US embassy cable - 04TEGUCIGALPA2452

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002452 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB 
STATE PASS TO USAID AND USTR 
TREASURY FOR DDOUGLASS 
LABOR FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, ELAB, ETRD, PGOV, HO 
SUBJECT: Honduras: 2003 Macroeconomic Overview 
 
REF: Tegucigalpa 2435 
 
1.  SUMMARY: Post submits its annual macroeconomic summary 
for Honduras for the year 2003, based on the official 
economic statistics released by the GOH in the fall of 2004. 
Reftel contains information on imports, exports, and the 
trade deficit; this cable contains information on economic 
growth, prices, wages, and employment.  Unless cited 
otherwise, all figures are from the Central Bank of 
Honduras' annual report. 
 
2.  The rate of economic growth in Honduras increased from 
2.5 percent in 2002 to 3.2 percent in 2003, with the maquila 
sector, tourism, and family remittances all registering 
strong growth.  The inflation rate reached 6.8 percent, its 
lowest level in over a decade, and flows of foreign direct 
investment increased by 39 percent.  However, unemployment 
rose, with the broadest measure of unemployment (the 
percentage of the economically active population with 
"employment problems") showing a sharp increase from 33 to 
42 percent.  END SUMMARY. 
 
---------------------------- 
ECONOMIC GROWTH AND ACTIVITY 
---------------------------- 
 
3.  The Honduran economy grew at a rate of 3.2 percent in 
2003, up from 2.5 percent in 2002.  This was the second 
highest growth rate in Central America, after Costa Rica's. 
However, population growth of 2.6 percent meant that per 
capita GDP growth was only 0.6 percent.  The expansion has 
been driven by growth in the maquila industry (offshore 
assembly for re-export), family remittances, and tourism. 
All sectors of the economy registered growth except for 
public administration and defense, which fell by 2 percent 
due to the public spending austerity policy implemented by 
the GOH.  The sector that increased the most in percentage 
terms was the construction sector (13.8 percent), which is 
recovering after three years of stagnation; public 
construction grew 17.2 percent while private construction 
grew by 10.9 percent.  The manufacturing sector grew by 3.7 
percent, a similar rate to that of last year, and the 
agricultural sector, which currently accounts for 12.8 
percent of GDP, increased by only 1.9 percent.  Within the 
service sectors, telecommunications grew by 3.5 percent, 
reflecting the recent expansion of cellular telephony and 
increased investment in the sector. 
 
REAL GDP GROWTH RATE 
-------------------- 
Year      Percent    Per capita 
 
1997         5.1         2.5 
1998         2.9         0.3 
1999        -1.9        -4.4 
2000         5.2         2.5 
2001         2.6         0.0 
2002         2.5         0.0 
2003         3.2         0.6 
 
REAL GDP BY ECONOMIC ACTIVITY: 
PERCENTAGE INCREASE OVER PREVIOUS YEAR 
-------------------------------------- 
Activity                     2001      2002       2003 
 
Agriculture                  -0.5       4.8        1.9 
Mining                       -0.8       5.0        3.2 
Manufacturing Industry        5.2       2.8        3.7 
Construction                 -5.2     -14.6       13.8 
Electricity, Water, Gas      -1.8       5.6        7.9 
Transportation, Storage       5.3       3.2        3.7 
Stores, Restaurants, Hotels   3.0       2.8        3.1 
Financial Institutions        3.1       2.2        1.7 
Housing                       3.9       3.9        4.2 
Public Admin. and Defense     8.7       7.2       -2.0 
Other Services               12.6       7.2        3.5 
---- 
Real GDP (All Activities)     2.6       2.7        3.2 
---- 
 
4.  The GOH has given priority to increased tourism 
development and hopes it will generate economic growth and 
substantial employment.  The key geographic areas of focus 
include the Bay Islands and the northern coast, and the 
"Mayan Route" from Copan to other archeological sites in 
Guatemala and Mexico.  The government's goal is to reach one 
million tourists and USD 500 million in income in 2004. 
According to data released by the Honduran Institute of 
Tourism, the number of tourist arrivals rose by 12.4 percent 
in 2003, to 886,600.  Cruise ship visitors increased by 10.6 
percent over 2002, to reach 135,000 people.  The tourist 
industry continues to recover following the September 11, 
2001 attacks and has become the third largest economic 
activity in the country after the maquila and agricultural 
sectors. 
 
