US embassy cable - 04TEGUCIGALPA325

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 000325 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB, DRL/IL, WHA/EPSC, AND WHA/CEN 
GUATEMALA FOR AGATT SHUETE 
SAN SALVADOR FOR COMMATT DTHOMPSON 
DOL FOR ILAB 
STATE PLEASE PASS TO USAID, OPIC, EXIM, USTR 
STATE PLEASE PASS TO USED IDB, USED WB, USED IMF 
 
E.O. 12958: N/A 
TAGS: ECON, EAGR, EFIN, ETRD, ELAB, EINV, PGOV, HO 
SUBJECT: Honduran Econ Highlights: December 2003 - January 
2004 
 
REF: Tegucigalpa 232 
 
Contents 
-------- 
Macroeconomics: 
 - 2004 Budget 
 - Controversy over Price Freeze 
 - Fuel Tax Increase 
 - Remittances on the Rise 
Tourism: 
 - GOH to Develop Tela Bay 
Business: 
 - Banking: Cuscatlan Buys Out Lloyds 
 - Colonel Sanders Arrives in Honduras 
 
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2004 Budget 
----------- 
 
1. (U) On December 30, 2003, Congress passed the 2004 
federal budget.  The consideration of the budget, 
traditionally undertaken in a special December session of 
Congress, took on particular importance this year, as the 
government of Honduras worked under the constraint of 
meeting the prior conditions listed in the preliminary 
Letter of Intent agreed to with the IMF. 
 
2. (U) The total size of the national budget is 34.5 billion 
lempiras, up 5.6 percent from the 2003 total of 32.7 billion 
lempiras.  However, taking into account the 6 percent 
devaluation of the lempira over the course of 2003, the 
budget actually shrank slightly in dollar terms, from USD 
1.935 billion to USD 1.922 billion, a 0.7 percent decrease. 
 
3. (U) As always, the Ministries of Education and Health 
make up the largest share of the federal budget, comprising 
42 percent of the total, down slightly from 43.1 percent in 
2003.  The Ministry of Education's budget increased by 
nearly 10 percent, despite the previously determined 
decreases in salary and benefit hikes imposed by the public 
salary restructuring law passed on December 19, 2003 (see 
reftel).  The budget for the Ministry of Health decreased by 
8.4 percent, a partial result of the salary caps established 
by the Public Finance law, also passed on December 19. 
 
4. (U) The biggest gainers in the budget are the Ministry of 
Tourism, which had its budget more than doubled to 201 
million lempiras (USD 11.2 million), and the Ministry of 
Environment and Natural Resources, whose budget increased by 
nearly 30 percent to 729 million lempiras (USD 10.6 
million).  The Ministry of Agriculture and the Ministry of 
the Presidency suffered the largest budget cuts in 
percentage terms, although certain functions performed by 
these ministries have been categorized differently in 2004 
than in 2003, making a straight year-to-year comparison more 
difficult.  The Ministries of Transport and Finance also 
experienced sizable budget cuts, of roughly 20 percent. 
 
--------------------------------------------- ----- 
Price Freeze: Good Intentions, Poor Implementation 
--------------------------------------------- ----- 
 
5. (SBU) Along with the fiscal measures passed on December 
19, Congress simultaneously enacted a price freeze, to be 
effective for six months, on an extensive list of 159 
products (mostly foodstuffs).  The intent was to soften the 
economic blow (and political cost) of the spending and 
salary measures being passed at the same time, but the 
effect was to generate confusion. 
 
6. (SBU) Congress apparently adopted the measure without 
prior consultation with the Ministry of Industry and Trade, 
which would have the responsibility of enforcing the freeze. 
The Ministry monitors the prices of only about 40 products 
and, with only twelve consumer protection inspectors, lacked 
the capacity to implement such an elaborate price control 
system throughout the country. 
 
7. (SBU) IMF officials privately pushed for repeal, given 
the inevitable distortions the measures would cause. 
Private sector groups criticized the plan as being 
impractical and damaging to businesses.  Newspapers carried 
daily reports of price increases in the covered products and 
the government's inability to curb them, putting the GOH 
under constant attack.  On January 20, Congress cut back the 
number of products covered to 38, roughly matching products 
the GOH already monitored. 
 
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Fuel tax increase 
----------------- 
 
8. (U) As part of the government's attempts to raise 
additional revenue, the GOH started the year with an 
increase in the fuel tax.  A decree that went into effect on 
January 1 raised the per gallon price of gasoline and diesel 
by 3.7 lempiras (20 U.S. cents), and a second decree in late 
January raised the price an additional 1.5 lempiras (8 U.S. 
cents).  There have been angry reactions from the 
transportation sector, which has threatened to increase the 
price of public transportation, though they have not done so 
yet. 
 
