FINANCE MINISTER DISCUSSES CHALLENGES BEFORE TRIP

C O N F I D E N T I A L TEGUCIGALPA 000930

SIPDIS

STATE FOR WHA, EEB
TREASURY FOR BRIAN O'NEILL, ANNA JEWELL, SARA SENICH

E.O. 12958: DECL: 10/09/2018
TAGS: EFIN EAID ENRG EPET PGOV PREL IMF HO
SUBJECT: FINANCE MINISTER DISCUSSES CHALLENGES BEFORE TRIP
TO WASHINGTON

REF: TEGUCIGALPA 772 AND REFTELS

Classified By: Ambassador Hugo Llorens for reasons 1.4 (b) and (d)


1. (C) Summary: Finance Minister Rebeca Santos called on
Ambassador on the eve of her trip to Washington to discuss
the overall macroeconomic picture in Honduras, particularly
focusing on the challenges she will face at IMF meetings in
Washington starting October 11. Santos said she believes
Honduras has made a good faith effort to adhere to April's
Precautionary Standby Agreement (reftel),meeting all its
fiscal targets and missing only the exchange rate goals on
the monetary side. She lamented the Honduran media's role in
causing a disproportionate reaction among speculators to that
adjustment. End Summary.


2. (C) Santos said Honduras urgently needs macroeconomic
stability going into an election year, and that political
will to adhere to the IMF program wanes every day. She said
President Zelaya is singularly focused on economic growth and
poverty reduction statistics, and believes the IMF agreement
is not brining any direct benefit to Honduras. He hopes that
the USD 100 million in bond placements through ALBA will put
Honduras in a "comfortable" macroeconomic position until at
least the end of the year. She also argued that the IMF
should show flexibility to Honduras given that the financial
crisis in the United States has changed the picture for
Honduras and compounded the oil and price shocks to generate
both higher inflation and lower growth. (Santos recently
stated that the GOH had revised its official GDP growth
forecast for this year downward to 4 percent, compared with
last year,s 6.3 percent.)


3. (C) Santos is concerned about waning support from the
donor community, adding that she was disturbed by the attempt
by the French and German delegates to block a USD 10 million
World Bank disbursement designed to help Honduras cope with
rising global food prices. She was insulted these delegates
had compared Honduras to an African country, saying that
Honduras attracts almost USD 1 billion in foreign direct
investment each year. (Note: The World Bank, Germany and the
EC are reprogramming budget support into technical assistance
projects as a signal that they no longer trust the GOH to
responsibly manage direct budget support funds. End Note)


4. (C) Ambassador committed to convey to Washington her hope
that the IMF will show greater flexibility in the face of a
dramatically different global financial picture since the
agreement was signed last April. He also agreed to discuss
with President Zelaya at their next meeting, perhaps next
week, the importance of remaining committed to the IMF
program to demonstrate to the international investment
community a commitment to macroeconomic stability. Santos
told Ambassador she believes Zelaya will end up approving the
minimum necessary concessions to the IMF in order to prevent
the program from being declared indefinitely off track. IMF
resrep has told econ officers he believes any commitment to
exchange rate flexibility, no matter how small, would be
received well by the IMF.


5. (C) Comment: Reserves did appear to stabilize in
mid-September after dropping sharply in July and August.
Inflation, which had reached 14.5 percent year on year, also
demonstrated a slight drop last month. Nevertheless, the
biggest risk to Honduras may be remittances, which are
projected to grow 11 percent this year. If they instead
decline or go flat, as Guatemala and El Salvador have
recently reported, international reserves could erode quickly
(Note: Remittances last year totaled about USD 2.6 billion --
roughly equal to the year-end level of reserves. End Note).
Santos is a serious player who is trying to do the right
thing in a volatile political environment while accommodating
her boss's wishes, including giving in to salary demands from
striking teachers and giving public sector workers and
across-the-board pay raise. It will be up to her colleague
Edwin Araque, President of the Central Bank, to demonstrate a
willingness to raise the base interest rate and introduce
flexibility to the exchange rate. End Comment.
LLORENS