C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 002419

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN
TREASURY FOR DDOUGLASS
COMMERCE FOR MSIEGELMAN
DOL FOR ILAB
STATE PASS AID FOR LAC/CAM
STATE PASS USTR FOR AMALITO

E.O. 12958: DECL: 11/30/2015
TAGS: ECON EFIN PGOV ELAB SOCI HO
SUBJECT: PART II: WHAT DOES A LIBERAL PARTY VICTORY MEAN
FOR THE HONDURAN ECONOMY AND U.S. ECONOMIC INTERESTS?

REF: REF: TEGUCIGALPA 1993 AND PREVIOUS

Classified By: Economic Chief Patrick Dunn for reasons 1.4 (b) and (d).


1. (C) Summary: This is the second of three cables analyzing
the Zelaya platform. As of early morning on November 30,
exit polling indicates an electoral victory for Liberal Party
presidential candidate Manuel "Mel" Zelaya Rosales. While we
await a formal announcement from electoral authorities, the
following cable assesses Zelaya's microeconomic platform and
proposed sectoral policies and their likely impacts on U.S.
interests. Part one provided an overview of the Zelaya
economic platform and impacts on the U.S., and part three
provides a more in depth assessment of the impacts of his
proposed macroeconomic policies.


2. (C) Summary Continued: The Zelaya platform's calls for
rational energy policies, agricultural diversification,
re-energizing mining and forestry, improving infrastructure,
and taking full advantage of CAFTA are each appropriate goals
that also mirror U.S. interests. Some proposals remain vague
(mining and telecomms) and some troubling (land reform, fuel
taxes). In our view, Zelaya's economic platform holds few or
no obvious items that threaten U.S. national economic
interests. His proposals, if implemented, should help
Honduras take maximal advantage of CAFTA and other economic
opportunities by creating an investment climate that is more
welcoming of both domestic and foreign investment. End
Summary.

Agro-Industry and Forestry
--------------


3. (C) Zelaya's plan for agro-forestry hits all the right
notes, calling for sustainability, diversification, quality
control, value-added production, and a renewed emphasis on
exports. It also calls for cutting red tape, pledging that
"laws that slow the

efficiency and dynamism of this economic
sector will be abolished." However, the plan is salted with
populist proposals as well, including free technical
assistance to farmers, subsidized fertilizers, subsidized
seed, subsidized irrigation, and the creation of a national
grain reserve. On November 9, Zelaya told Ambassador and
EconChief that these and other farmer-friendly policies would
promote production, increase diversity, and thereby lower
prices for consumers, obviating any need for price controls
while meeting his campaign promise to lower the cost of the
basket of basic consumer goods. Of more concern is his
proposal to increase production of basic grains such as corn
and beans -- products Honduras would be hard-pressed to
compete in globally.


4. (SBU) Zelaya's stance on agricultural trade is positive,
but with potentially high-cost caveats that bear watching,
particularly for their fiscal impacts. For example, Zelaya's
plan states, "My government will take advantage of the market
opportunities that have been opened by free trade agreements.
It will support producers so that they can be competitive,
supplying the country's needs and producing excess for
export. Those producers that are at a competitive
disadvantage will benefit from production compensation
programs." Such social safety nets are in no way anti-trade,
but they could be quite costly, and Zelaya's platform does
not indicate how such programs would be funded.

Land Reform
--------------


5. (C) On land reform, Zelaya's stance merits careful
observation. His call to reform the "institutional anarchy"
that currently paralyzes reform of the land titling process
is well-founded and laudable. So, too, is his observation
that a clean title to land is not enough to spur rural
production, but must be accompanied by technical assistance
and capacity building. However, his proposal to fold the
current laws on agricultural reform, land reform, forestry,
water and property into one mega-law promises to be a
bureaucratic nightmare. Finally, his opposition to programs
such as the World Bank's PATH program -- which is actively
working to clean up and harmonize Honduras' disaster of a
land registry and cadastre -- is troubling. He calls for
de-politicizing the National Agrarian Institute (responsible
for land titling issues), but rejects "manipulation" of the
land-registry reform process by "special projects that obey
only financial institutions."

Industrial Policy
--------------


6. (C) On industrial policy, Zelaya calls for welcoming
foreign investment, but as a supplement to domestic
investment and growth. He favors a policy that will create
domestic investment and savings and promote Honduran
industrial growth. (Comment: Honduras is awash in
liquidity, so flight of capital is not a key concern.
However, much of that liquidity is absorbed in Central Bank
sterilization operations using GOH-issued risk-free bonds at
high rates, crowding out riskier private sector borrowers and
imposing enormous costs on the Central Bank. If Zelaya
intends to mobilize this capital for domestic investment, his
chief challenges will be how to do so without spurring
inflation, and how to wean domestic banks from the low-risk,
high-yield instruments currently comprising most of their
portfolios. That said, Zelaya's underlying insight has
merit: to create sustainable economic growth that encourages
foreign direct investment, first create an environment that
encourages domestic investment. End Comment.)


7. (U) Similarly, Zelaya supports growth and diversification
of the maquila sector, with emphasis on value-added
post-processing (such as freezing and packaging vegetables).
To encourage this growth, he proposes passing legal reforms,
lowering energy costs to regionally competitive rates, and
creating competitive port facilities and communications.
Post fully supports such initiatives.

Tourism
--------------


8. (U) Zelaya's proposals for tourism lack specificity,
focusing only on its benefits and calling for the future
development of a more comprehensive strategy. However,
Zelaya does link tourism to municipal management, and notes
the market opportunities for small and medium businesses that
expanded tourism presents. He also calls for using tourism
revenues for archaeological and environmental conservation
efforts. He hopes to increase tourism by 20 percent per year
until Honduras doubles its current flow of 1 million visitors
annually. (Comment: The vast majority of these 1 million
visitors are one-day cruise ship passengers, who spend little
-- we've heard USD 10 per capita, or about one-fifth of the
Caribbean average -- and therefore contribute little to the
Honduran economy. Higher-quality and more diverse tourist
services and attractions will be key to improving these poor
results. End Comment.)

Mining
--------------


9. (U) Zelaya's mining plan, while highlighting a potentially
important growth sector, clocks-in at a mere two sentences,
one of which is merely hortatory. Turning attention to this
much-maligned and politically sensitive sector is long
overdue, following a year-and-a-half long moratorium on all
new mining concessions. Yet, there is nothing in the Zelaya
platform (nor in any of the conversations Post has had with
the campaign) to indicate Zelaya has formulated any specific
proposals to re-invigorate this stagnant sector.

Infrastructure
--------------


10. (SBU) Without naming the Millennium Challenge Corporation
by name, Zelaya promises to hold to agreed infrastructure
improvement goals of improving the primary and secondary road
network, and adds port improvements, expansion of the
electricity grid, improved telecommunications, and "saving
the national railroad." While that last one leaves us
scratching our heads, the remainder of the listed items are
key to economic growth and are in keeping with existing
programs and policies. Regarding telecommunications, Zelaya
-- in the space of one paragraph -- promises to strengthen
state-run telephone company Hondutel to make it competitive
(to survive after it loses its land-line monopoly in December
2005), but then saddles it with the burden of providing
universal service to "areas that are not attractive for
private firms." Precisely how he intends to split that baby
remains to be seen. Post will follow this -- and the
associated telecomms reform bill now in Congress -- closely.
Ford
Ford