TFHO1: HONDURAS STILL HAS MONEY IN THE BANK

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 000978

SENSITIVE
SIPDIS

STATE FOR EXIM/MICHELE WILKINS

E.O. 12958: N/A
TAGS: ECON EFIN EAID ETRD KDEM BBSR HO
SUBJECT: TFHO1: HONDURAS STILL HAS MONEY IN THE BANK

REF: A. TEGUCIGALPA 883

B. TEGUCIGALPA 771

TEGUCIGALP 00000978 001.2 OF 002



1. (SBU) SUMMARY: In the post-coup period, some worried if
Honduras had sufficient foreign exchange (FX) reserves to
finance trade while maintaining its fixed exchange rate. The
two major contributors to Honduran FX reserves are Foreign
Direct Investment (FDI) and remittances. Although during the
first quarter of 2009, FDI was down 17 percent relative to
the same period in 2008, the Balance of Payments cash flow
statement shows a different picture. For the week ending
September 3, the year-to-date accumulated total was up 0.4%
over 2008. For the same period, the Banco Central de
Honduras (BCH) reports that remittances are down 13.1%. As
of August 27, Honduras had USD 2109.6 million of Net
International Reserves (NIR),down 14.2% from December 2008.
The BCH estimates that it has sufficient NIRs to cover 3.6
months of imports. The data indicates that the de facto
regime will likely have sufficient FX reserves to meet their
FX requirements, including financing trade, until mid-January
despite maintaining a fixed exchange rate policy. END
SUMMARY.

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Background
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2. (U) For several years, the Honduran government has fixed
the exchange rate at 18.8951 Lempiras per USD 1.
Prior to the June 28 coup, there was already much talk about
whether the balance of payments imbalances made the fixed
exchange rate regime sustainable. In the post-coup period,
some worried that the political crisis would acerbate the
impacts of the global financial crisis and if Honduras had
sufficient foreign exchange (FX) reserves to finance trade
while maintaining its fixed exchange rate. Although imports
are not the only FX outflow, it constitutes by far the
largest. The two major sources of Honduran FX are Foreign
Direct Investment (FDI) and remittances.

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FDI Trends for Honduras
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3. (U) During the first quarter of 2009, FDI was down 17
percent relative to the same period in 2008. At the end of
March 2009, Honduras had received a total of USD 144.9
million in FDI. More recent figures for the overall FDI
levels are unavailable as the BCH has not yet published a
Balance of Payments report for the second quarter. Data for
the post-coup period will be included in the third quarter
report.


4. (U) The United States is the largest principal investor
with almost 60% of total FDI originating from the U.S.
Canada is the second largest, contributing about 20%,
followed by the United Kingdom and Germany who provided a
combined total of about 13%.


5. (U) FDI is broken up between the following sectors:
maquilas (35.3%),telecommunications (31.8%),manufacturing
(12.6%),services (10.3%),and other (10%).

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Cash Flows
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6. (U) FDI, as represented on the Balance of Payments
schedule, includes not only cash flows, but also equity
securities, reinvested earnings, and other capital. When
looking at the cash flow statement, which directly impacts FX
levels, a different picture emerges.


7. (U) FDI cash flows for 2009 closely resemble 2008. For
the week ending September 3, the year-to-date accumulated
total was USD 344.6 million, up 0.4% over 2008.


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Remittances
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8. (U) Remittance inflows from Honduras living abroad are
consistently trending lower for 2009 over 2008. For the week
ending September 3, the BCH reports that remittances are down
USD 240.0 million for the year. This represents a 13.1%
decrease.

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FX Position
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9. (U) For the week ending September 3, the BCH reports that
it has USD 2,237.7 million of Net International
Reserves (NIR). This represents a 9.1% decrease since
December 2008. However, this figure includes the August 28
allocation of additional Special Drawing Rights (SDRs) by the
IMF (ref A). As of August 27, Honduras had USD 2109.6
million of NIR, down 14.2% from December 2008.


10. (U) For the week ending September 3, preliminary data
provided to the BCH from exchange agents show that currency
trading is down about 16.2%. There are no indications that
people are circumventing exchange agents and exchanging money
on the black market. According to the BCH, the average
differences between the bank controlled and the non-official
buy and sell prices are -0.3% and 0.11% respectively.


11. (U) Using the formula established by the International
Monetary Fund (IMF),the BCH estimates that it has
sufficient NIRs to cover 3.6 months of imports. The
Executive Secretariat of the Central American Monetary
Council (SECMCA) places Honduras in the middle of the Central
American pack. Meanwhile, the level of goods
imported has also decreased. Therefore the current levels of
FX will cover more months of imports than previously.

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Comment
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12. (SBU) Although FDI and remittances are significantly
down in 2009, the fact that FDI cash flows have remained
stable and are similar to 2008 levels, despite the global
economic and the political crises, indicate that the de facto
regime will likely have sufficient FX reserves to meet their
FX requirements, including financing trade, until mid-January
despite maintaining a fixed exchange rate policy.
LLORENS