US embassy cable - 04TEGUCIGALPA2093

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002093 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EB 
STATE PASS AID FOR LAC/CAM 
DOL FOR ILAB 
TREASURY FOR DDouglass 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, ETRD, ELAB, EINV, HO 
SUBJECT: Honduras:  President Gives Economic Overview 
 
REF: A. Tegucigalpa 1599 
 
     B. Tegucigalpa 2057 
     C. Tegucigalpa 1984 
 
1.  Summary: On September 9, at the opening of an event to 
promote DR-CAFTA, President Ricardo Maduro presented a 
sweeping overview of the state of the Honduran economy.  As 
usual, President Maduro emphasized what he sees as the 
accomplishments of his administration - reining in 
government spending, improved public security, increased 
investment, and accelerated economic growth - yet also spoke 
frankly of the challenges that remain, specifically the need 
for continued fiscal discipline and the weakness of the 
financial sector.  End summary. 
 
2.  Leaving his notes on the table, President Ricardo Maduro 
delivered a wide-ranging extemporaneous overview of the 
Honduran economy in his keynote address to the recent 
Caribbean Central America Action (CCAA) conference on the DR- 
CAFTA trade agreement.  In his 30-minute address to the 
September 9 gathering, Maduro stressed sustained growth 
through continuity of policy, and highlighted his 
administration's economic programs and priorities.  Though 
the presidential primaries are more than five months away, 
the political season has already begun in earnest in 
Tegucigalpa.  Maduro himself is ineligible under the 
Honduran Constitution to stand for another term, but his 
message of continuity was clearly calibrated to support the 
National Party candidate (according to recent polls likely 
to be Tegucigalpa Mayor Miguel Pastor or President of 
Congress Porfirio "Pepe" Lobo) as next year's elections 
approach. 
 
3.  Maduro opened by saying that poverty reduction through 
job creation and sustained economic growth continue to be 
the organizing principles behind the GOH economic policy. 
Achieving these objectives will require significant foreign 
and domestic investment.  Maduro estimated that to reach an 
annual growth rate of 6 percent (slightly over 3 percent in 
per capita terms) Honduras must attract over $3 billion of 
investment per year for the next 20 years.  Continued moves 
toward regional integration, such as DR-CAFTA, will be 
critical to attracting this investment, as will be overall 
confidence in GOH economic stewardship.  For example, the 
GOH has been relatively successful in containing inflation, 
holding it to just 6.8 percent in 2003.  A spike in 
annualized inflation for 2004 (year to date) to 
approximately 9 percent has the GOH and IMF appropriately 
concerned, though Maduro attributed much of this rise to 
higher energy prices. 
 
4.  Maduro highlighted the need for stability of remittances 
flows from Hondurans abroad, primarily in the United States, 
calling them "fundamental" to the Honduran economy.  He 
estimated that current remittances total nearly $1 billion 
per year, up 28 percent over last year and equivalent to 
nearly 15 percent of Honduras' GDP.  According to Maduro, 
these flows directly or indirectly assist half of the 
population of Honduras.  (Note:  Foreign Minister Leonidas 
Rosa Bautista is conducting meetings in Washington September 
16-17 to press for U.S. renewal of Temporary Protected 
Status (TPS) for Hondurans who claim they cannot return to 
Honduras due to the damage wrought by the 1998 Hurricane 
Mitch.  Estimates of the number of Hondurans currently in 
the U.S. range from 650,000 to nearly 1 million, but of 
those only 87,000 benefit from TPS.  The continued strong 
growth in total remittances is consistent with the trend in 
remittances to Honduras over the last several years, and 
with similar growth trends seen in other Central American 
countries.  This growth is variously attributed to increased 
numbers of expatriate Hondurans, economic growth in the 
U.S., increased social and economic stability of Hondurans 
resident in the U.S., and decreasing remittance costs.  End 
note.) 
 
