DOMINICAN REPUBLIC SCENESETTER FOR POSSIBLE VIP

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 005437

SIPDIS

DEPT FOR S/S, WHA,WHA/CAR, WHA/EPSC

E.O. 12958: DECL: 09/30/2010
TAGS: PGOV PREL EFIN DR
SUBJECT: DOMINICAN REPUBLIC SCENESETTER FOR POSSIBLE VIP
VISIT


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


1. Following is a backgrounder for a possible VIP visit to
the Dominican Republic:
(U) Background. The Dominican Republic, just 70 miles from
Puerto Rico across the treacherous Mona Passage, is a
heavyweight in the Caribbean, a strong trading partner, and a
helpful ally in the Caribbean. The U.S. government has used
its prestige and resources to assure that elections here are
conducted fairly and with close international observation.
We made possible the OAS election observation for the May
presidential elections with our $225,000 contribution, and we
spent more than $1 million in USAID funds to support the
highly effective civil society observations that put 60,000
trained Dominican observers in the field. Leonel Fernandez
knows that we were vital in keeping the May 2004 presidential
elections honest and thereby in making possible his victory.
(U) The Returning President. Leonel Fernandez was president
during the boom years of 1996-2000, when GDP growth exceeded
7 percent, thanks to a reorientation to exports just as the
U.S. economy boomed. He took office on August 16, 2004 in
drastically different circumstances -- with 40 percent
inflation, a weakened currency, widespread electricity
blackouts, and financial and fiscal disarray, including an
inoperative IMF standby and a budget deficit for 2004 of more
than 7 percent of GDP. He set the tone with a resounding
inaugural speech promising a new orientation to Dominican
government, stern enforcement of laws against corruption,
resolute measures to confront economic crisis, and a new,
socially conscious and market-friendly approach to
government. Fernandez said that the country would pursue
peace and security through multilateral means, at the UN and
the Organization of American States.
(SBU) The inaugural celebration brought a giddy rush of
confidence in the future. With this optimism, the peso has
strengthened nearly 20 percent against the dollar since then,
and the Central Bank has been able to place its certificates
for much longer terms at lower rates, suggesting that
investors believe 40% inflation will evaporate. The
president,s economic manager, Technical Secretary
Temistocles Montas and his team have actively consulted with
the IMF, the U.S. Treasury, the Paris Club and New York
financial advisors. The new administration has kept up
payments on sovereign debt and seeks a friendly
restructuring, stretching out repayment to gain time for
financial stabilization.
A New Broom Sweeps
(SBU) Fernandez appointed to his cabinet a range of
reasonably qualified, experienced supporters. Many are in
the same jobs that they held in his first administration.
Last time they held office during boom times, when few
questions were asked. In the new, grim Dominican reality,
they will be subjected to closer scrutiny by everyone.
(C) Fernandez made excellent choices in appointments in law
enforcement, especially for Attorney General, Police Chief,
and head of the Armed Forces. Last week he responded quickly
to USG concerns and removed a senior manager in the National
Intelligence Agency.
(SBU) Four appointments to high ranked advisory jobs without
managerial responsibility went to individuals whom the
previous administration charged with embezzlement but never
brought to trial. Fernandez maintains these four were the
victims of unfounded political persecution.
Urgent Problems
(U) This new/old administration is struggling with urgent
problems. Chief among them:
- - (SBU) Getting back to the table with the IMF. The
Fernandez team worked hard with cooperation from the outgoing
administration, to construct a "fiscal reform package," part
of the effort to get back to negotiations with the IMF. The
Congress took two months to debate it, water it down, and
pass it. Fernandez has announced cuts in government
expenditures but must do more to repair the budget, likely to
finish 2004 with a deficit equivalent to more than 7 percent
of GDP. IMF technicians visited during the last week of
September but serious negotiations await convincing Dominican
actions.
- - (SBU) Free trade. Fernandez urges long-term investment
in education, science, and infrastructure to improve
competitiveness and strongly endorses the need to get a free
trade agreement with the U.S. and Central America. Fiercely
protectionist sugar interests grafted into his tax reforms a
25 pct tax on soft drinks and refreshments made with fructose
-- a measure directly counter to the newly negotiated
DR-CAFTA free trade agreement and in breach of WTO
commitments. The USG has vigorously warned the Dominicans
that this would be a "deal killer" for free trade. Fernandez
promulgated the bill as delivered while promising to seek
repeal of the protectionist measure. He is systematically
seeking consensus from concerned sectors on an approach to
placate sugar while still preserving the prospect of an
agreement.
- - (SBU) Convincing the Paris Club. The Paris Club one-year
deal struck last March for $189 million in rescheduling was
contingent on government measures for "comparability of
treatment" for private sector creditors. To date the
government hasn,t identified its approach to "comparable
treatment," though it has an offer of a syndicated $100
million loan through Citibank that might be construed to
fulfill the requirement. The Paris Club expects an answer in
early October.
- - (SBU) Getting to restructuring. The government owes
arrears to bilateral creditors, international financial
institutions and to the private sector. Fernandez,s team
says earnestly that they will clear these, as required by the
IMF and the Paris Club, and they,ve found funds with which
to avoid catastrophic defaults on sovereign bonds and
sovereign guarantees, although at times only by a matter of
hours. They are seeking lenders to deposit dollars with the
Central Bank to bolster reserves.
- - (C) Solving the crisis of energy supply and pricing. The
electricity sector is almost completely without capital.
Fernandez has borrowed USD 50 million from domestic banks,
enough to pay a small percentage of overdue government debts
so generators can purchase fuel over the next three months.
He says he has asked Venezuela,s Hugo Chavez to sell him
petroleum at a 25 percent discount over six months, with
15-year terms for financing. At best, this might be a
six-month respite; at worst, it could provide a point of
leverage for Chavez,s regional political agenda (note,
however, that Fernandez has shown absolutely no sympathy for
Chavez,s views). The administration is seeking to limit the
costly subsidy on cooking gas only to household purchasers.
The transport sector could strongly oppose this initiative.
- - (C) Corruption and Banking Fraud. Fernandez has very
good people in law enforcement. Our first in-depth
discussions suggest that the Central Bank aggressively pursue
cases against bankers who embezzled breath-taking sums
(equivalent to 20 pct of 2003 GDP) and thereby caused the
current financial imbalance. The Attorney General has barred
the principal accused from leaving the country. Assistant
Secretary Noriega and Ambassador Hertell have urged the need