9. (U) According to GOH officials, the level of the fuel tax 
will keep changing on a regular basis so that the government 
can maintain a balanced budget and meet IMF requirements. 
These changes in the price of fuel will happen on a regular 
basis, probably once or twice a month.  The GOH currently 
estimates that it will receive around 4 billion lempiras 
(USD 222 million) in revenue from oil taxes this year. 
 
10. (U) As shown in the table below, Honduras now has the 
most expensive prices for gasoline and other kinds of fuel 
in the region. 
 
Country     Premium Gasoline   Regular Gasoline     Diesel 
-------     ----------------   ----------------     ------ 
Guatemala        2.02                1.97            1.45 
El Salvador      2.08                1.98            1.69 
Costa Rica       2.39                2.34            1.73 
Nicaragua        2.42                2.32            1.97 
Honduras         2.80                2.72            1.95 
 
Price of one gallon, in USD.  Source: Honduran Press 
accounts, quoting the Ministry of Commerce, Guatemala 
 
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Remittances and Migration Continue to Rise 
------------------------------------------ 
 
11. (U) The Ministry of Foreign Affairs and the National 
Statistics Institute estimate that Honduras received USD 800 
million in family remittances in 2003, a figure which 
represents approximately 13 percent of the country's GDP. 
Remittances have increased by USD 96 million (14 percent) 
over the figure for 2002.  Family remittances are currently 
the second largest source of foreign currency, after the 
maquila industry. 
 
12. (U) The Ministry of Foreign Affairs estimates that every 
year around 35,000 Hondurans migrate to other countries, 
predominantly the U.S., looking for job opportunities.  The 
majority of these immigrants are men between 19 and 29 years 
old.  According to statistics, there is only one woman for 
every nine men that immigrate, which explains why the 
majority of those who receive family remittances are women. 
 
13. (U) The Consular Section witnessed a sudden surge in the 
number of NIV applicants immediately following the 
announcement of President Bush's immigration reform plan. 
The announcement of the plan seems to have created the 
perception among the Honduran public that those who enter 
the U.S. now, before the plan goes into effect, will be in a 
better position to gain legal status if the plan is approved 
by Congress. 
 
----------------------------------------- 
Tela Bay - The Next Cancun?  GOH Hopes So 
----------------------------------------- 
 
14. (U) In early January, Congress approved new legislation 
that permits the GOH, through the Ministry of Tourism, to 
develop 312 hectares of prime tourism land, along 2 miles of 
coastline, in the area of Tela Bay on the north coast.  The 
land, which is owned by the GOH, will be passed to the 
control of a newly-created consortium, the Tela Bay Tourism 
Investment and Development company, which will include both 
private investors and the Ministry of Tourism as members. 
The hope is that this new legislation will permit investment 
that the GOH has been unable to undertake on its own. 
 
15. (U) Initial plans for the project were developed in the 
early 1990's, but there has been little progress until now. 
The GOH is planning the construction of seven major resorts, 
including four and five-star hotels, with a total capacity 
of 1,920 rooms.  A residential area will also be 
constructed, with a capacity for 168 villas, one mall, a 
convention center, and a golf course.  During 2004, the GOH 
is investing USD 12 million to provide infrastructure and 
basic services for the project, while raising money for the 
additional investments. 
 
16. (SBU) One AmCit, Miguel Garciga, has claimed to own land 
in the project area and requested Embassy advocacy. 
Preliminary investigations and discussion with the Tourism 
Ministry indicate that the AmCit's claim to ownership is 
unfounded. 
 
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Cuscatlan Buys Operations of Lloyds TSB in Central America 
--------------------------------------------- ------------- 
 
17. (U) At the beginning of December of 2003, Cuscatlan Bank 
from El Salvador bought all the assets of Lloyds TSB Bank in 
Honduras, Guatemala, and Panama for USD 80 million.  The 
reasons for the sale, according to the Lloyds Bank 
representative for Latin America, Tim Bower, are that the 
Salvadoran bank has better conditions to get more out of the 
Central American market.  The sale leaves Citibank as the 
only U.S. or European bank operating in Honduras, but brings 
the total number of Central American banks operating in the 
country to two. 
 
--------------------------------------------- ------------ 
Kentucky Fried Chicken Opens First Restaurant in Honduras 
--------------------------------------------- ------------ 
 
18. (U) In early January, Kentucky Fried Chicken opened its 
first restaurant in Honduras, located in the northern city 
of San Pedro Sula.  Kentucky Fried Chicken is owned by Yum! 
Brands, which also operates the Pizza Hut franchise, which 
is already very successful in Honduras, with 26 restaurants. 
The President of Yum! Brands International, Graham Allan, 
attended the opening and declared that further KFC openings 
are planned.  U.S. fast food franchises are well represented 
in Honduras, and KFC will have to compete for market share 
against such established fried chicken brands as Church's, 
Popeye's, and Central American favorite, Pollo Campero. 
 
Palmer