for the first time in over a decade. (Note: These
are the average nominal rates charged by banks to their best
customers; small and medium enterprises, on the other hand,
complain of a dearth of credit, very short loan periods, and
substantially higher average rates. End note.)

ANNUAL INTEREST RATES
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In Lempiras In Dollars
Year Lending Deposit Lending Deposit

1999 29.46 15.04 12.86 5.59
2000 24.57 12.23 13.13 5.10
2001 23.18 11.76 12.08 3.58
2002 22.06 9.57 10.93 2.25
2003 20.30 8.14 9.20 1.62


8. Total banking credit to the private sector stood at
49,370 million lempiras at the end of December 2003,
following an increase of 12.4 percent in nominal terms.
Banks and financial companies are still exercising caution
in their lending practices, particularly in the agricultural
sector, which saw a net decrease in new loans of 7.5 percent
in nominal terms. This caution is the result of a flood of
non-performing loans following 1998's Hurricane Mitch,
coupled with historically low prices for such key
commodities as coffee.


9. New industrial loans rose by 32.5 percent, reflecting
the recovery registered by the manufacturing sector, and
headed by the maquila sector. Services and real estate
loans grew moderately in nominal terms but registered small
declines in real terms, despite the growth in both the
tourism and construction sectors, which partially benefit
from external financial sources. Trade and consumer credits
reflected substantial falls in both real and nominal terms.
Total credit stock in 2003 grew, while total new loans
declined by 6.6 percent in nominal terms.

NET INTERNAL CREDIT (MILLIONS OF LEMPIRAS)
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Change Change
2001 2002 2003 01/02 02/03

Public Sector -11,395 -12,499 -8,712 9.7% -30.3%
Private Sector 40,807 43,922 49,370 7.6% 12.4%
Net Internal
Credit 29,412 31,422 40,658 6.8% 29.4%

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PUBLIC SECTOR FINANCES
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10. The central government's budget deficit widened to 5.9
percent of GDP in 2003. Government revenue rose by 9.9
percent, to just over 23 billion lempiras (USD 1.3 billion).
Much of the increase in revenues is due to increased tax
compliance, stemming from a crackdown on tax evaders that
led to the temporary closure of more than 1,600 businesses
during 2003. Revenue collected from taxes grew by 7 percent
in 2002, and by 14 percent in 2003.


11. However, government expenditure increased by 13.1
percent, owing to the ballooning public wage bill (not
brought under control until December 2003) and to government
financing of several agricultural relief schemes, estimated
at a cost of around 1.2 percent of GDP. The financing of
the resulting deficit came mostly from internal credit,
particularly a 1.2 billion lempira loan from the Central
Bank, guaranteed by transfers from Hondutel (the State-owned
telephone company). Despite the GOH's poor fiscal
performance in 2003, statistics available so far for 2004
show that the government is on track to meet its target of
reducing this year's budget deficit to 3.5 percent of GDP,
as agreed with the IMF.

CENTRAL GOVERNMENT FINANCIAL ACCOUNT
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(millions of Lempiras) 2001 2002 2003

Gov't Income 19,726.5 20,977.1 23,055.3
From Taxes 16,083.1 17,229.0 19,632.4
Other Sources 3,643.4 3,748.4 3,422.9
Gov't Expenditure 24,966.4 26,644.6 30,135.6
Budget Deficit 5,239.9 5,667.2 7,080.3
As % of GDP 5.3% 5.2% 5.9%


12. Honduras's foreign debt, which is held by the official
sector, Central Bank, and private sector (financial and non-
financial),was USD 5,115.6 billion in the year 2003, up 3.1
percent from 2002. The increase was mainly due to the U.S.
dollar's depreciation with respect to other currencies that
make up the "baskets" of the international lending
institutions. In 2003, loans from multilateral and
bilateral institutions totaled USD 489.5 million, USD 287.7
million to the private sector and USD 201.8 million to the
public sector. Foreign debt service in 2003 was USD 503.3
million, USD 413.5 million of capital and USD 89.8 million
in interest. The GOH continues its policy of taking on only
foreign concessional loans for projects of high priority,
and expects to reach its HIPC completion point in the first
quarter of 2005.

HONDURAN FOREIGN DEBT (IN USD MILLIONS)
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Type of Creditor 2001 2002 2003 %age

Multilateral 3,118.3 3,162.2 3,324.2 65.0
Bilateral 1,414.6 1,487.5 1,538.7 30.5
Commercial 275.1 314.0 252.7 4.5
TOTAL 4,808.0 4,963.7 5,115.6 100.0

Palmer