US embassy cable - 05TEGUCIGALPA2420

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002420 
 
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 III: WHAT DOES A LIBERAL PARTY VICTORY MEAN 
FOR THE HONDURAN ECONOMY AND U.S. ECONOMIC INTERESTS? 
 
REF: TEGUCIGALPA 1993 AND PREVIOUS 
 
Classified By: Economic Chief Patrick Dunn for reasons 1.4 (b) and (d). 
 
1. (C) Summary: This is the third of three cables analyzing 
the Zelaya economic platform.  As of early morning on 
November 28, 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 
macroeconomic platform and likely impacts on U.S. interests. 
Part one provided an overview of the Zelaya economic platform 
and impacts on the U.S.; part two provided a more in-depth 
assessment of the impacts of his proposed microeconomic and 
sectoral policies. 
 
2. (C) Summary Continued:  Zelaya's gentleman's agreement 
with the IMF and unambiguous calls for fiscal discipline are 
sine qua nons for future macro stability, and his endorsement 
of decentralization, anti-corruption, improved efficiency and 
competitiveness are like music to our ears.  Post will watch 
closely how the new administration seeks to balance foreign 
exchange inflows, exchange rates, interest rates, and 
liquidity concerns -- perhaps the pre-eminent macroeconomic 
concern facing the new administration.  Finally, Post is 
encouraged to see Zelaya's platform adopt the Monterrey 
Consensus position that ultimately Honduras is responsible 
for implementing the reforms necessary to take full advantage 
of globalization and lay the foundations for sustainable 
economic growth.  End Summary. 
 
Macroeconomics 
-------------- 
 
3. (C) Publicly and privately, Zelaya has stressed that 
macroeconomic stability has cost the Honduran public too much 
to allow poorly considered policies to put it in jeopardy 
now.  He has emphatically said that he intends to continue 
policies of fiscal discipline, stable exchange rates, low 
inflation, and combating corruption and tax evasion. 
Privately, he has also assured both Post and the 
International Monetary Fund (IMF) that he will continue to 
uphold the agreed-upon components of the Fund's Poverty 
Reduction and Growth Facility (PRGF).  In a November 28 
discussion with EconChief, the IMF resident Representative 
declined to comment on the significance of an apparent Zelaya 
victory, saying the Fund is remaining cautious until a clear 
victor is formally announced by electoral authorities.  That 
said, the Fund remains concerned over how Zelaya would offset 
the revenue losses from the proposed reduction in fuel taxes 
and whether his courting of the teachers' unions during the 
campaign will put at risk completing the teachers' wage 
reforms that were agreed to with the Fund and that will be 
key to future fiscal balance.  (For more on this, see reftel.) 
 
4. (U) However, Zelaya feels (and clearly the public agrees) 
that the benefits of these years of austerity have not 
reached the common man.  Zelaya therefore calls for a more 
progressive tax system and a more adaptable labor system 
(Note: Here he refers to training, not any relaxation of 
restrictive labor regulations that inhibit labor market 
flexibility. End note.)  He calls for an opening of decision 
making regarding economic policy and for improved social 
equality, but does not explain what that would look like or 
how it would be achieved. 
 
Exchange Rates 
-------------- 
 
5. (SBU) Zelaya proposes stabilizing the exchange rate and 
controlling excess liquidity by keeping monetary emissions in 
line with inflows of foreign exchange reserves.  (Comment: 
With remittances and earnings from non-traditional exports 
increasing sharply year-on-year, it is not clear to Post how 
such a policy would be implemented without risking inflation. 
 Further, there seems a conflict between limiting liquidity 
and providing accessible credit more broadly to spur economic 
growth.  Finally, it is not clear that the exchange rate is 
the appropriate target for monetary policy -- the Fund has 
pushed instead for moving to a freely-floating exchange rate, 
and using interest-rate targeting to signal macroeconomic 
intentions to the market.  Post will raise this issue with 
Zelaya's monetary team at the earliest opportunity.  End 
Comment.) 
Interest Rates 
-------------- 
 
6. (SBU) Zelaya's plan recognizes that lack of credit and 
high interest rates (18 percent and higher) have held back 
economic development.  In response, he calls for 
strengthening banks that provide agricultural credit, 
creating new savings and loan associations in the rural 
areas, and strengthening the GOH-supported bank for 
affordable housing.  (Comment:  Providing affordable credit 
requires more than just building more banks.  How Zelaya 
proposes to increase available capital or reduce interest 
rates (without boosting inflation) is nowhere addressed and 
remains one of the macroeconomic challenges facing the next 
administration.  End Comment.) 
 
Energy Policy 
------------- 
 
7. (U) Zelaya proposes to reduce the cost of fuel to 
consumers by tightening state-imposed profit margins, by 
combating corruption, and by improving management at the 
national electrical company ENEE (which currently has 
technical losses estimated at 27 to 30 percent).  He calls 
for incentives for production of alternative fuels, including 
ethanol and biodiesel, as well as adoption of wind, solar, 
hydro, and geothermal generation technologies. He promises a 
reduction of the GOH tax on fuels, and supports 
regionalization of the energy market, both to explore 
volume-discounts for fuel purchases and to build-in economies 
of scale for electrical generation. 
 
Trade and Investment Policy 
--------------------------- 
 
8. (U)   Zelaya's plan expressly recognizes what is in Post's 
opinion one of the key disincentives to investment in 
Honduras:  lack of juridical security.  Zelaya notes that 
implementation and enforcement of the new Competition 
(anti-trust) law and Administrative Simplification law will 
be cornerstones of this policy.  (Comment:  This will need to 
be accompanied by strengthening of the judiciary, but formal 
recognition of the collusive and anti-competitive nature of 
the Honduran market is an important first-step.  End 
comment.)  On trade, Zelaya is unambiguous, declaring, "we 
support completing the Central American Customs Union and 
taking maximum advantage of openings to the American market 
offered by the entry into force of CAFTA." 
 
9. (U) Perhaps the most important passage in the economic 
platform is the following, in which Zelaya recognizes 
Honduras' own responsibility for taking the steps necessary 
to set the stage for economic growth:  "We do not forget that 
to achieve our goals our country must redouble its efforts in 
such areas as: investment; modernization of agro-industry; 
infrastructure improvements; creating a more skilled 
workforce; rationalizing energy costs; and strengthening the 
financial services sector. (This must be done) by means of 
short-, medium-, and long-term plans, because only in this 
way can we produce more exports, improve our competitiveness, 
and take better advantage of our resources." 
 
Ford 
Ford