Honduran Econ Highlights: December 2003 - January

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 000325

SIPDIS

SENSITIVE

STATE FOR EB, DRL/IL, WHA/EPSC, AND WHA/CEN
GUATEMALA FOR AGATT SHUETE
SAN SALVADOR FOR COMMATT DTHOMPSON
DOL FOR ILAB
STATE PLEASE PASS TO USAID, OPIC, EXIM, USTR
STATE PLEASE PASS TO USED IDB, USED WB, USED IMF

E.O. 12958: N/A
TAGS: ECON EAGR EFIN ETRD ELAB EINV PGOV HO
SUBJECT: Honduran Econ Highlights: December 2003 - January
2004

REF: Tegucigalpa 232

Contents
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Macroeconomics:
- 2004 Budget
- Controversy over Price Freeze
- Fuel Tax Increase
- Remittances on the Rise
Tourism:
- GOH to Develop Tela Bay
Business:
- Banking: Cuscatlan Buys Out Lloyds
- Colonel Sanders Arrives in Honduras

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2004 Budget
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1. (U) On December 30, 2003, Congress passed the 2004
federal budget. The consideration of the budget,
traditionally undertaken in a special December session of
Congress, took on particular importance this year, as the
government of Honduras worked under the constraint of
meeting the prior conditions listed in the preliminary
Letter of Intent agreed to with the IMF.


2. (U) The total size of the national budget is 34.5 billion
lempiras, up 5.6 percent from the 2003 total of 32.7 billion
lempiras. However, taking into account the 6 percent
devaluation of the lempira over the course of 2003, the
budget actually shrank slightly in dollar terms, from USD
1.935 billion to USD 1.922 billion, a 0.7 percent decrease.


3. (U) As always, the Ministries of Education and Health
make up the largest share of the federal budget, comprising
42 percent of the total, down slightly from 43.1 percent in

2003. The Ministry of Education's budget increased by
nearly 10 percent, despite the previously determined
decreases in salary and benefit hikes imposed by the public
salary restructuring law passed on December 19, 2003 (see
reftel). The budget for the Ministry of Health decreased by
8.4 percent, a partial result of the salary caps established
by the Public Finance law, also passed on December 19.


4. (U) The biggest gainers in the budget are the Ministry of
Tourism, which had its budget more than doubled to 201
million lempiras (USD 11.2 million),and the Ministry of
Environment and Natural Resources, whose budget increased by
nearly 30 percent to 729 million lempiras (USD 10.6
million). The Ministry of Agriculture and the Ministry of
the Presidency suffered the largest budget cuts in
percentage terms, although certain functions performed by
these ministries have been categorized differently in 2004
than in 2003, making a straight year-to-year comparison more
difficult. The Ministries of Transport and Finance also
experienced sizable budget cuts, of roughly 20 percent.

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Price Freeze: Good Intentions, Poor Implementation
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5. (SBU) Along with the fiscal measures passed on December
19, Congress simultaneously enacted a price freeze, to be
effective for six months, on an extensive list of 159
products (mostly foodstuffs). The intent was to soften the
economic blow (and political cost) of the spending and
salary measures being passed at the same time, but the
effect was to generate confusion.


6. (SBU) Congress apparently adopted the measure without
prior consultation with the Ministry of Industry and Trade,
which would have the responsibility of enforcing the freeze.
The Ministry monitors the prices of only about 40 products
and, with only twelve consumer protection inspectors, lacked
the capacity to implement such an elaborate price control
system throughout the country.


7. (SBU) IMF officials privately pushed for repeal, given
the inevitable distortions the measures would cause.
Private sector groups criticized the plan as being
impractical and damaging to businesses. Newspapers carried
daily reports of price increases in the covered products and
the government's inability to curb them, putting the GOH
under constant attack. On January 20, Congress cut back the
number of products covered to 38, roughly matching products
the GOH already monitored.

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Fuel tax increase
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8. (U) As part of the government's attempts to raise
additional revenue, the GOH started the year with an
increase in the fuel tax. A decree that went into effect on
January 1 raised the per gallon price of gasoline and diesel
by 3.7 lempiras (20 U.S. cents),and a second decree in late
January raised the price an additional 1.5 lempiras (8 U.S.
cents). There have been angry reactions from the
transportation sector, which has threatened to increase the
price of public transportation, though they have not done so
yet.


