US embassy cable - 05TEGUCIGALPA2419

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 002419 
 
SIPDIS 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN 
TREASURY FOR DDOUGLASS 
COMMERCE FOR MSIEGELMAN 
DOL FOR ILAB 
STATE PASS AID FOR LAC/CAM 
STATE PASS USTR FOR AMALITO 
 
E.O. 12958: DECL: 11/30/2015 
TAGS: ECON, EFIN, PGOV, ELAB, SOCI, HO 
SUBJECT: PART II: WHAT DOES A LIBERAL PARTY VICTORY MEAN 
FOR THE HONDURAN ECONOMY AND U.S. ECONOMIC INTERESTS? 
 
REF: REF: TEGUCIGALPA 1993 AND PREVIOUS 
 
Classified By: Economic Chief Patrick Dunn for reasons 1.4 (b) and (d). 
 
1. (C) Summary: This is the second of three cables analyzing 
the Zelaya platform.  As of early morning on November 30, 
exit polling indicates an electoral victory for Liberal Party 
presidential candidate Manuel "Mel" Zelaya Rosales.  While we 
await a formal announcement from electoral authorities, the 
following cable assesses Zelaya's microeconomic platform and 
proposed sectoral policies and their likely impacts on U.S. 
interests.  Part one provided an overview of the Zelaya 
economic platform and impacts on the U.S., and part three 
provides a more in depth assessment of the impacts of his 
proposed macroeconomic policies. 
 
2. (C) Summary Continued:  The Zelaya platform's calls for 
rational energy policies, agricultural diversification, 
re-energizing mining and forestry, improving infrastructure, 
and taking full advantage of CAFTA are each appropriate goals 
that also mirror U.S. interests.  Some proposals remain vague 
(mining and telecomms) and some troubling (land reform, fuel 
taxes).  In our view, Zelaya's economic platform holds few or 
no obvious items that threaten U.S. national economic 
interests.  His proposals, if implemented, should help 
Honduras take maximal advantage of CAFTA and other economic 
opportunities by creating an investment climate that is more 
welcoming of both domestic and foreign investment.  End 
Summary. 
 
Agro-Industry and Forestry 
-------------------------- 
 
3. (C) Zelaya's plan for agro-forestry hits all the right 
notes, calling for sustainability, diversification, quality 
control, value-added production, and a renewed emphasis on 
exports.  It also calls for cutting red tape, pledging that 
"laws that slow the efficiency and dynamism of this economic 
sector will be abolished."  However, the plan is salted with 
populist proposals as well, including free technical 
assistance to farmers, subsidized fertilizers, subsidized 
seed, subsidized irrigation, and the creation of a national 
grain reserve.  On November 9, Zelaya told Ambassador and 
EconChief that these and other farmer-friendly policies would 
promote production, increase diversity, and thereby lower 
prices for consumers, obviating any need for price controls 
while meeting his campaign promise to lower the cost of the 
basket of basic consumer goods.  Of more concern is his 
proposal to increase production of basic grains such as corn 
and beans -- products Honduras would be hard-pressed to 
compete in globally. 
 
4. (SBU) Zelaya's stance on agricultural trade is positive, 
but with potentially high-cost caveats that bear watching, 
particularly for their fiscal impacts.  For example, Zelaya's 
plan states, "My government will take advantage of the market 
opportunities that have been opened by free trade agreements. 
 It will support producers so that they can be competitive, 
supplying the country's needs and producing excess for 
export.  Those producers that are at a competitive 
disadvantage will benefit from production compensation 
programs."  Such social safety nets are in no way anti-trade, 
but they could be quite costly, and Zelaya's platform does 
not indicate how such programs would be funded. 
 
