I. COMMERCIAL OVERVIEW A. OVERVIEW OF IMPORT MARKET Although a 5-20 percent (of CIF value) tariff covers most products, certain items such as grains, poultry, leather and textiles have tariffs that range up to 100 percent. The Government of Honduras eliminated a 10 percent import surtax on 20,000 products but high surtaxes remain on a number of products. A selective consumption tax is imposed almost exclusively on imported luxury type items. As a result of the implementation of progressive policies to dismantle the statist/interventionist economy, a traditional preference for U.S. products and healthy levels of economic growth, imports from the U.S. increased from USD 504 million in 1989 to USD 867 million in 1993. The immediate response to the implementation of trade liberalization policies was a rapid increase in imports of consumer goods. In recent years, capital goods have experienced the highest growth rates. An escalation in construction and infrastructure has fueled the demand for construction equipment, building products and hand and power tools. The government's initiatives to modernize and diversify the country's economy have stimulated an increase in the demand for agricultural machinery and equipment, forestry and woodworking equipment and electrical power systems. The transportation sector has seen strong growth in the importation of used Japanese-made passenger and utility vehicles from the U.S., and used school buses that are popular for urban transportation. B. BRIEF SYNOPSIS OF COMMERCIAL ENVIRONMENT Several factors combine to make the commercial environment in Honduras highly attractive for experienced U.S. exporters. The proximity of Central America to the U.S. market and the best port facilities in the region ease logistics. Several airlines have daily direct flights to Miami, Houston and New Orleans, and the Pacific and Caribbean shipping routes are well served. This, coupled with a history of social stability and the recent development of regional economic integration, makes Honduras an excellent location to penetrate the Central America market. It is common to find that business and political leaders speak English. Many were educated in the U.S. and travel there frequently for business and tourism. Consumer tastes in Honduras are traditionally oriented toward U.S. products. U.S. dominance of Honduras' foreign trade, with about a 50 percent share of the import market, illustrates the strong commercial connection between the two countries. All commercial banks in Honduras are privately owned and have correspondent relationships with U.S. banks. Loan rates start at 36 percent, which is considered high by any economic observer, but inflation is currently running at about three percent a month. As of June 21, the Lempira traded at 8.6 to one dollar. Honduras' legal system does not function on precedent, lacks codified laws and does not offer the option of a jury trial. As a result, international investors often find themselves caught up in a nasty web of contradictory laws and regulations. Occasionally, those who believe they have followed prescribed legal procedures find they do receive clear and timely adjudication of their cases. The Honduran legal system is undergoing reform, including important contributions from the U.S. Agency for International Development's Democratic Initiative project. Commercial cases are settled in the civil courts. C. HOST COUNTRY BUSINESS ATTITUDE TOWARD THE U.S. Most Honduran businesses are at ease with U.S. business practices. Traditionally, many Honduran families, both from the elite and middle class, send their children to the United States for education, and private bi-lingual schools (English/Spanish) abound, so it is common to find local businesspeople and professionals who speak English and have had some experience with U.S. culture. That familiarity, as well as the dominance of U.S. media in markets such as cable and network television and radio broadcasts, also strengthens the Hondurans' taste for U.S. consumer products and culture. Many Honduran firms have enjoyed longstanding relationships with U.S. suppliers and trading patterns have been formed by the proximity to the U.S. market. Most Honduran businessesen consider U.S. companies and U.S. products reliable. D. MAJOR BUSINESS OPPORTUNITIES Electrical generating systems: Honduras is facing a severe energy crisis caused by rising electricity demand and output shortfalls at the country's largest hydroelectric plant. A Presidential Decree issued in April 1994 authorizes the National Electric Company (ENEE) to engage in direct contract negotiations with firms that offer thermal electric generating systems. Over the next two years, the U.S. Embassy estimates investment in this area will reach USD 150 million. Telecommunications: In 1993, the Honduran Telecommunications Company (HONDUTEL) awarded two contracts, collectively valued at USD 155 million, for the installation of 220,000 telephone lines. HONDUTEL also awarded a USD 30 million leasing arrangement for private cellular telephone services. The Government of Honduras appears close to making a final decision on the privatization of HONDUTEL. Road Construction: While the Reina administration is not likely to continue to invest heavily in major infrastructure projects, the Ministry of Communication, Transportation and Public Works (SECOPT) plans to upgrade approximately 2,000 kilometers of secondary roads, which are part of Honduras' 14,000 KM official road network. This upgrading involves widening and repairing the gravel surfaced roads that connect small towns to the main road system. Social Housing: The government has announced plans to implement a program for the construction of low cost housing. The estimates are between 30-50 thousand units of social housing. The project will be executed in the next three years. The Central American Bank for Economic Integration (CABEI) has ventures between foreign and local construction companies. The project will consist of blocks of between 200-500 units. E. MAJOR ROAD BLOCKS TO DOING BUSINESS Impediments to increased U.S. exports stem mainly from the small size of the market, the low purchasing power of the majority of Hondurans, lack of financial resources, and a constricted supply of local financing. Bank interests rates are high, running 27-32 percent (and are expected to rise), repayment periods of one year or less are common, and external financing is limited. While Honduras imports a wide variety of products, few product markets have much depth. Significant barriers include: tariffs, taxes and fees, foreign exchange shortages, discriminatory government procurement practices, IPR infringements, poor administration of justice, investment disputes and a deficient agricultural distribution system. F. NATURE OF LOCAL AND THIRD COUNTRY COMPETITION The U.S. is Honduras' primary trading partner. Approximately 50 percent of the country's total trade is with the U.S. Hondurans continue to be partial to U.S. products. While the U.S. enjoys a dominate position in most sectors, competition varies on a sector-by-sector basis. In recent years Asian and European firms have made inroads into the Honduran market.