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for effective prosecution and exemplary punishment. U.S.
authorities have been working with the Central Bank to help
this happen.
Your Presence and Your Message
(U) The Department and the U.S. Government should acknowledge
and support Fernandez,s efforts to set things right:
cooperation during the transition, efforts to renew the IMF
standby and initiatives for reforming subsidies and the
electricity sector. He would respond well to a public
message of U.S. support. Fernandez is an orthodox thinker,
studious and reaching out for counsel.
(C) The Ambassador hopes that the Secretary can further
underscore the importance of the already negotiated free
trade agreement, which Fernandez declared on September 30 is
"important not only for free zone exporters but for the
economic future of the country." A positive boost from the
Secretary will strengthen his hand with Congress and better

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arm him to manage the recalcitrant powerful Dominican sugar.
(C) Other themes to stress :
- - effective economic adjustment is premised on imposing
austerity quickly and decisively
- - corruption undermines democratic institutions, and
- - the international community expects both executive and
judicial branches to prosecute and punish those responsible
for the massive bank frauds that so damaged the country,s
finances and economy.

2. (U) Drafted by Michael Meigs.

3. (U) This message and our other series of reporting
messages can be viewed on on our SIPRNET site
http://www.state.sgov.gov/p/wha/santodomingo< /a>
along with extensive other material.

HERTELL