US embassy cable - 05TEGUCIGALPA1720

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 001720 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
DOL FOR ILAB 
GUATEMALA FOR COMATT AND AGATT 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, EAGR, PGOV, HO 
SUBJECT: HONDURAS: MACROECONOMIC UPDATE: SIGNS ARE 
POSITIVE; ANGST BY POLITICIANS OVER SPENDING RESTRAINT 
 
 
1. (SBU) Summary:  As of July, inflation remains moderate, at 
8.6 percent year-on-year, though fuel price increases have 
led to increases in consumer prices for foodstuffs, lodging, 
utilities, and transportation.  The GOH continues to consult 
broadly on proposals for applying an estimated USD 212 
million in savings from forgiven debt service payments, 
having received proposals valued at over six times the value 
of available funds.  The Honduran lempira remains stable at 
18.86 lempiras to the U.S. dollar.  Interest rates dipped to 
16.4 percent this week on anomalous action but are expected 
to rebound to 18 percent next week.  Minister of Finance 
William Chong Wong has been sharply criticized by at least 
one Nationalist Party Congressman for refusing to allow the 
Nationalists in Congress to break the GOH fiscal 
responsibility agreements in order to increase their chances 
of winning the November 27 elections.  Post fully supports 
Chong's fiscally responsible approach, and sees in such 
attacks precisely what the IMF and others have feared:  the 
temptation to throw fiscal restraint out the window in an 
all-out attempt to win the 2005 elections.  End Summary. 
 
2. (U) Inflation:  Year-on-year headline inflation for July 
was 8.9 percent, according to recently released Central Bank 
of Honduras figures.  Consumer Price Index inflation for the 
month of July was 0.9 percent, bringing accumulated inflation 
for the year to 5.8%, according to the Bank.  The key 
contributions to this increase came from Foodstuffs (42 
percent -- see para 3), Utilities and Lodging (22 percent), 
and Transportation (15 percent).  Increased costs for 
gasoline and LPG were reportedly significant contributors to 
the price rises seen in all three leading categories. 
 
3. (U) Foodstuffs:  The Ministry of Commerce has just 
released the results of an August 8-12 price survey of the 
elements of the family basket of foodstuffs (the "canasta 
basica").  The canasta basica is a politically important 
rough measure of pricing pressures on Honduran lower classes. 
 The survey showed price raises in most products, and a 
significant (20 percent) decline in the price of red beans 
(owing to a strong harvest) and a slight decrease in the cost 
of milk products (thanks to increased production during the 
rainy season).  The net effect was an overall price increase, 
significantly contributing to overall price pressures seen in 
July.  The components of the basket are: 
 
Rice, 350 grams 
Red beans, one pound 
White Corn, one pound (in kernel) 
Corn Flour, two pounds 
Pasta, 200 grams 
Poultry meat, one pound 
Cut of Beef, one pound 
Cut of pork, one pound 
"Mantequilla" cream cheese, one pound 
Fresh Cheese, one pound 
Common ("popular") cheese, one pound 
Eggs, per egg 
 
4. (U) Fuel Prices Rise:  The cost for gasoline has hit a 
historical high, retailing at just over 69 lempiras 
(approximately USD 3.65) per gallon.  That is an increase of 
three lempiras in addition to last week's price increase of a 
bit more than two lempiras per gallon, for a total price 
increase of nearly ten percent in just eight days.  (Note: 
Fuel prices are set by the GOH based in part on a complex 
formula that guarantees profit margins to each stage of the 
petroleum retail chain.  End note.)  Liquefied Petroleum Gas 
(LPG) has also continued to rise, up this week from 201 to 
206 lempiras per 25 pound tank.  In part in response to 
public outcry over rising prices, Minister of Environment and 
Natural Resources Patricia Panting announced that the GOH 
will be inviting oil exploration in the offshore areas 
between Tela and La Mosquitia, on Honduras' Atlantic coast. 
Previous exploration over the last 45 years has occasionally 
shown oil traces, but in insufficient quantities to be 
commercially viable. 
 
5. (U) Debt Forgiveness:  Colombian Foreign Minister Carolina 
Barco Isakson announced during her visit to Honduras the week 
of August 8 that Colombia has agreed to forgive USD 23 
million in bilateral debt owed by Honduras.  While 
symbolically important, this is a modest sum in the face of 
the estimated USD 2.8 billion forgiveness Honduras recently 
secured from the Group of Eight industrialized nations, the 
Paris Club, and the International Financial Institutions. 
That forgiveness should free up an estimated USD 212 million 
(approximately 4,100 million lempiras) per year -- which 
would have been earmarked for debt service -- to spend on 
social programs.  The GOH has been conducting outreach events 
in provincial capitals to explain debt forgiveness, and to 
solicit proposals for applying those funds within the 
framework of the agreed Poverty Reduction Strategy.  Minister 
of Labor German Leitzelar leads that effort for the GOH and 
reported that, as of early August, the GOH had received 
approximately 25 billion lempiras in proposals, or six times 
the total annual resources freed up by the debt forgiveness. 
 
6. (U) Currency:  Following an August 11 Central Bank auction 
of USD 18.6 million, the exchange rate remains roughly stable 
at 18.8692 lempiras to the dollar.  The Central Bank predicts 
a depreciation of the lempira of approximately 2.5 percent in 
CY 2005, down from 4.4 percent in CY 2004. 
 
7. (U) Interest Rates:  Average commercial lending rates in 
lempiras, which have held steady around 18.2 percent for most 
of 2005, took a sharp dip to 16.4 percent this week due to 
two large loans to parastatal firms at 14 percent rates, a 
Central bank official told EconChief.  That 16 percent 
average rate therefore does not represent the 18 to 22 
percent that prime private sector borrowers are paying.  The 
average rates is expected to rebound next week, absent the 
effects of the two abovementioned loans. Lempira deposits 
yielded just a bit over 10 percent, for an interest rate 
spread of over 8 percent (a reflection of the inefficiency of 
what is still a relatively uncompetitive banking sector.) 
Average rates on dollar-denominated loans and deposits were 
7.8 percent and 3.25 percent, respectively. 
 
8. (SBU) Playing Politics with Fiscal Restraints:  Minister 
of Finance William Chong Wong came under fire this week from 
Nationalist Party Congressman Antonio Flores for defending 
GOH adherence to the IMF agreement.  Chong is holding 
Congress to its obligation under Honduran law to identify 
offsetting spending cuts or revenue enhancements to pay for 
its proposed cut in electricity rates (reported septel). 
Flores did not mince words when he publicly declared that the 
Nationalist Party "is not going to lose the elections because 
of (Chong)."  He reportedly described Chong as "poking 
Congress with a short stick" because "every time (Congress) 
discusses a project or launches a proposal, we run right into 
the terrible opposition of William Chong Wong."  Flores 
declared that his fellow party members "are sick of this 
situation" and that Chong is putting the Nationalist Party in 
"a difficult position" and is "putting the (Nationalist) 
government in danger by not making the necessary funds 
available to carry out the projects we have designed for our 
communities... If we are going to work to ensure the victory 
of (Nationalist presidential candidate and President of 
Congress) Porfirio (Lobo Sosa), and if we have to fight 
William Chong Wong, or whomever in the Executive branch, 
we'll do so."  (Comment:  Post fully supports Chong's 
fiscally responsible approach, and sees in Flores' comments 
precisely what the IMF and others have feared:  the 
temptation to throw fiscal restraint out the window in an 
all-out attempt to win the 2005 elections.  End comment.) 
 
Williard 
Williard