Identifier
Created
Classification
Origin
04SANTODOMINGO5154
2004-09-15 18:47:00
CONFIDENTIAL//NOFORN
Embassy Santo Domingo
Cable title:  

DOMINICAN PRESIDENT AND ECON TEAM SEEK TO REASSURE

Tags:  PGOV EFIN DR 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 04 SANTO DOMINGO 005154 

SIPDIS

SENSITIVE

STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA; DEPT PASS
EXIMBANK; NSC FOR SHANNON AND MADISON
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY FOR
OASIA-LAMONICA
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI

E.O. 12958: DECL: 09/15/2014
TAGS: PGOV EFIN DR
SUBJECT: DOMINICAN PRESIDENT AND ECON TEAM SEEK TO REASSURE
EXIMBANK


Classified By: DCM Lisa Kubiske. Reason: 1.4 (a) and (d).

C O N F I D E N T I A L SECTION 01 OF 04 SANTO DOMINGO 005154

SIPDIS

SENSITIVE

STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA; DEPT PASS
EXIMBANK; NSC FOR SHANNON AND MADISON
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY FOR
OASIA-LAMONICA
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI

E.O. 12958: DECL: 09/15/2014
TAGS: PGOV EFIN DR
SUBJECT: DOMINICAN PRESIDENT AND ECON TEAM SEEK TO REASSURE
EXIMBANK


Classified By: DCM Lisa Kubiske. Reason: 1.4 (a) and (d).


1. (U) Summary: During the September 8 visit of EXIMBANK Vice
President David Miller Dominican President Fernandez and his
advisors stressed that the country,s economic crisis was one
of liquidity rather than insolvency. They indicated their
commitment to meeting the country's debt obligations and
added that much planning is needed to achieve a solution.
Fernandez said optimistically that he sees three steps to
solving short term liquidity problems, so he can get on with
the development plans from his first administration. End
summary.


2. (U) EXIMBANK Senior VP for Finance Jeffrey Miller and
Senior VP for Credit and Risk Assessment John McAdams
accompanied the Ambassador on September 8 to call on Finance
Secretary Vicente Bengoa and Central Bank Governor Hector

SIPDIS
Valdez Albizu before meeting with President Fernandez. The
Ambassador hosted a lunch for Ex-Im officials to meet local
business leaders.

--------------
Our country is not insolvent
--------------


3. (SBU) Finance Secretary Vicente Bengoa said that the
Dominican Republic,s economic crisis does not reflect
insolvency, but rather signifies that the country is facing a
liquidity problem. He said that devaluation of the peso
caused an adjustment in the current account, traditionally
running in deficit and offset by strong foreign investment
shown in the capital account. Investment has diminished
sharply since the crisis began. Bengoa commented that the
root of the problem is a shortage of pesos in the country,
and that the solution is tax reform designed to raise peso
revenues.


4. (SBU) On the topic of its debt troubles, Bengoa said that
debt ceiling will be renegotiated with IMF. He had no
specifics to offer, indicating that the new government is
still in the planning stages on its approach. He said that

the GODR would shortly be sending a mission to the IMF, which
would include himself, the Central Bank Governor Hector
Valdez Albizu, and staff of the
President.

--------------
Priorities and help from private banks
--------------


5. (SBU) Central Bank Governor Hector Valdez Albizu said
without elaboration that funds that were earmarked for
service of international debt "were not used for the stated
purpose by the previous government." The consequences are
evident in the current crisis. Valdez Albizu said the
administration must set up priorities, the first being to
normalize streams of payments to creditors. The Governor
reiterated Finance Secretary Bengoa,s message that the
problem was
one of liquidity rather than one of solvency, and said that
while tax reform was part of the answer to the country's
problems, funds from private investors could be a more
immediate source of relief.


6. (SBU) The solution for avoiding immediate default, Valdez
Albizu commented, was to turn to private banks. There were
local investors willing to offer assistance in the form of
cash to be deposited in the Central Bank; the Bank has
already received commitments of USD 125 million. He sees
this potential assistance from commercial banks as the best
hope to resolve the immediate liquidity problem. These funds
could meet the "comparability of treatment"
criteria of the Paris Club, he said, and the only other
alternative would default. When asked about prospects for
default, Valdez Albizu responded that the "Central Bank
supports the urgency of paying its debts to investors."
(NOTE: That same day and the following morning local Citibank
manager Ignacio Jasminoy urgently asked EcoPol counselor
whether the administration had expressed its intention to
accept the banks' offer. He, for one, is waiting for a firm
signal. Citi would put together a package for up to two years
at 12 pct per annum.)

--------------
Who is responsible for debt?
--------------


7. (U) Both Finance Secretary Bengoa and President Fernndez
confirmed newspaper reports that effective October 1 the
responsibility for managing debt payments will be shifted
from the Central Bank to the Secretary of Finance, where it
has traditionally remained. Central Bank Governor Valdez
Albizu commented shortly that the responsibility was "shared,
and both the Bank and the Ministry would be responsible for
paying the debts.