9. (U) According to GOH officials, the level of the fuel tax
will keep changing on a regular basis so that the government
can maintain a balanced budget and meet IMF requirements.
These changes in the price of fuel will happen on a regular
basis, probably once or twice a month. The GOH currently
estimates that it will receive around 4 billion lempiras
(USD 222 million) in revenue from oil taxes this year.


10. (U) As shown in the table below, Honduras now has the
most expensive prices for gasoline and other kinds of fuel
in the region.

Country Premium Gasoline Regular Gasoline Diesel
-------------- -------------- -------------- --------------
Guatemala 2.02 1.97 1.45
El Salvador 2.08 1.98 1.69
Costa Rica 2.39 2.34 1.73
Nicaragua 2.42 2.32 1.97
Honduras 2.80 2.72 1.95

Price of one gallon, in USD. Source: Honduran Press
accounts, quoting the Ministry of Commerce, Guatemala

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Remittances and Migration Continue to Rise
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11. (U) The Ministry of Foreign Affairs and the National
Statistics Institute estimate that Honduras received USD 800
million in family remittances in 2003, a figure which
represents approximately 13 percent of the country's GDP.
Remittances have increased by USD 96 million (14 percent)
over the figure for 2002. Family remittances are currently
the second largest source of foreign currency, after the
maquila industry.


12. (U) The Ministry of Foreign Affairs estimates that every
year around 35,000 Hondurans migrate to other countries,
predominantly the U.S., looking for job opportunities. The
majority of these immigrants are men between 19 and 29 years
old. According to statistics, there is only one woman for
every nine men that immigrate, which explains why the
majority of those who receive family remittances are women.


13. (U) The Consular Section witnessed a sudden surge in the
number of NIV applicants immediately following the
announcement of President Bush's immigration reform plan.
The announcement of the plan seems to have created the
perception among the Honduran public that those who enter
the U.S. now, before the plan goes into effect, will be in a
better position to gain legal status if the plan is approved
by Congress.

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Tela Bay - The Next Cancun? GOH Hopes So
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14. (U) In early January, Congress approved new legislation
that permits the GOH, through the Ministry of Tourism, to
develop 312 hectares of prime tourism land, along 2 miles of
coastline, in the area of Tela Bay on the north coast. The
land, which is owned by the GOH, will be passed to the
control of a newly-created consortium, the Tela Bay Tourism
Investment and Development company, which will include both
private investors and the Ministry of Tourism as members.
The hope is that this new legislation will permit investment
that the GOH has been unable to undertake on its own.


15. (U) Initial plans for the project were developed in the
early 1990's, but there has been little progress until now.
The GOH is planning the construction of seven major resorts,
including four and five-star hotels, with a total capacity
of 1,920 rooms. A residential area will also be
constructed, with a capacity for 168 villas, one mall, a
convention center, and a golf course. During 2004, the GOH
is investing USD 12 million to provide infrastructure and
basic services for the project, while raising money for the
additional investments.


16. (SBU) One AmCit, Miguel Garciga, has claimed to own land
in the project area and requested Embassy advocacy.
Preliminary investigations and discussion with the Tourism
Ministry indicate that the AmCit's claim to ownership is
unfounded.

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Cuscatlan Buys Operations of Lloyds TSB in Central America
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17. (U) At the beginning of December of 2003, Cuscatlan Bank
from El Salvador bought all the assets of Lloyds TSB Bank in
Honduras, Guatemala, and Panama for USD 80 million. The
reasons for the sale, according to the Lloyds Bank
representative for Latin America, Tim Bower, are that the
Salvadoran bank has better conditions to get more out of the
Central American market. The sale leaves Citibank as the
only U.S. or European bank operating in Honduras, but brings
the total number of Central American banks operating in the
country to two.

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Kentucky Fried Chicken Opens First Restaurant in Honduras
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18. (U) In early January, Kentucky Fried Chicken opened its
first restaurant in Honduras, located in the northern city
of San Pedro Sula. Kentucky Fried Chicken is owned by Yum!
Brands, which also operates the Pizza Hut franchise, which
is already very successful in Honduras, with 26 restaurants.
The President of Yum! Brands International, Graham Allan,
attended the opening and declared that further KFC openings
are planned. U.S. fast food franchises are well represented
in Honduras, and KFC will have to compete for market share
against such established fried chicken brands as Church's,
Popeye's, and Central American favorite, Pollo Campero.

Palmer