US embassy cable - 05TEGUCIGALPA2217

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002217 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/ESPC, DRL/IL, AND EB/IFD/OMA 
STATE PASS AID FOR LAC/CEN 
STATE PASS USTR FOR WILLIAM CLATANOFF 
TREASURY FOR DORA DOUGLAS 
DOL FOR ILAB 
COMMERCE FOR MSIEGELMAN 
 
E.O. 12958: N/A 
TAGS: ELAB, ETRD, EINV, EIND, KTEX, PGOV, HO 
SUBJECT:  Honduras:  Readout of Secretary Gutierrez 
Bilateral Meeting with Honduran President Ricardo Maduro 
 
 
1.  Summary:  On October 19, Secretary Gutierrez met with 
President Ricardo Maduro in a closed session.  The Secretary 
encouraged Maduro to attend the Summit of the Americas, and 
to quickly comply with any outstanding CAFTA requirements to 
expedite entry into force.  Maduro welcomed the Secretary's 
visit and the accompanying trade delegation, praised CAFTA, 
and highlighted his own achievements over his nearly- 
complete four-year term.  Maduro indicated that his recent 
encounter with Venezuelan President Chavez over petroleum 
had been inconclusive.  End Summary. 
 
2.  On October 19, 2005, during his trade mission to San 
Pedro Sula, Honduras, Secretary Gutierrez and his team met 
with GOH President Ricardo Maduro, to discuss CAFTA 
implementation in Honduras.  Also present were Minister of 
Trade and Commerce Irving Guerrero, Honduran Ambassador to 
the U.S. Norman Garcia, Department of Commerce (DOC) DAS for 
Western Hemisphere Walter Bastian, DOC Assistant Secretary 
and USFCS Director General Israel Hernandez, DOC Chief of 
Staff Claire Buchan, Embassy Charge James Williard, 
Millennium Challenge Corporation Vice President John Hewko, 
and Senior Commercial Officer Mitch Larsen (notetaker). 
 
CAFTA 
----- 
 
3.  President Maduro opened the meeting by welcoming the 
Secretary to Honduras and saying that CAFTA brings lots of 
 
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promise, that it will strengthen Honduran democracy and rule 
of law, improve competitiveness, strengthen young and 
fledgling institutions, open markets, and fight oligopolies. 
Maduro said he understood the risks that President Bush took 
in fighting for CAFTA.  He also stated that Honduras was 
relatively well-prepared for the implementation of CAFTA and 
that the country's fiscal situation was under control. 
 
4. The Secretary thanked Maduro for meeting, especially on 
the heels of his return from Spain for the annual Ibero- 
American Summit (Note: Maduro flew directly from the airport 
to the port by helicopter specifically to meet with the 
Secretary).  He said Honduras is going down the right road 
 
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with CAFTA.  As an example, he cited Guatemalan supermarket 
executives who had told him the day before that they 
expected prices would decrease in Guatemala between 15-20 
percent as a result of CAFTA. 
 
5. Citing increased interest in Honduras because of CAFTA, 
the Secretary described the makeup of the mission's business 
delegation.  It was composed of 19 impressive U.S. 
companies, including diesel manufacturing, healthcare, 
insurance, automotive, tourism, energy, and others.  It also 
included firms such as the Eastman Chemical Company and Ford 
Motor Company.  He said that there were over 100 
applications for the mission and that Central America is 
more stable than much of Latin America - it's just that many 
are just now discovering that.  He also noted the 
participation of interagency representatives from OPIC, 
USDTA, Eximbank, SBA, IDB, and MCC.  Maduro replied that he 
was pleased to have the Secretary in Honduras, as well as 
all the companies and the interagency delegation. 
 
6. Maduro said preparations were going well in Honduras for 
CAFTA, but said that Costa Rica will probably have the 
hardest time, since it is "more closed" and will have more 
to open up. The Secretary stressed that President Bush has 
to certify very soon that all things are in place with 
respect to CAFTA.  The USG wants to move forward with CAFTA 
in early January.  He asked Maduro to comply expeditiously 
with Honduras' commitments to help "take issues off the 
table."  Otherwise CAFTA could suffer the same fate as the 
U.S. FTA with Morocco, whose entry into force has been held 
up significantly because President Bush could not certify 
due to a number of outstanding issues. 
 
Taxes in Honduras 
----------------- 
 
7. Noting his failed attempt to dramatically increase 
gasoline prices, President Maduro said he should have raised 
sales taxes instead. Corporate marginal tax rates in 
Honduras are currently 30 percent, and the VAT (IVA) is only 
4 percent, the lowest in the region.  (The VAT/IVA in 
Guatemala is 12 percent and in Costa Rica it is 15 percent.) 
Maduro has encouraged his National Party to address the tax 
situation in Honduras immediately if they are re-elected 
this November.  He also listed the items exempted from sales 
taxes in Honduras, which include medicines, school supplies, 
energy, water, and the "canasta basica" (basket of basic 
food items).  Maduro explained that when he took office, 
7,000 products were price-controlled, and that one of his 
initial priorities was to remove many of these controls. 
The Secretary responded that price controls simply do not 
work; only the market works. 
 