--------------
New bonds and oil but no new debt
--------------


8. (SBU) President Fernandez was alone with the visitors
throughout their 75-minute discussion with him. He said that
his administration would focus on three steps to extricate
the DR from its tight spot while avoiding taking on
additional debt. The first was the assistance mentioned by
both Bengoa and Valdez Albizu, to come in the form of cash
from private investors. Fernandez says he believes that the
administration should be able to raise USD 500 million in
relatively short order. He had met with representatives of
financial advisors Bear Stearns to discuss a swap of USD 500
million in ,06 bonds for bonds with a maturity date of 2011.
He expects to issue new bonds at the same rate of interest,
and he argued that bondholders would be willing to accept the
later maturity date rather than face the country's immediate
default.


9. (C) The third step and most significant source of funds
suggested by Fernndez would come from a proposal already
been made to the government of Venezuela. Referring to the
San Jose Pact under which Mexico and Venezuela have been
selling oil to various Central American and Caribbean nations
since 1980, he said the administration has proposed that
Venezuela provide oil at a 25 percent discount off market
price and finance the remaining 75 percent at favorable terms
over 15 years. Fernndez asserted that this would not
increase Dominican debt, as the equivalent of the financed
amount would be deposited in the Central Bank to bolster
reserves and to assist in managing the money supply.
Fernandez said that the deal will be worth about $750 million
over six months, or USD 1.5 billion over a year. The
Venezuelans have not yet accepted
the proposal.

--------------
We will pay
--------------


10. (SBU) At each meeting, Ex-Im officials stressed the
importance of clearing arrears of between 9 and 12 million to
EXIMBANK. If these amounts are not paid in the next several
weeks, Ex-Im will shut down all activity in the Dominican
Republic. Each Dominican interlocutor strongly asserted that
the government would pay before the deadline. President
Fernandez was adamant that the government "should pay right
away."


11. (SBU) Miller raised the topic of five pending projects
worth $130 million, ready for signature at Ex-Im. Loans for
three water projects, improvements for a hospital and funding
for a gold mine projectwere previously authorized by the
Dominican Congress, but Mejia administration indicated that
they planned to cancel the loan requests. The cancellation
letter was never sent. Neither Bengoa nor Valdez could
respond, but President Fernandez was familiar with each
project. He asked for the water projects go forward but
decided to cancel the other two as too costly.

--------------
Energy and a vision for the future
--------------


12. (SBU) Regarding the energy sector and its capitalization
problems, Fernandez said his strategy is to assure an
uninterrupted supply of electricity - - no blackouts - - and
then to raise electricity tariffs. His staff had met with
investors interested in transporting to the Dominican
Republic two partially completed coal-fired electric plants
now located in Houston. Each plant has a capacity of 70
megawatts and can be on line in one year, as opposed to the
five years to build a plant. (He did not explain how the
additional capacity would help resolve a cash-flow problem;
current installed capacity in the Dominican Republic is more
than adequate to meet current demand.)


13. (SBU) Regarding future projects, President Fernandez
noted that he wants "to build what is good for the country,
not just do what businessmen want to do." He said he plans
to pursue construction of a light rail system to provide
reliable transport for the population and to help alleviate
the worsening traffic problems of the city. Fernandez
estimated that the project would cost between USD 250 and 300
million and would improve the lives of many. He acknowledged
that such a project would not likely be self-sustaining and
the government would have to subsidize riders, but added that
the country would benefit in fuel savings and benefits such
as cleaner air.


14. (SBU) A second project he wants to support is a housing
plan that would move around fifteen thousand families away
from the flood-prone banks of the Ozama river on the eastern
side of Santo Domingo to a government subsidized housing
development in a safer area. The vacated river banks could
be made environmentally sound and the government would
undertake an urban renewal project bringing hotels, parks and
tourists to the new attraction. The estimated cost of the
project is USD 70 million.


15. (C) While Fernandez was clear in his understanding that
the Dominican economy faces more urgent issues that must be
dealt with first, he seems dedicated to the idea of taking on
the types of projects he finds most appealing.

- - - - - - - -
COMMENT
- - - - - - - -


15. (C) Although these were certainly cordial contacts, they
raise some misgivings for us. Dominican technicians had been
closeted with the Fund up until September 3 trying to craft
solutions to the financial impasse, but during this visit
none of our Dominican interlocutors talked numbers. A
reasonable explanation is that the man with the real
responsibility for making these decisions and securing the
funds wasn't there -- Technical Secretary for the Presidency
Temistocles Montas. He, along with chief economist Julio
Ortega, had been speaking to the Paris Club two days earlier
and were returning to the Dominican Republic via New York,
where they were consulting with financial advisors. Montas
and Ortega have an appointment to call on Treasury DAS Nancy
Lee on Thursday, September 16; given their access to
Fernandez and their expertise, we expect a much clearer
message.
KUBISKE