US embassy cable - 04TEGUCIGALPA2458

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002458 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EB 
STATE PASS TO USAID AND USTR 
TREASURY FOR DDOUGLASS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, ELAB, ETRD, EINV, HO 
SUBJECT: Honduras: 2003 Monetary and Financial Overview 
 
REF: A: Tegucigalpa 2435 
 
     B: Tegucigalpa 2452 
 
1.  SUMMARY: Post submits its annual monetary and financial 
overview for Honduras for the year 2003, based on the 
official economic statistics released by the GOH in the fall 
of 2004.  Ref A contains information on imports, exports, 
and the trade deficit, and ref B contains information on 
economic growth, prices, and wages; this cable contains 
information on balance of payments, currency, money supply, 
interest rates, and government spending.  Unless cited 
otherwise, all figures are from the Central Bank of 
Honduras' annual report. 
 
2.  Honduras' current account deficit increased by 18 
percent in 2003, as a growing trade deficit was only 
partially offset by growth in net transfers, mainly family 
remittances.  The capital account and overall balance of 
payments were also negative.  Interest rates continued their 
decline of recent years, while the monetary position 
remained stable and the GOH continued its policy of a 
gradual, controlled devaluation of the lempira.  END 
SUMMARY. 
 
------------------- 
BALANCE OF PAYMENTS 
------------------- 
 
3.  Honduras ran a current account deficit in 2003 of USD 
258.3 million, 18 percent higher than in 2002, as an 
increase in net transfers was not sufficient to offset a 
growing trade deficit.  The trade deficit increased by 14 
percent in 2003 to USD 1,349.9 million, and net transfers - 
mostly family remittances from Hondurans living abroad - 
increased by 13 percent to USD 1,091.6 million.  Remittances 
rose by 21 percent in 2003, to account for 12.8 percent of 
GDP. 
 
4.  Long term direct foreign investment increased by 39 
percent over 2002, to reach USD 198.0 million.  However, a 
net outflow of USD 110.2 million in short term investment, 
coupled with an increase in private sector loans, combined 
to create a capital account deficit of USD 32.5 million. 
Honduras' total balance of payments in 2003 was therefore a 
deficit of USD 231.2 million, and net international reserves 
fell by USD 88.2 million. 
 
CONDENSED BALANCE OF PAYMENTS (USD MILLIONS) 
-------------------------------------------- 
                          2001         2002        2003 
 
Exports                  2,510.7      2,570.6     2,711.1 
Imports                  3,742.2      3,757.9     4,060.9 
Trade Balance           -1,231.6     -1,187.4    -1,349.9 
Net Transfers              929.2        968.7     1,091.6 
Current Account           -302.4       -218.7      -258.3 
Capital Account            228.7        232.7       -32.5 
Balance of Payments         -0.3         63.5      -231.2 
Change in Int. Reserves 
(Decrease +, Increase -)  -147.3        -214.0       88.2 
 
REMITTANCES, IN USD AND AS SHARE OF GDP 
--------------------------------------- 
            Remittances       As percent 
Year       in USD million       of GDP 
 
1999            319              5.9 
2000            409              6.9 
2001            533              8.5 
2002            711             11.1 
2003            860             12.8 
2004 (est.)    1075             15.5 
 
Note: 2004 figures based upon estimates through September 
2004: 3.75 percent annual rate of GDP growth and 25 percent 
growth in remittances. 
 
------------------------- 
CURRENCY AND MONEY SUPPLY 
------------------------- 
 
5.  The Central Bank continued its policy of a controlled 
depreciation of the nominal exchange rate of the lempira, 
using an auction system to regulate the allocation of 
foreign exchange.  The lempira fell from a rate of 16.88 to 
the dollar at the end of 2002, to 17.95 at the end of 2003, 
a 6.4 percent devaluation, practically unchanged from the 
6.5 percent devaluation of the previous year.  The minimum 
wage increased by an average of 9.7 percent, more than 
compensating for the rate of inflation. 
EXCHANGE RATE (LEMPIRAS/USD) 
---------------------------- 
               End of    Devaluation 
               Period    in Percent 
 
1998           13.95         5.7 
1999           14.62         4.8 
2000           15.02         2.8 
2001           15.85         5.6 
2002           16.88         6.5 
2003           17.95         6.4 
 
6.  Domestic liquidity, as measured by M1, rose from 13.1 
billion lempiras at the end of 2002 to 15.8 billion lempiras 
at the end of 2003, a 16.5 percent increase in nominal terms 
(and 9.7 percent in real terms) over the previous year.  The 
money supply shrank in real terms over the first half of the 
year and grew in the second half of the year, though the 
rise in the second half failed to spark an increase in bank 
lending, apparently due to caution exercised by bankers. 
 
MONETARY INDICATORS 
------------------- 
(December of each year, in millions of Lempiras) 
                                               % var  % var 
                  2001       2002       2003   01/02  02/03 
 
Money (M1)      11,514.8   13,191.6   15,806.8  14.6   19.8 
 In circulation  5,118.7    5,487.8    6,415.5   7.2   16.9 
 In deposits     6,396.2    7,703.8    9,391.3  20.4   21.9 
 
Broad Money     36,314.1   40,444.9   46,422.7  11.4   14.2 
Supply (M2) 
 
Deposits in Foreign 
 Currency       13,801.2   16,288.1   18,654.4  18.0   14.5 
 
Money Supply    50,115.3  56,733.0    65,077.1  13.2   14.7 
(M3) 
 
------------------------- 
INTEREST RATES AND CREDIT 
------------------------- 
 
7. Nominal interest rates on lempira-denominated loans 
averaged 20.24 percent in 2003, compared with 22.06 percent 
in 2002.  In early 2004, interest rates fell below 20 
percent for the first time in over a decade.  (Note:  These 
are the average nominal rates charged by banks to their best 
customers; small and medium enterprises, on the other hand, 
complain of a dearth of credit, very short loan periods, and 
substantially higher average rates.  End note.) 
 
