(U) REQUEST FOR INFORMATION ON THE HONDURAN

C O N F I D E N T I A L TEGUCIGALPA 001114

SIPDIS

E.O. 12958: DECL: 12/02/2018
TAGS: HO PINR ECON EFIN EINV ENRG
SUBJECT: (U) REQUEST FOR INFORMATION ON THE HONDURAN
ECONOMIC CLIMATE (C-AL8-02551)

REF: A. SECSTATE 126009

B. TEGUCIGALPA 1042

C. TEGUCIGALPA 1009

D. TEGUCIGALPA 1006

E. TEGUCIGALPA 991

F. TEGUCIGALPA 963

G. TEGUCIGALPA 930

H. TEGUCIGALPA 920

I. TEGUCIGALPA 772

J. TEGUCIGALPA 526

K. 07 TEGUCIGALPA 1798

L. 07 TEGUCIGALPA 1647

Classified By: Amb. Hugo Llorens, e.o. 12958 reasons 1.4(b) and (d)


1. (U) Summary: Following is Post's response to ref A request
for information on Honduran Economic Climate. Answers are
keyed to questions in incoming telegram. End Summary.



A. (U) ENERGY SECTOR:

1) (C/NF) WHAT IS THE OPERATING AND FINANCIAL STATUS OF THE
HONDURAN STATE ENERGY COMPANY ENEE? ARE THERE ANY
BLACKOUTS/SHORTAGES ON THE HORIZON?

(C/NF) ENEE Director Rixi Moncada told us in late October
that, despite recent increases in electricity rates and
falling fuel oil prices, ENEE's financial condition remained
"critical" (ref E). ENEE has paid off its arrears to private
power providers, but the funds it was counting on for capital
improvements (to reduce transmission losses, among other
things) from concessionally financed Venezuelan fuel
deliveries (Petrocaribe) have not materialized, and serious
internal management problems (refs K, L) have not been
addressed. Rolling blackouts have become increasingly common
throughout Honduras over the past six months. Installed
capacity is barely sufficient to meet peak demand, and demand
continues to increase. The 250 MW of new coal-fired capacity
for which contracts were recently approved (see below) will
not likely become available for at least two years, assuming
that financing can be found for the projects. The 100 MW of
wind power that was recently authorized (ref H) will also
take about two years to become operational. In the meantime,
blackouts/shortages are likely.

2) (C/NF) WHAT IS THE STATUS OF NEGOTIATIONS FOR COAL
POWERED ENERGY? WHICH INDIVIDUALS IN THE BUSINESS SECTOR AND
GOVERNMENT WILL BENEFIT FROM THESE CONTRACTS, AND TO WHAT
EXTENT?

(C/NF) The controversial contracts to generate 250 MW of
electricity from coal (of which Honduras has none) were
approved in October (ref E). The contracts, which were
criticized by the World Bank and by the Honduran Supreme
Accounting Tribunal (TSC -- analogous to U.S. GAO) on a
combination of economic, fiscal, environmental and procedural
grounds, are expected to benefit the Larach, Canahuati and
Rosenthal families in Honduras (ref J). We expect the
contracts to benefit these interests to an extent similar to
that which Freddy Nasser and the Kafie Brothers have
benefited from similar "emergency" power purchase agreements
concluded during the administration of President Carlos
Roberto Reina (1994-1998). Nasser and the Kafies are
reported to have billed the GOH more than USD 1.5 billion
under those contracts between 2002 and 2007 (ref J).

3) (C/NF) GIVEN THE DIFFICULTIES IN THE RENEWABLE ENERGY
SECTOR (LISTED IN VARIOUS REPORTS, INCLUDING REFTEL),HOW
RECEPTIVE WILL TEGUCIGALPA BE TOWARDS THE US-BRAZIL BIOFUELS
INITIATIVE? DO WE HAVE ANY SPECIFIC INFORMATION REGARDING
OTHER ENERGY PROJECTS THAT HAVE THE POSSIBILITY OF AFFECTING
NEAR-TERM ENERGY SECURITY?

(C/NF) The GOH is extremely receptive to participating in the
U.S.-Brazil biofuels initiative. There is already
significant interest in the Honduran private sector in
producing both cane ethanol and biodiesel from African palm,
jatropha and other sources. Biofuels have been slow to
develop in Honduras primarily because of lack of a regulatory
framework for marketing them. A law was passed in late 2007
to encourage biofuels, but implementing regulations have not
been published. An estimated 60 small renewable energy
projects, with a cumulative generating capacity of about 124
MW, are currently awaiting GOH regulatory approval, in some
cases for several years. ENEE and the Ministry of

Environment and Natural Resources (SERNA) are under public
pressure to begin approving them, but private generators that
currently supply power with fuel oil wield considerable
influence within the Congress and the bureaucracy to obstruct
approval of competing renewable projects. Discussions have
been underway for years with Taiwan and others to construct a
second large-scale hydroelectric facility -- Patuca III -- to
accompany the El Cajon hydrodam, which provides about 30
percent of Honduras's electricity. Discussions on a similar
project with Brazil stretch back decades. Honduras is
negotiating with a number of international firms, including
U.S. firms Tejas Oil and Gas and Rose Dome Energy, about
concessions to explore for oil and gas both onshore and
off-shore. Honduras currently has no oil or gas production.


B. (U) MONETARY AND FISCAL POLICY AND FINANCIAL SECTOR:

1) (C/NF) WHAT IS THE NATURE OF FINANCE MINISTER REBECCA
SANTOS'S RELATIONS WITH ZELAYA? HOW MUCH INFLUENCE DOES SHE
WIELD?

