US embassy cable - 05TEGUCIGALPA2194

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002194 
 
SIPDIS 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, WHA/CEN, 
CA/OCS/ACS/WHA, DS 
STATE PASS AID FOR LAC/CAM 
TREASURY FOR DDOUGLASS 
DOL FOR ILAB 
 
E.O. 12958: DECL: 10/27/2015 
TAGS: ECON, EFIN, ELAB, ENRG, EPET, ASEC, CASC, PGOV, HO 
SUBJECT: HONDURAN GASOLINE PRICES FROZEN UNTIL "END OF 
YEAR" BY CONGRESS; ENEE TO CONSOLIDATE DEBT 
 
REF: A. TEGUCIGALPA 2044 
 
     B. TEGUCIGALPA 2131 
     C. TEGUCIGALPA 1831 
 
Classified By: EconChief PDunn for reasons 1.5 (B,D) 
 
1. (C) Summary:  Despite the Honduran Notables Commission 
recommendation to end the freeze on November 30, the Honduran 
legislature has extended the gasoline price freeze in effect 
since September 7 until the &end of the year,8 or until the 
approved 300 million Lempira (USD 16 million) government 
subsidy runs out, whichever comes first.  Action on the near 
bankrupt national electric company (ENEE) continues, with the 
GOH planning to float USD 100 million in five year loans to 
consolidate ENEE,s high interest debt.  The debt float may 
block attempts to create a government-backed unit to buy 
fuel, which had been recommended by an AmCit consultant who 
appears to be seeking the proposed unit,s Commissioner role. 
 End Summary. 
 
2. (U) The Honduran legislature agreed in a late night 
session October 17 to continue the current gasoline price 
freeze (reftel A and previous) for the &duration of the fuel 
crisis,8 which was reported in the press as December 31. 
This recommendation came despite the fact that the Honduran 
Notables Commission -- set up to review the fuel price 
situation -- recommended the price freeze continue only 
through November 30, just after the November 27 Presidential 
elections, a decision endorsed by President Ricardo Maduro. 
This legislative action defines and legitimizes the financial 
impact for the entire price freeze period, estimated at 375 
million Lempira (USD 20 million).  The GOH will pick up 300 
million Lempira (USD 16 million) and gasoline importers are 
expected to contribute the 75 million Lempira (USD 4 million) 
balance. 
 
3. (C) The IMF has stated publicly that the GOH could meet 
this 300 million Lempira cost without substantially risking 
their hard-fought fiscal discipline.  As discussed in ref B, 
an IMF official told EconOff that the Commission,s 
recommended November 30 deadline was timed to fall just after 
the November 27 presidential elections but before a scheduled 
IMF board meeting required to disburse new funding.  The 
legislature's extension of the price freeze into December 
will likely lead the IMF to postpone that scheduled review of 
the GOH,s fiscal situation. 
 
4. (U) The new legislation also featured for the first time 
specific instructions on how gasoline distributors will be 
compensated for the difference between the import price they 
are paying and the frozen retail price.  Every two weeks the 
companies must present their claim amounts to the Ministry of 
Finance, which then has five days to pay them.  The greater 
clarity on repayment has helped smooth acceptance of the 75 
million Lempira subsidy by the fuel importers and 
distributors, although what constitutes the import price may 
be open to interpretation.  Overall, the gasoline 
distributors Post has spoken with, while mindful of the 
upcoming change in administration in late January 2006, were 
guardedly optimistic. 
 
5. (C) Minister of Finance William Chong Wong continued to 
express concerns over a U.S. citizen fuel consultant that is 
advising the Notables Commission.  (Note: This consultant was 
selected and contracted by the Commission, and is in no way 
funded or endorsed by the USG or Post.  To date, Post has had 
no direct contact with the consultant.  End Note.)  Per Chong 
Wong, the consultant is strongly recommending creating a GOH 
&tender8, or a government-led effort to centralize fuel 
purchases for the country.  The consultant is specifically 
targeting the near bankrupt government power company ENEE as 
a candidate for the tender, which is suffering from the high 
cost of energy acquisition.  Per Chong Wong, a GOH tender 
even to specifically help ENEE would be &regressing to where 
we were in the 1980s.8  The consultant, whose business 
interests include global energy trading and supply management 
(ref B), appears to be seeking the proposed unit,s 
Commissioner role. 
 
6. (U) In Minister Chong Wong,s view, a more constructive 
strategy is to renegotiate the overvalued debt and energy 
supplier contracts that ENEE has placed the last few years. 
To this end the Finance Ministry is working on a new debt 
issuance for ENEE, which will repackage about USD 100 million 
in existing high interest debt into five year notes at 
approximately 5.5 percent interest.  The current debt, owed 
primarily to suppliers and private banks, has interest 
ranging from 14 to 18 percent.  The more manageable debt load 
will allow the energy company to lower its debt payment and 
potentially renegotiate unfavorable contracts with suppliers 
that ENEE has had problems paying (ref C).  The refinancing, 
per Chong Wong, may also save enough money to discourage GOH 
interest in a fuel tender. 
 
7. (C) COMMENT: The GOH legislature's decision to ignore the 
November 30 deadline recommended by President Maduro and 
Catholic Church Cardinal Oscar Rodriguez and promote the more 
ambiguous &end of year8 deadline will give a longer buffer 
before the incoming administration has to announce how they 
will handle gasoline prices.  Meanwhile, the IMF appears 
comfortable with the 300 million Lempira cost to the GOH and 
the gasoline distributors have grudgingly accepted their 75 
million Lempira contribution, although with continued 
apprehension about repayments under the incoming 
administration.  A GOH-led fuel tender for supplying ENEE 
remains a strong probability, amid concerns that injecting 
the government bureaucracy into fuel purchases would be 
harmful in the long run.  Finally, despite Minister Chong 
Wong,s comments, restructured debt for a company that lost 
USD 165 million last year may not stave off an aggressive 
search for other solutions like a tender, particularly with 
mismanagement and lack of investment also topping the list of 
needed improvements at ENEE.  END COMMENT. 
Williard