Honduras: Readout of Secretary Gutierrez

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002217

SIPDIS

STATE FOR WHA/CEN, WHA/ESPC, DRL/IL, AND EB/IFD/OMA
STATE PASS AID FOR LAC/CEN
STATE PASS USTR FOR WILLIAM CLATANOFF
TREASURY FOR DORA DOUGLAS
DOL FOR ILAB
COMMERCE FOR MSIEGELMAN

E.O. 12958: N/A
TAGS: ELAB ETRD EINV EIND KTEX PGOV HO
SUBJECT: Honduras: Readout of Secretary Gutierrez
Bilateral Meeting with Honduran President Ricardo Maduro



1. Summary: On October 19, Secretary Gutierrez met with
President Ricardo Maduro in a closed session. The Secretary
encouraged Maduro to attend the Summit of the Americas, and
to quickly comply with any outstanding CAFTA requirements to
expedite entry into force. Maduro welcomed the Secretary's
visit and the accompanying trade delegation, praised CAFTA,
and highlighted his own achievements over his nearly-
complete four-year term. Maduro indicated that his recent
encounter with Venezuelan President Chavez over petroleum
had been inconclusive. End Summary.


2. On October 19, 2005, during his trade mission to San
Pedro Sula, Honduras, Secretary Gutierrez and his team met
with GOH President Ricardo Maduro, to discuss CAFTA
implementation in Honduras. Also present were Minister of
Trade and Commerce Irving Guerrero, Honduran Ambassador to
the U.S. Norman Garcia, Department of Commerce (DOC) DAS for
Western Hemisphere Walter Bastian, DOC Assistant Secretary
and USFCS Director General Israel Hernandez, DOC Chief of
Staff Claire Buchan, Embassy Charge James Williard,
Millennium Challenge Corporation Vice President John Hewko,
and Senior Commercial Officer Mitch Larsen (notetaker).

CAFTA
--------------


3. President Maduro opened the meeting by welcoming the
Secretary to Honduras and saying that CAFTA brings lots of

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promise, that it will strengthen Honduran democracy and rule
of law, improve competitiveness, strengthen young and
fledgling institutions, open markets, and fight oligopolies.
Maduro said he understood the risks that President Bush took
in fighting for CAFTA. He also stated that Honduras was
relatively well-prepared for the implementation of CAFTA and
that the country's fiscal situation was under control.


4. The Secretary thanked Maduro for meeting, especially on
the heels of his return from Spain for the annual Ibero-
American Summit (Note: Maduro flew directly from the airport
to the port by helicopter specifically to meet with the
Secretary). He said Honduras is going down the right road

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with CAFTA. As an example, he cited Guatemalan supermarket
executives who had told him the day before that they
expected prices would decrease in Guatemala between 15-20
percent as a result of CAFTA.


5. Citing increased interest in Honduras because of CAFTA,
the Secretary described the makeup of the mission's business
delegation. It was composed of 19 impressive U.S.
companies, including diesel manufacturing, healthcare,
insurance, automotive, tourism, energy, and others. It also
included firms such as the Eastman Chemical Company and Ford
Motor Company. He said that there were over 100
applications for the mission and that Central America is
more stable than much of Latin America - it's just that many
are just now discovering that. He also noted the
participation of interagency representatives from OPIC,
USDTA, Eximbank, SBA, IDB, and MCC. Maduro replied that he
was pleased to have the Secretary in Honduras, as well as
all the companies and the interagency delegation.


6. Maduro said preparations were going well in Honduras for
CAFTA, but said that Costa Rica will probably have the
hardest time, since it is "more closed" and will have more
to open up. The Secretary stressed that President Bush has
to certify very soon that all things are in place with
respect to CAFTA. The USG wants to move forward with CAFTA
in early January. He asked Maduro to comply expeditiously
with Honduras' commitments to help "take issues off the
table." Otherwise CAFTA could suffer the same fate as the
U.S. FTA with Morocco, whose entry into force has been held
up significantly because President Bush could not certify
due to a number of outstanding issues.