(C/NF) Santos, a technocrat, has never been part of Zelaya's
inner circle, but at times she has been able to influence his
thinking on fiscal matters. Over the last year, however, our
sources and our observations tell us her influence over the
President has waned in terms of her overall influence on
macroeconomic policy. However, Santos maintains primacy over
fiscal policy, which Zelaya recognizes she has ably managed.
We believe that Central Bank President Edwin Araque, whose
views are both less orthodox and more malleable to political
expediency, appears to currently have more influence within
the GOH. However, President Zelaya recognizes that Santos
retains the credibility of the international financial
community and that is the source of her strength.

2) (C/NF) WHAT IS THE NATURE OF CENTRAL BANK PRESIDENT
ARAQUE'S RELATIONS WITH ZELAYA? HOW MUCH INFLUENCE DOES HE
WIELD?

(C/NF) Araque, from what we have been able to observe, has
become Zelaya's principal macroeconomic adviser -- or rather
executor of the President's policy preferences -- within the
cabinet. He is prepared to do the President's political
bidding, far less prone than his predecessor Gabriela Nunez
to assert Central Bank independence and reluctant to present
Zelaya with unpleasant policy choices (for example, on the
exchange rate, where he does not appear willing to counsel
the President on the possible negative repercussions of
refusing to deviate from the current dollar peg).

3) (C/NF) WHO DOES ZELAYA RELY ON MOST FOR ECONOMIC ADVICE?

(C/NF) Zelaya listens to an eclectic mix of voices on
economic matters. Within his political inner circle,
Presidential Legal Adviser Milton Jimenez, Liberal Party
President Patricia Rodas and Minister of the Presidency
Enrique Flores Lanza, none of whom is an economist or has
substantial business experience, all influence Zelaya's
thinking on political-economic matters. Jimenez and Rodas
hold populist/Chavista views on economic matters, are
suspicious of U.S. motives and disdainful of private
enterprise. Flores Lanza is more moderate in his public
pronouncements and comments to us but has been associated
with numerous statist schemes, such as the attempt to create
a state fuel-import monopoly. On energy matters, Zelaya
listens to Honduran businessman/writer Moises Starkman and
U.S.-citizen consultant Robert Meyeringh, although it appears
Meyeringh has lost the President's confidence over the past
six months. Starkman, who holds more mainstream economic
views, also influences Zelaya on more general economic and
business matters. Of the traditional Honduran
economic/financial elite, magnate Jaime Rosenthal and his son
Yani have the most influence over Zelaya. Yani Rosenthal was
Minister of the Presidency during the first two years of
Zelaya's Presidency. Jaime Rosenthal, in addition to
controlling the media outlets that are most sympathetic to
and supportive of Zelaya, is a major bankroller of Zelaya's
Liberal Party and hammered together the electoral alliance
among Zelaya, President of Congress Roberto Micheletti and
Yani Rosenthal, who stood for President of Congress on
Micheletti's ticket in the November 30 primary elections.
That alliance may dissolve in the wake of Micheletti's
overwhelming defeat November 30 at the hands of Vice
President Elvin Santos's stand-in, Mauricio Villeda, for the
Liberal Party presidential nomination. The advice the
Rosenthals give Zelaya can best be described as

self-interested, but tied to business realities. Zelaya also
listens occasionally to Presidential Adviser Nelson Avila --
a gadfly, old-school heterodox economist who as recently as a
year ago was advocating revaluing (not devaluing) the lempira
and who has called the link between money supply growth and
inflation a "neoliberal, ideological" concept.


4) (C/NF) HOW HEALTHY IS THE HONDURAN FINANCIAL SECTOR?
HOW HAS THE DOMESTIC CREDIT MARKET RESPONDED TO THE GLOBAL
FINANCIAL CRISIS?

(C/NF) Standard and Poors recently graded Honduras a "B" for
short-term financial stability (ref B). The rating agency
judged that Honduras's debt-GDP ratio -- 30 percent -- and
debt-service burden were low, thanks primarily to USD 4
billion in official debt forgiveness since 2005, and that
long-term growth prospects were good. On the downside,
macroeconomic policy is erratic, the Zelaya Administration is
publicly committed to a fixed exchange rate and the economic
base is weak (depending on exports of a handful of
commodities, plus remittances and apparel processing),making
the country vulnerable to external shocks. Net international
reserves at the end of 2007 were sufficient to cover 3.9
months of imports. But reserves have declined in 2007 and
were equal to just over 3 months of imports by early
November. The financial sector is shallow and the market for
government debt is thin. In part because of this (lack of
deep integration with international credit markets),the
Honduran financial sector has not suffered a significant
impact yet from the global financial crisis. However, signs
of stress were beginning to appear in November, and Honduras
could suffer significantly in 2009 if the U.S. recession
persists/deepens (ref D). The IMF has been concerned for
more than a year that domestic credit in Honduras has been
growing at an unsustainable rate -- more than 30 percent in
2007 -- mostly credit card debt and construction loans.
Although credit growth has slowed substantially in 2008, it
is still far outpacing the growth in deposits (ref C). The
IMF is therefore recommending continued monetary restraint,
despite growing fears of a contagion from the global credit
crunch. Nonetheless, the Central Bank in late November,
under pressure from Honduran banks and the private sector,
lowered reserve requirements substantially for banks with
lempira-denominated deposits. Honduras has moved from a
period of easy credit, high growth and higher inflation of
six months ago to a current situation characterized by lower
exports, growth and inflation and a relative scarcity of
credit.
LLORENS