Land Reform 
----------- 
 
5. (C) On land reform, Zelaya's stance merits careful 
observation.  His call to reform the "institutional anarchy" 
that currently paralyzes reform of the land titling process 
is well-founded and laudable.  So, too, is his observation 
that a clean title to land is not enough to spur rural 
production, but must be accompanied by technical assistance 
and capacity building.  However, his proposal to fold the 
current laws on agricultural reform, land reform, forestry, 
water and property into one mega-law promises to be a 
bureaucratic nightmare.  Finally, his opposition to programs 
such as the World Bank's PATH program -- which is actively 
working to clean up and harmonize Honduras' disaster of a 
land registry and cadastre -- is troubling.  He calls for 
de-politicizing the National Agrarian Institute (responsible 
for land titling issues), but rejects "manipulation" of the 
land-registry reform process by "special projects that obey 
only financial institutions." 
 
Industrial Policy 
----------------- 
 
6. (C) On industrial policy, Zelaya calls for welcoming 
foreign investment, but as a supplement to domestic 
investment and growth.  He favors a policy that will create 
domestic investment and savings and promote Honduran 
industrial growth.  (Comment:  Honduras is awash in 
liquidity, so flight of capital is not a key concern. 
However, much of that liquidity is absorbed in Central Bank 
sterilization operations using GOH-issued risk-free bonds at 
high rates, crowding out riskier private sector borrowers and 
imposing enormous costs on the Central Bank.  If Zelaya 
intends to mobilize this capital for domestic investment, his 
chief challenges will be how to do so without spurring 
inflation, and how to wean domestic banks from the low-risk, 
high-yield instruments currently comprising most of their 
portfolios.  That said, Zelaya's underlying insight has 
merit:  to create sustainable economic growth that encourages 
foreign direct investment, first create an environment that 
encourages domestic investment.  End Comment.) 
 
7. (U) Similarly, Zelaya supports growth and diversification 
of the maquila sector, with emphasis on value-added 
post-processing (such as freezing and packaging vegetables). 
To encourage this growth, he proposes passing legal reforms, 
lowering energy costs to regionally competitive rates, and 
creating competitive port facilities and communications. 
Post fully supports such initiatives. 
 
Tourism 
------- 
 
8. (U) Zelaya's proposals for tourism lack specificity, 
focusing only on its benefits and calling for the future 
development of a more comprehensive strategy.  However, 
Zelaya does link tourism to municipal management, and notes 
the market opportunities for small and medium businesses that 
expanded tourism presents.  He also calls for using tourism 
revenues for archaeological and environmental conservation 
efforts.  He hopes to increase tourism by 20 percent per year 
until Honduras doubles its current flow of 1 million visitors 
annually.  (Comment:  The vast majority of these 1 million 
visitors are one-day cruise ship passengers, who spend little 
-- we've heard USD 10 per capita, or about one-fifth of the 
Caribbean average -- and therefore contribute little to the 
Honduran economy.  Higher-quality and more diverse tourist 
services and attractions will be key to improving these poor 
results.  End Comment.) 
 
Mining 
------ 
 
9. (U) Zelaya's mining plan, while highlighting a potentially 
important growth sector, clocks-in at a mere two sentences, 
one of which is merely hortatory.  Turning attention to this 
much-maligned and politically sensitive sector is long 
overdue, following a year-and-a-half long moratorium on all 
new mining concessions.  Yet, there is nothing in the Zelaya 
platform (nor in any of the conversations Post has had with 
the campaign) to indicate Zelaya has formulated any specific 
proposals to re-invigorate this stagnant sector. 
 
Infrastructure 
-------------- 
 
10. (SBU) Without naming the Millennium Challenge Corporation 
by name, Zelaya promises to hold to agreed infrastructure 
improvement goals of improving the primary and secondary road 
network, and adds port improvements, expansion of the 
electricity grid, improved telecommunications, and "saving 
the national railroad."  While that last one leaves us 
scratching our heads, the remainder of the listed items are 
key to economic growth and are in keeping with existing 
programs and policies.  Regarding telecommunications, Zelaya 
-- in the space of one paragraph -- promises to strengthen 
state-run telephone company Hondutel to make it competitive 
(to survive after it loses its land-line monopoly in December 
2005), but then saddles it with the burden of providing 
universal service to "areas that are not attractive for 
private firms."  Precisely how he intends to split that baby 
remains to be seen. Post will follow this -- and the 
associated telecomms reform bill now in Congress -- closely. 
Ford 
Ford