ANNUAL INTEREST RATES 
--------------------- 
            In Lempiras             In Dollars 
Year     Lending    Deposit     Lending    Deposit 
 
1999      29.46      15.04       12.86       5.59 
2000      24.57      12.23       13.13       5.10 
2001      23.18      11.76       12.08       3.58 
2002      22.06       9.57       10.93       2.25 
2003      20.30       8.14        9.20       1.62 
 
8.  Total banking credit to the private sector stood at 
49,370 million lempiras at the end of December 2003, 
following an increase of 12.4 percent in nominal terms. 
Banks and financial companies are still exercising caution 
in their lending practices, particularly in the agricultural 
sector, which saw a net decrease in new loans of 7.5 percent 
in nominal terms.  This caution is the result of a flood of 
non-performing loans following 1998's Hurricane Mitch, 
coupled with historically low prices for such key 
commodities as coffee. 
 
9.  New industrial loans rose by 32.5 percent, reflecting 
the recovery registered by the manufacturing sector, and 
headed by the maquila sector.  Services and real estate 
loans grew moderately in nominal terms but registered small 
declines in real terms, despite the growth in both the 
tourism and construction sectors, which partially benefit 
from external financial sources.  Trade and consumer credits 
reflected substantial falls in both real and nominal terms. 
Total credit stock in 2003 grew, while total new loans 
declined by 6.6 percent in nominal terms. 
 
NET INTERNAL CREDIT (MILLIONS OF LEMPIRAS) 
----------------------------------------- 
                                           Change   Change 
                  2001     2002     2003    01/02    02/03 
 
Public Sector   -11,395  -12,499   -8,712    9.7%   -30.3% 
Private Sector   40,807   43,922   49,370    7.6%    12.4% 
Net Internal 
  Credit         29,412   31,422   40,658    6.8%    29.4% 
 
---------------------- 
PUBLIC SECTOR FINANCES 
---------------------- 
 
10.  The central government's budget deficit widened to 5.9 
percent of GDP in 2003.  Government revenue rose by 9.9 
percent, to just over 23 billion lempiras (USD 1.3 billion). 
Much of the increase in revenues is due to increased tax 
compliance, stemming from a crackdown on tax evaders that 
led to the temporary closure of more than 1,600 businesses 
during 2003.  Revenue collected from taxes grew by 7 percent 
in 2002, and by 14 percent in 2003. 
 
11.  However, government expenditure increased by 13.1 
percent, owing to the ballooning public wage bill (not 
brought under control until December 2003) and to government 
financing of several agricultural relief schemes, estimated 
at a cost of around 1.2 percent of GDP.  The financing of 
the resulting deficit came mostly from internal credit, 
particularly a 1.2 billion lempira loan from the Central 
Bank, guaranteed by transfers from Hondutel (the State-owned 
telephone company).  Despite the GOH's poor fiscal 
performance in 2003, statistics available so far for 2004 
show that the government is on track to meet its target of 
reducing this year's budget deficit to 3.5 percent of GDP, 
as agreed with the IMF. 
 
CENTRAL GOVERNMENT FINANCIAL ACCOUNT 
------------------------------------ 
(millions of Lempiras)   2001          2002          2003 
 
Gov't Income           19,726.5      20,977.1      23,055.3 
   From Taxes          16,083.1      17,229.0      19,632.4 
   Other Sources        3,643.4       3,748.4       3,422.9 
Gov't Expenditure      24,966.4      26,644.6      30,135.6 
Budget Deficit          5,239.9       5,667.2       7,080.3 
As % of GDP                5.3%          5.2%          5.9% 
 
12. Honduras's foreign debt, which is held by the official 
sector, Central Bank, and private sector (financial and non- 
financial), was USD 5,115.6 billion in the year 2003, up 3.1 
percent from 2002.  The increase was mainly due to the U.S. 
dollar's depreciation with respect to other currencies that 
make up the "baskets" of the international lending 
institutions.  In 2003, loans from multilateral and 
bilateral institutions totaled USD 489.5 million, USD 287.7 
million to the private sector and USD 201.8 million to the 
public sector.  Foreign debt service in 2003 was USD 503.3 
million, USD 413.5 million of capital and USD 89.8 million 
in interest.  The GOH continues its policy of taking on only 
foreign concessional loans for projects of high priority, 
and expects to reach its HIPC completion point in the first 
quarter of 2005. 
 
HONDURAN FOREIGN DEBT (IN USD MILLIONS) 
---------------------------------------- 
Type of Creditor    2001       2002       2003       %age 
 
Multilateral       3,118.3    3,162.2    3,324.2     65.0 
Bilateral          1,414.6    1,487.5    1,538.7     30.5 
Commercial           275.1      314.0      252.7      4.5 
TOTAL              4,808.0    4,963.7    5,115.6    100.0 
 
Palmer