5.  Maduro stressed the need to continue to advance in 
improving the investment climate, noting that if this 
process is done badly, the resulting growth will not be 
sustainable in the long term.  He said there is a continuing 
need for meaningful civil service reform, to promote the 
formation of a cadre of experienced technical staff within 
the GOH ministries.  The current trend, to replace the 
entire staff right down to the char force after each 
election, robs the GOH of institutional memory, setting back 
the pace of progress and undermining hard-won reforms put in 
place by previous administrations.  (Note:  The exception to 
this rule appears to be the Central Bank, which, largely 
because it is outside the existing civil service system, 
manages to retain a significant portion of its technical 
staff from administration to administration.  The 18 month- 
old Supreme Accounts Tribunal (TSC), roughly equivalent to 
the U.S. GAO, has internalized this lesson and in its 
recently completed hiring and retention guidelines has 
instituted protections for its staff (septel, forthcoming). 
Other ministries are looking for models they can adopt that 
would provide their senior technical staff with similar 
stability (septel, forthcoming).  The Maduro Administration, 
however, has not made it a priority to pass a new civil 
service law to end this problem throughout the GOH.  End 
note.) 
 
6.  Maduro, elected on a law-and-order platform, also 
recognized that public security remains a concern for 
investors.  He cited the dramatic drop under his 
administration in bank robberies and carjackings, and vowed 
to continue to improve public safety.  His government 
enacted anti-gang ("maras") legislation over a year ago, he 
said, and Honduran police and military forces now recognize 
local and transnational criminal gangs as a genuine and 
significant threat to social stability and sustained 
economic growth. 
 
7.  Fiscal discipline, a centerpiece of the GOH agreement 
with the IMF, will continue to challenge a government 
struggling to balance development needs with a stable and 
welcoming investment climate.  Maduro noted that a primary 
GOH goal is to reduce the portion of the federal budget 
dedicated to government employee salaries from its current 
11 percent to below 8 percent over the next four years. 
(This has sparked protests from the powerful teachers' 
unions, including a six-week walkout in June and July 
(reftel A) and a protest march held on September 15, which 
precipitated the recent change in Ministers of Education 
(reftel B)).  The 2005 budget, submitted on September 14 and 
totaling approximately $2.1 billion, remains faithful to 
these goals, according to Vice Minister of the Presidency 
Rocio Tabora.  Post has not yet had an opportunity to review 
the proposed budget, but notes that in real terms the total 
represents only modest growth over last year's $1.92 billion 
budget.  On September 14, Tabora told EconOff that much of 
this apparent growth is actually an artifact of accounting 
changes, with bilateral and multilateral donations for the 
first time being accounted for within the budget. 
 
8.  Turning briefly to the revenue side of the budget, 
Maduro underscored progress to date in improving tax 
collection and expanding the tax base, with the intent of 
using those additional revenues to reduce the deficit 
without having to raise taxes on the Honduran public. 
(While Maduro did not cite the USG in this speech, Post 
notes that this success is largely the result of efforts by 
a Treasury and USAID-sponsored technical advisory program 
which includes a taxation resident advisor in the Honduran 
tax authority (the DEI).  The August 20 signing ceremony for 
that program's annual renewal, usually conducted at the 
working level, became instead a Presidential signing 
ceremony at Maduro's request, with extensive press coverage 
of Maduro's remarks praising the program.) 
 
9.  The greatest vulnerability, the President said, is the 
weakness of the financial sector.  While Honduras has been 
successful in attracting investment into the energy and 
telecommunications sectors, continued future investment 
inflows will require increased confidence in the financial 
system.  To move in this direction, as well as to comply 
with IMF program requirements, the GOH is in the process of 
passing four key financial laws, covering reforms of the 
Central Bank, the bank regulator (the CNBS), the bank 
insurance system (FOSEDE), and a sweeping reform of the 
financial sector.  The first three have been approved by 
Congress and once printed in the GOH federal register will 
become law (reftel C).  The fourth and key reform is 
currently in mark-up (the third of three required 
congressional debates), but is making progress, according to 
banking sector contacts. 
 
10.  Comment:  Maduro's remarks, broadly consistent with the 
priorities laid out in the GOH poverty reduction strategy 
and the IMF agreement, hit many of the right notes for both 
his domestic and international audiences.  There was little 
new here, but in some ways the medium was the message - the 
consistency of his message reinforced his message of 
consistency.  However, his almost one hour late arrival at 
the conference, as well as the long and sometimes unfocused 
extemporaneous speech, detracted from the message he was 
trying to get across.  As a Stanford-educated economist, 
Maduro is well aware of the steps he must take to bring his 
ambitious plan to fruition.  He is also clearly aware that 
this process will extend well beyond the end of his term in 
2005.  Vigilance and discipline in adhering to these goals 
as we head into the electoral season and beyond will be 
Maduro's great challenge.  Post is reassured by his words, 
but will watch with interest to see if the GOH can marshal 
the necessary political will to put those words into action. 
End comment. 
 
Palmer