FINMIN SEEKS HELP CONVINCING ZELAYA OF GRAVITY OF

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000078

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EEB/OMA
TREASURY FOR IMF AND IDB EXECUTIVE DIRECTORS

E.O. 12958: DECL: 02/03/2019
TAGS: EFIN IMF HO
SUBJECT: FINMIN SEEKS HELP CONVINCING ZELAYA OF GRAVITY OF
CRISIS

REF: A. TEGUCIGALPA 69

B. 08 TEGUCIGALPA 1114

C. 08 TEGUCIGALPA 1009

D. 08 TEGUCIGALPA 1006

Classified By: Ambassador Hugo Llorens, E.O. 12958 Reason 1.4(d)


1. (U) This is an action request. See para 9.


2. (C) Summary: In a meeting with the Ambassador, Finance
Minister Rebecca Santos told us she sees President Manuel
Zelaya,s trip to Washington later this month as an
opportunity to persuade him to adopt an economic
stabilization program and enter into serious discussions with
the IMF. She expressed strong concern for the likely
negative impact of the global financial crisis on growth,
employment, credit availability, investment. All of these
negative trends are likely to weaken Honduras, public
finances. End Summary.


3. (U) Santos requested an urgent meeting with the Ambassador
February 2 to discuss the worsening external economic
environment and President Zelaya's upcoming trip to
Washington, scheduled for the week of February 16. Zelaya is
seeking meetings with Treasury, as well as with the IMF,
World Bank and Interamerican Development Bank. She said
meetings had already been confirmed with the IMF Deputy
Director and Director for the Western Hemisphere.


4. (C) Santos said she was worried that monetary problems --
and the reluctance of Central Bank President Edwin Araque to
effectively address them -- could affect the Honduran fiscal
situation and make it difficult for her to manage public
finances during the last year of Zelaya's term or to hand
matters over to her successor in good shape. She said that
Zelaya garnered information about the financial situation
from numerous sources, including Honduran bankers, but she is
not confident that he fully comprehends the gravity of the
worsening global financial environment and its potential
implications for Honduras.


5. (C) Santos complained that the presentation Zelaya
received from the IDB last year was not thorough and failed
to convince him that adjustment measures were needed. She
requested, therefore, that on his upcoming trip Zelaya
receive comprehensive, candid and up-to-date briefings on the
outlook for the global economy this year and the implications
for small economies like Honduras in his planned meetings
with Treasury, the IMF, and IDB.


6. (C) The Ambassador agreed with Santos that the Washington
trip was a good opportunity to get the Honduran government to
engage the Fund in serious negotiations that would result in
the adoption of an economic program to confront the current
global financial situation. The Ambassador reviewed in
detail his past economic policy discussions with President
Zelaya and our message to him on the importance of taking
policy actions to minimize the impact of the international
situation. The Ambassador noted that the GOH,s continued
rosy GDP estimates ) of 3.4 percent growth for 2009 ) were
too optimistic and suggested that Honduras' problem was not
severe. Santos agreed that GDP growth was likely to be far
lower and blamed the Central Bank for maintaining these
inflated official estimates. She did note that it might be
politically unwise to concede defeat preemptively and admit
that Honduras, was already in an economic crisis, which was
not yet clear. Santos did observe that remittances, which
are a fifth of Honduran GDP, fell 3 percent in January and
that banks, "terrified" of a possible devaluation, are not
lending.


7. (C) Santos said she feared the IMF had written off the
possibility of reaching an agreement with Zelaya, because of
Zelaya's rigid stance against loosening the exchange-rate peg
and because of the difficult negotiations over the past three
years. But she said Zelaya, although not an economic expert,
respected expert opinion, including that of the U.S.
Treasury, the IDB and World Bank President Robert Zoellick.
She therefore remains hopeful that Zelaya can be persuaded to
adopt measures to stabilize reserves and maintain
macroeconomic stability in what remains of his term.


8. (C) The Ambassador said he planned to be in Washington for

TEGUCIGALP 00000078 002 OF 002


Zelaya's meetings with USG officials and would pass along
Santos's request to Treasury and to U.S. Executive
Directorsto ensure that we provided the President a good
brief on the international financial situation and how it may
impact on Honduras.


9. (C) Comment and Action Request: Zelaya's upcoming visit to
Washington may represent the final opportunity to persuade
him to adopt sound macroeconomic policies in the remaining
year of his administration. Zelaya has been stubborn on the
exchange rate, persuaded by the advice of Honduran bankers
and fearing the political fallout from a devaluation. But we
think he can be turned around if given enough political cover
and intellectual ammunition. Zelaya has also tended to
approach the IFIs from a purely opportunistic perspective,
seeking maximum resources with minimum conditions. However,
with oil trading at about a third of what it was six months
ago, Zelaya no doubt realizes he will not get nearly the
financial support from Venezuela this year that he expected
when he signed onto ALBA and Petrocaribe last year, and that
he has nowhere else to go. We therefore recommend that
Washington agencies do what they can to assure that Zelaya
receives solid, up-to-date, non-sugar-coated briefings in his
meetings later this month. End Comment and Action Request.
LLORENS