Summit of the Americas 
---------------------- 
 
8. The Secretary asked Maduro to personally attend the 
upcoming Summit of the Americas in Argentina, claiming that 
his absence would be a real blow to the full participation 
of all CAFTA countries, especially given Honduras' 
leadership as one of the first countries to ratify.  Maduro 
said that he would be pleased to attend the Summit. 
 
Hard Currency Flows, Industry, and Investment 
--------------------------------------------- 
 
9. Raising the issues of dollarization and remittances, 
Maduro claimed that Honduras received $1.3 billion in 
remittances in 2004 and is expecting $2 billion in 2005.  He 
stated that dollarization is not a priority for Honduras, 
but that remittances are having an increasing social impact. 
The problem is that growing remittances could cause the 
Honduran currency to revalue. 
 
10. Maduro noted that Honduras had strengthened its banking 
system since the "debacle" of 5-7 years ago.  Now there are 
foreign banks and a solid playing field in banking in 
Honduras, although a good home mortgage program is lacking. 
He also expressed his belief that microcredits was a great 
concept for the bottom of the entrepreneurial chain.  This 
is an area that Maduro said he would like to be involved in 
once he leaves the Presidency. 
 
11. Turning to the fuel price crisis, Maduro said that 
recent increases in the Honduran fuel bill are equivalent to 
2.5 times the country's aid receipts.  On the other hand, 
the country is currently growing at 5 percent, or two times 
the regional average.  In Honduras, maquilas used to mean 
simple assembly, whereas now it means full integration.  In 
forestry, an industry with many opportunities in Honduras, 
Maduro said the country was polarized between the 
environmentalists and business interests. 
 
12. Maduro added that the recent debt forgiveness was very 
important to Honduras.  Everyone in Honduras is now in 
unison regarding the IMF Agreement, he said, "even the 
Catholic Church."  The Agreement has provided $218 million 
in increased monetary flows, or 10 times what Honduras 
spends on its school lunch programs, and two times the $100 
million Maduro had promised his constituents.  Those debt 
service payments, which were 3 percent of Honduran GDP - can 
now be re-directed to social programs, to help the private 
sector, and to increase productivity.  The Secretary praised 
Maduro for his fiscal discipline and for leaving a strong 
economic foundation for his successor. 
 
13. Maduro said Mexico now has an interest in financing a 
new oil refinery in the region.  He also said that after 
repeated attempts to schedule a meeting with Hugo Chavez 
over fuel, he "grabbed" Chavez at the Ibero Summit in Spain. 
However, Maduro said that Chavez seemed more interested in 
holding out the prospect of some petroleum price break than 
in actually negotiating a deal.  Maduro speculated that 
Chavez merely craves the attention he commands by holding 
out the prospect of lower prices.  Maduro expressed surprise 
that Chavez apparently "wants to do something with Mexico." 
Maduro felt strongly that Chavez is directly involved with 
the FMLN party in Nicaragua (the Sandinistas).  Maduro 
praised Deputy Secretary of State Zoellick's recent trip to 
Nicaragua.  The Secretary questioned Chavez's economic 
performance, noting that inflation has increased 
significantly since he took office.  He also reiterated that 
all the Sandinistas had apparently voted against CAFTA. 
 
14. On investments, Maduro noted that one area where the 
country was not attracting foreign investment was in call 
centers, where much of the business was going to countries 
like Costa Rica and El Salvador.  He claimed that Honduras 
has good English speakers and that the country needs to do 
better in this particular area. 
 
Port Security 
------------- 
 
15. Moving to port issues, the Secretary and the President 
discussed the ceremony (later in the day) at Puerto Cortes 
to officially inaugurate the new U.S. Customs office.  With 
regard to the Container Security Initiative (CSI), Maduro 
claimed that Honduras was on-track and things were moving 
forward as planned.  Ambassador Garcia confirmed that final 
preparations should be ready during November.  The Secretary 
congratulated the President on efforts to date and said 
that, as the third port in Latin America with CSI status, 
this was a real advantage for Honduras. 
 
16. Following their bilateral meeting, the Secretary and 
President Maduro went on to a port briefing and lunch and 
then a dedication event at the new U.S. Customs Office in 
Puerto Cortes, at which both gave brief remarks and took 
questions from local press. 
 
17.  This cable was cleared by the Department of Commerce. 
 
Williard