AMBASSADOR'S COURTESY CALLS WITH IMF AND CENTRAL

UNCLAS TEGUCIGALPA 001009

SENSITIVE
SIPDIS

STATE FOR WHA AND EEB
TREASURY FOR SARAH SENICH AND ANA JEWELL

E.O. 12958: N/A
TAGS: EFIN ECON ETRD EAGR HO
SUBJECT: AMBASSADOR'S COURTESY CALLS WITH IMF AND CENTRAL
BANK PRESIDENT

REF: TEGUCIGALPA 1006


1. (SBU) Summary: Ambassador Llorens continued economic
courtesy calls this week with visits from IMF
Resrep Mario Garza and Central Bank (BCH) President Edwin
Araque. Both meetings focused on the probable
effects of the financial crisis (reftel),further
complication to the Honduran economy because of massive
flood damage in the past month, and the need for an IMF
agreement in 2009 as an anchor of stability for
potential foreign investors. Araque and Garza agreed that
the increasingly complicated economic
situation increases the need for monetary discipline, and
Araque acknowledged that the BCH has downwardly
revised the GDP growth projection to 4.1 percent in 2008,
down from 6.5 percent. End Summary.


2. (SBU) In separate meetings with the Ambassador November 5,
Araque and IMF ResRep Mario Garza both
attested that liquidity was not a current problem in
Honduras. Garza said bank credit was still
growing at a 20 percent annual rate, which he said was too
fast. Growth of deposits, meanwhile, are
slowing, he said. As a result, the excessive bank lending is
coming out of reserves. Araque maintained
that the growth of bank lending had reached the level agreed
to in the IMF Standby Agreement -- 18 percent,
down from 36 percent in 2007.


3. (SBU) Araque spoke about the effects of commodity prices
shocks this year, saying the increase in oil
prices alone would likely reduce growth this year by 0.7
percent. The external price shocks have also
driven the current account deficit this year to around 14-15
percent of GDP -- twice what the IMF considers
the maximum safe level. The decline in commodity prices in
the wake of the crisis will provide some relief. Araque
predicted cheaper oil would save Honduras about USD 300
million on its fuel import bill this year.
Araque also said falling fuel prices would help moderate
inflation, which had been running at more than a
15-percent annual rate, to around 12 percent for the year.


4. (SBU) Before the global credit crisis hit, economic
analysts here were warning that lax monetary policies
threatened to fuel inflation and instability with a negative
impact on growth over the next two years
(reftel). Although the recent drop fuel prices has slowed
the inflation rate somewhat, food prices, which
have hit the poorest Hondurans especially hard this year, are
not falling as quickly, if at all.


5. (SBU) Garza said the GOH should take advantage of the
current breathing space provided by falling fuel
prices to move on permitting more flexibility in the exchange
rate, which has been effectively fixed since October 2005.
He said the IMF was pushing for a gradual devaluation of 4-5
percent over the course of a
year, utilizing the Central Bank's currently authorized
flexibility within its existing band. Garza
argued that a gradual devaluation now is referable to a more
drastic devaluation imposed by the markets
later. (Araque said he had already devalued the Lempira in
April, but the move was "neutralized" by
external price shocks.) Garza also called for a further
increase of 2-3 percent in the mandatory investment
requirement (reserve requirement) on commercial banks.


6. (SBU) The Central Bank reported an 89 percent rise in the
demand for foreign currency in the month of September, a
clear indicator that the Lempira is overvalued. While GOH
officials continue to maintain
publicly that even the slightest devaluation is both
unnecessary and unacceptable, President Zelaya told
the Ambassador that he would consider some modest move toward
greater exchange rate flexibility in December, after primary
elections to select candidates for next year's election to
choose his successor.

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Comment
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7. (SBU) The Ambassador encouraged Araque to seek to
conclude an IMF agreement since it would

send a clear message to international investors, in turbulent
economic times, of the Zelaya Government,s commitment to
macroeconomic stability. Araque said that President
Zelaya,s priority is to maintain growth
and employment at the highest possible levels. He therefore
agreed that the argument that investment would
be reduced if no agreement was reached with the Fund was a
powerful one likely to influence President
Zelaya. Unfortunately, Araque has so far not shown the
backbone to eschew political expedience and press
for forceful economic policies. On the positive side, Resrep
Garza says the Fund is willing to show
flexibility in most areas of the agreement except being the
exchange rate.


8. (SBU) The outcome of the internal elections, now scheduled
for November 30, will give us a better idea
of the likely direction of economic policy beyond 2009. We
will urge both major candidates and their
prospective economic teams to visit Washington early in 2009
to meet with the international financial institutions with
the hope of forging consensus positions in advance of the
general election on strategies
to cope with the likely emerging global slowdown. End
Comment.
LLORENS