5.  In early 2004, the Minister of Tourism announced that 
the Honduran Institute of Tourism plans to proceed with the 
USD 140 million Tela Bay project, which will include a 
luxury resort, golf courses, access to local Garifuna 
villages, scuba diving, and (pending completion of an 
airport in Copan) day trips to the Mayan ruins of Copan. 
The project was given a boost in 2003 by the announcement of 
the Spanish and Italian governments confirming the necessary 
financing.  In January 2004, Congress authorized the 
transfer of 311 hectares of government land to a mixed- 
equity company, in which the Honduran Institute of Tourism 
will be a partner.  In September 2004, President Maduro led 
a senior GOH delegation to the Dominican Republic to drum up 
additional private sector interest in investing in the 
project. 
 
TOURISM: VISITORS AND INCOME 
---------------------------- 
           Visitors          Foreign Exchange 
Year        ('000)         Income (USD Million) 
 
1999         428.1                195.0 
2000         688.4                259.8 
2001         672.0                274.6 
2002         788.1                341.5 
2003         886.6                373.2 
 
Source: Ministry of Tourism. 
 
------------------------------- 
FOREIGN DIRECT INVESTMENT (FDI) 
------------------------------- 
 
6.  According to Central Bank data, FDI flows to Honduras in 
2003 totaled USD 198 million, a 39 percent increase over 
2002, though still well off the historical high of USD 282 
million reached in 2000.  The U.S. continues to be the 
dominant source of FDI in Honduras; while a country 
breakdown for 2003 is not yet available, 2002 figures show 
that 38 percent of total FDI flows to Honduras were from the 
United States. 
 
FOREIGN DIRECT INVESTMENT BY COUNTRY OF ORIGIN 
--------------------------------------------- - 
(USD '000s) 
 
                 1999        2000        2001        2002 
 
United States 113,855.1    64,240.6    52,600.0    54,500.0 
Canada         55,099.6    36,057.9    15,057.0    18,115.0 
El Salvador    13,907.7     7,878.8     9,240.0    11,798.0 
Costa Rica      6,442.5    21,186.6    24,106.6     9,831.5 
Panama         19,474.8    15,099.7    18,088.0     8,795.0 
Italy          -3,606.0    13,624.8     7,624.0     6,175.0 
Guatemala       3,354.5    11,084.8    10,847.0     6,046.0 
Spain           5,884.3     7,784.5     9,784.5     5,390.0 
United Kingdom  2,567.4    14,956.7     4,289.0     4,790.0 
Japan             124.0         0.0     1,150.6     1,188.2 
Switzerland     6,948.1    -4,050.9    -1,250.0       543.0 
Germany           156.7       218.6       188.6       219.0 
Mexico          4,612.9      -138.8       207.0       223.0 
Other countries 8,515.6    94,056.3    43,068.9    15,246.9 
 
Total         237,337.2   281,999.6   195,001.2   142,860.6 
 
Country breakdown for 2003 not yet available. 
 
--------------- 
PRICES AND WAGES 
---------------- 
 
7.  Inflation, as measured by the Consumer Price Index, rose 
by 6.8 percent in 2003, the lowest annual inflation rate in 
over a decade, and 1.3 percentage points lower than the rate 
in 2002.  (Note:  Sharp rises in energy inputs have led to a 
spike in inflation in 2004, with rates currently estimated 
at nearly 9 percent annualized - higher than in 2003, but 
still moderate by recent historical standards.  End note.) 
Factors contributing to the low inflation rate included the 
stability of the real exchange rate (carefully maintained 
through a crawling peg nominal exchange rate that devalues 
at approximately 6 percent per year), the application of 
prudent monetary policy, and an increased domestic supply of 
basic grains due to increases in national production. 
 