Taxes in Honduras
--------------


7. Noting his failed attempt to dramatically increase
gasoline prices, President Maduro said he should have raised
sales taxes instead. Corporate marginal tax rates in
Honduras are currently 30 percent, and the VAT (IVA) is only
4 percent, the lowest in the region. (The VAT/IVA in
Guatemala is 12 percent and in Costa Rica it is 15 percent.)
Maduro has encouraged his National Party to address the tax
situation in Honduras immediately if they are re-elected
this November. He also listed the items exempted from sales
taxes in Honduras, which include medicines, school supplies,
energy, water, and the "canasta basica" (basket of basic
food items). Maduro explained that when he took office,
7,000 products were price-controlled, and that one of his
initial priorities was to remove many of these controls.
The Secretary responded that price controls simply do not
work; only the market works.

Summit of the Americas
--------------


8. The Secretary asked Maduro to personally attend the
upcoming Summit of the Americas in Argentina, claiming that
his absence would be a real blow to the full participation
of all CAFTA countries, especially given Honduras'
leadership as one of the first countries to ratify. Maduro
said that he would be pleased to attend the Summit.

Hard Currency Flows, Industry, and Investment
--------------


9. Raising the issues of dollarization and remittances,
Maduro claimed that Honduras received $1.3 billion in
remittances in 2004 and is expecting $2 billion in 2005. He
stated that dollarization is not a priority for Honduras,
but that remittances are having an increasing social impact.
The problem is that growing remittances could cause the
Honduran currency to revalue.


10. Maduro noted that Honduras had strengthened its banking
system since the "debacle" of 5-7 years ago. Now there are
foreign banks and a solid playing field in banking in
Honduras, although a good home mortgage program is lacking.
He also expressed his belief that microcredits was a great
concept for the bottom of the entrepreneurial chain. This
is an area that Maduro said he would like to be involved in
once he leaves the Presidency.


11. Turning to the fuel price crisis, Maduro said that
recent increases in the Honduran fuel bill are equivalent to
2.5 times the country's aid receipts. On the other hand,
the country is currently growing at 5 percent, or two times
the regional average. In Honduras, maquilas used to mean
simple assembly, whereas now it means full integration. In
forestry, an industry with many opportunities in Honduras,
Maduro said the country was polarized between the
environmentalists and business interests.


12. Maduro added that the recent debt forgiveness was very
important to Honduras. Everyone in Honduras is now in
unison regarding the IMF Agreement, he said, "even the
Catholic Church." The Agreement has provided $218 million
in increased monetary flows, or 10 times what Honduras
spends on its school lunch programs, and two times the $100
million Maduro had promised his constituents. Those debt
service payments, which were 3 percent of Honduran GDP - can
now be re-directed to social programs, to help the private
sector, and to increase productivity. The Secretary praised
Maduro for his fiscal discipline and for leaving a strong
economic foundation for his successor.


13. Maduro said Mexico now has an interest in financing a
new oil refinery in the region. He also said that after
repeated attempts to schedule a meeting with Hugo Chavez
over fuel, he "grabbed" Chavez at the Ibero Summit in Spain.
However, Maduro said that Chavez seemed more interested in
holding out the prospect of some petroleum price break than
in actually negotiating a deal. Maduro speculated that
Chavez merely craves the attention he commands by holding
out the prospect of lower prices. Maduro expressed surprise
that Chavez apparently "wants to do something with Mexico."
Maduro felt strongly that Chavez is directly involved with
the FMLN party in Nicaragua (the Sandinistas). Maduro
praised Deputy Secretary of State Zoellick's recent trip to
Nicaragua. The Secretary questioned Chavez's economic
performance, noting that inflation has increased
significantly since he took office. He also reiterated that
all the Sandinistas had apparently voted against CAFTA.


14. On investments, Maduro noted that one area where the
country was not attracting foreign investment was in call
centers, where much of the business was going to countries
like Costa Rica and El Salvador. He claimed that Honduras
has good English speakers and that the country needs to do
better in this particular area.

Port Security
--------------


15. Moving to port issues, the Secretary and the President
discussed the ceremony (later in the day) at Puerto Cortes
to officially inaugurate the new U.S. Customs office. With
regard to the Container Security Initiative (CSI),Maduro
claimed that Honduras was on-track and things were moving
forward as planned. Ambassador Garcia confirmed that final
preparations should be ready during November. The Secretary
congratulated the President on efforts to date and said
that, as the third port in Latin America with CSI status,
this was a real advantage for Honduras.


16. Following their bilateral meeting, the Secretary and
President Maduro went on to a port briefing and lunch and
then a dedication event at the new U.S. Customs Office in
Puerto Cortes, at which both gave brief remarks and took
questions from local press.


17. This cable was cleared by the Department of Commerce.

Williard