Honduras coup costs oil, aid as economy stalls

TEGUCIGALPA, Honduras - The economy of Honduras, never strong, could be deeply damaged by multinational efforts to isolate and pressure the interim government into returning President Manuel Zelaya to power.

International aid and loans are drying up, the threat of trade sanctions looms and Hugo Chavez cut off supplies of Venezuelan oil to Honduras shortly after his ally Zelaya was ousted in a pre-dawn military raid.

The poor are sure to be hit hardest by the economic isolation. About half of Hondurans live in poverty, and most are vulnerable to a surge in gasoline prices likely to follow the suspension of oil shipments to the cash and fuel-strapped country.

Suspended by the Organization of American States and condemned by the United Nations, the new government is not backing down. President Roberto Michelleti's government blocked Zelaya from landing Sunday in a dramatic airport standoff, and has ruled out any compromise that would involve Zelaya returning to office.

"The current government is taking this tough 'No one can tell us what to do' stance, but they have to take the economy into consideration," said Gerardo L. Munck, a Latin America expert at the University of Southern California. "People will use economic tools to make their political point against what has happened."

Honduras is the hemisphere's fourth-poorest country and directly finances nearly 20 percent of its budget with foreign donations and credit. The global economic crisis has slashed its top income sources — including remittances sent home by Hondurans working abroad and exports, which include coffee, bananas and lumber as well as clothing and shrimp.

The World Bank and the Inter-American Development Bank together suspended an estimated $470 million in aid and loans last week, awaiting what World Bank chief Robert Zoellick called a "clarification of legal issues."

More than $100 million in U.S. assistance also would be lost if the U.S. State Department officially classifies Zelaya's ouster a "coup," triggering an automatic suspension. If that happens, it could take years to sort out broken contracts and resume aid, said Heather Berkman, a Latin America analyst at the Eurasia Group in Washington.

So far, the White House has simply called the ouster "not legal."

U.S. aid includes $43 million in direct assistance this year and $114 million pledged but not yet delivered through Millennium Challenge Corporation. Without that cash, stalled projects would cause layoffs and prevent the construction of hospitals, roads and schools and the government would likely be forced to cut services.

"What is it that they want to do: punish politicians or punish the population?" asked Benjamin Bogran, a former businessman who became Honduras' new economy minister. "Every time a political situation arises, it's not the leaders who suffer but the people."

The poor would also feel the suspension of oil shipments from Venezuela, which sold Honduras about $350 million in fuel last year, giving it 25 years to repay about half that amount at just 1 percent interest, Berkman said. The deal, part of Chavez's Petrocaribe oil initiative, had entitled Honduras to as many as 20,000 barrels a day since June 2008 — nearly half its daily fuel need.

Zelaya's opponents say he has scared off foreign investment by cozying up to the socialist Chavez, and that by raising the minimum wage by 64 percent this year, he hurt small businesses, fueled more than 10 percent inflation and cost the country jobs.

Zelaya counters that the instability triggered by his ouster is far more detrimental to the economy.

Many Hondurans are bracing for the worst, while others suggest that total isolation could transform its import-dependent economy, forcing local industries to grow.

"You have to see it from the positive side, too: We have resources and we could overcome this," said Manuel Bautista, who directs the Honduran School of Economists.

Yet analysts say that trade sanctions are unlikely. Nicaragua, Guatemala and El Salvador sealed borders to commerce for two days last week, but their own producers complained it hurt them more than it did Honduran consumers.

Trade sanctions are also seen as a highly unpopular U.S. tool in Latin America, where Washington has been widely criticized for its 47-year-blockade against Cuba.

"Latin American countries aren't going to say 'Let's do what the U.S. does to Cuba to Honduras,'" said Munck. "It's not their style."

The U.S., which buys more than two-thirds of Honduran exports, won't likely seek another embargo, in part because many Honduran factories and farms are U.S.-owned, and because trade ties have deepened since the U.S.-Central American Free Trade Agreement took effect in 2006.

More likely, the U.S. could threaten to revoke the Temporary Protected Status that affords Honduran immigrants easier access to legal work in the U.S. — a less drastic step than freezing remittances but still a way to threaten the flow of money home, which represents about 18 percent of the Honduran economy, Berkman said.

Political crisis could ultimately have the same effect as economic sanctions, though, if conflict or roadblocks paralyze the country and goods don't flow.

"The government thinks it can muddle through in isolation for a few months until new elections — and it could, if that was all it depended on," said Berkman. "But once aid and the economy come into play, that's when people get upset."

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Theresa Bradley reported from Mexico City. Associated Press writers Nestor Ikeda in Washington; Eduardo Gallardo in Santiago, Chile; and Rachel Jones in Caracas, Venezuela, contributed to this report.

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