8.  Prices of telecommunications and cement fell due to 
increased competition in both sectors: specifically, the 
launching in November of Megatel, a Swedish-Honduran company 
in the telecommunications sector, and in September of 
Cemento Uno, a Honduran partner with Taiheyo Cement, the 
leading Japanese cement manufacturer.  (Note:  By mid 2004, 
unfair competition and predatory pricing practices had 
driven Cemento Uno out of business, with a resultant sharp 
rise in cement prices.  Lacking an effective competition 
law, the GOH has had to resort to setting prices for cement 
to restrain monopoly rent-seeking by the surviving firm. 
End note.)  However, increases in the prices of gasoline and 
public transportation partially offset the low inflation 
rates in other parts of the economy. 
 
9.  The latest revision of the minimum wage (an increase of 
12 percent for workers in agriculture and approximately 9 
percent for most other workers) was implemented in spring 
2004, and more than compensated for the annual rate of 
inflation.  Wage and benefits packages for other 
professions, notably teachers and doctors, grew far faster 
than inflation, since they are based on multiples of the 
minimum wage.  New negotiations are expected to start in 
November of this year for the 2005 minimum wage increase. 
 
INFLATION 
--------- 
Year       Percent 
 
1994         29.1 
1995         26.9 
1996         25.2 
1997         12.7 
1998         15.7 
1999         11.0 
2000         10.1 
2001          8.8 
2002          8.1 
2003          6.8 
 
---------- 
EMPLOYMENT 
---------- 
 
10.  Employment data is collected by the National Institute 
of Statistics (INE) through a household survey conducted 
each May and September.  INE calculates four measures of 
unemployment: open unemployment, visible sub-unemployment, 
invisible sub-unemployment, and, most broadly, the 
percentage of the economically-active population with 
employment problems.  On all four measures, unemployment 
increased from 2002 to 2003, and early figures from 2004 
show the increase continuing.  By the most narrow 
definition, open unemployment rose from 3.8 percent in 
September 2002 to 5.1 percent in 2003, and to 5.9 percent in 
May 2004, with the majority of the unemployed living in 
urban areas and belonging to the younger segment of the 
labor force.  The broadest measure of unemployment, the 
percentage of the economically active population with 
employment problems, showed a significant increase of 8.6 
percentage points in 2003, from 33.2 percent to 41.8 
percent.  Employment in the maquila sector, however, 
continued to rise, growing 8.2 percent to 114,237 employees 
in 2003. 
 
EMPLOYMENT INDICATORS 
---------------------                    2002       2003 
 
Economically Active Population (million) 2.44       2.56 
Open Unemployment (percent)               3.8        5.1 
Visible Sub-employment (percent)          4.8        7.1 
Invisible Sub-employment (percent)       26.6       29.6 
Economically-Active Population with 
  Employment Problems (percent)          33.2       41.8 
 
Source: National Institute of Statistics (INE). 
 
OPEN UNEMPLOYMENT 
----------------- 
 
Year      Percent of Labor Force 
 
September 1998           3.0 
September 1999           3.3 
September 2000           N/A 
September 2001           3.9 
May 2002                 4.1 
September 2002           3.8 
May 2003                 5.4 
September 2003           5.1 
May 2004                 5.9 
 
Source: National Institute of Statistics (INE). 
 
MAQUILA SECTOR EMPLOYMENT 
------------------------- 
 
Year       Employees    Pct Change 
 
1998         98,905        18.5% 
1999        103,271         4.4% 
2000        106,530         3.2% 
2001         94,416       -11.4% 
2002        105,556        11.8% 
2003        114,237         8.2% 
 
Palmer