DOMINICAN TOURIST DESTINATIONS WARY AS ECONOMIC

UNCLAS SANTO DOMINGO 001974

SIPDIS

LA PAZ FOR A/DCM

E.O. 12958: N/A
TAGS: EINV EAID DR
SUBJECT: DOMINICAN TOURIST DESTINATIONS WARY AS ECONOMIC
DOWNTURN HITS

REF: SANTO DOMINGO 1425

UNCLASSIFIED


1. Summary: The tourist havens of Punta Cana and La Romana in
the eastern part of the Dominican Republic are beginning to
feel the effects of the global economic downturn, but the
impact remains limited and most new development is
continuing. However, Cap Cana, a large scale luxury resort
project, which nearly defaulted on a USD 100 million bridge
loan in November, has been forced to trim operations and cut
back on staff. Early indicators for the high season which
runs from December to March suggest that occupancy rates will
be 5 to 10 percent below 2007 levels. Another threat for the
tourist developments near Punta Cana is the lack of urban
planning and public services. End Summary.

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Tourist arrivals down about 5%
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2. The effects of the economic downturn are beginning to
reverberate in the Dominican Republic's eastern tourist
destinations, Punta Cana-Bavaro and La Romana-Bayahibe.
After a decade of rapid growth, both destinations have begun
to perceive the first decline in passenger traffic since the
region began to develop 40 years ago, with the exception of
late 2001. Juan Carlos Sanchez, executive director of the
Bavaro Tourism Cluster, told Econoff that some hotel
occupancy rates in Bavaro fell as low as 20 percent in
September and October. While these months are traditionally
the slowest of the year, he said it was the first time he
could remember occupancy rates dropping below 30 percent.
Early indicators of high-season occupancy rates showed a
small decline compared to last year; Eastern Zone Hotel
Association President Ernesto Veloz said Christmas week
occupancy rates of 85-90 percent were about 7 percent below
2007 rates for this peak occupancy period.


3. Airport records confirmed the drop in passenger volume.
Nationwide, the arrival of non-resident foreign nationals
(the group that most often corresponds to tourists) showed
growth until August, when it began falling slightly. The
non-resident foreigner numbers from September through
November were down 7.5 percent compared to last year. While
the arrivals at Punta Cana International Airport (PUJ) were
slightly stronger than the national trend, down just 4.6
percent, the smaller La Romana International Airport (LRM)
saw travel by this group fall 20 percent below 2007 figures.
PUJ received just under 1.8 million passengers in 2007, 40
percent of total air arrivals in the Dominican Republic, and
LRM processed about 212,000 passengers. Both airports rely
almost exclusively on tourist travel.


4. PUJ, the country's highest-volume airport and the world's
largest privately owned airport, is fully owned and operated
by Grupo Puntacana, established 40 years ago as one of the
first major tourist developers on the eastern shore. The
airport's director of operations, Walter Zemialkowski, who
previously directed a county-owned airport in Florida, said
Punta Cana's status as a private facility allows it greater
agility in responding to changing situations. He told
EconOff that although he expects this fiscal year to show a
drop in passenger volume of about 5 percent, he did not
foresee any layoffs or a slowdown in the facility's
investment plans. In fact, the very day that EconOff visited
Zemialkowski, the airport was processing its first flight in
the new Terminal B, which will be used primarily for U.S.
travelers. Zemialkowski said that after 20 years of growth
in passenger traffic (with the exception of fiscal year
2002),a period of decline represents small concern.


5. The passenger reductions at LRM, however, a small airport
located roughly equidistant between PUJ and the Dominican
Republic's second largest airport, Las Americas International
Airport in Santo Domingo (SDQ),are part of a long-term
trend. Since receiving 300,000 international travelers in
2004, the airport processed just 220,000 last year and is
looking at even slimmer arrivals this year. But Luis Emilio
Rodriguez Amiama, who directs the airport as well as the
nearby port and duty-free zone (all three are owned by the
sugar and tourism giant Central Romana Corporation),is
unfazed by the pattern. He noted that LRM makes more money
per passenger in terms of fees than any other airport in the
country and remains a money-maker for Central Romana as well
as a key component of its tourism operation, which includes
the Casa de Campo resort and a cruise ship terminal.

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Cap Cana: country's first victim to financial crisis
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6. While the economic downturn represents a slight
contraction in tourist volume for most players in the tourism
sector in the Dominican Republic, it has taken a greater toll
on Cap Cana, a 46-square-mile luxury golf and beach
development south of Punta Cana. More than any other tourist
development in the Dominican Republic, Cap Cana is fully
integrated in global financial markets, the company's CEO and
Executive Vice President, George Spence, explained to
EconOff. Seeking USD 100 million in financing, Cap Cana
hired Morgan Stanley and Deutsche Bank to issue bonds in
December 2007. But when the investment banks advised Cap
Cana that the bond market was poor, Cap Cana instead opted
for a bridge loan with those same institutions, which they
intended to refinance within the next year through a bond
issue. The climate never improved for bonds, however, and
when the bridge loan came due in November 2008, Cap Cana
sought refinancing from Lehman Brothers. That attempt fell
through when Lehman Brothers collapsed three days before the
bridge loan matured. With no credit available, Cap Cana
negotiated to settle with its creditors, a group of
cash-starved hedge funds that had acquired the loan and on
December 7, the company settled its debt for cash and a large
chunk of its property.


7. With its financing run dry, Cap Cana has laid off more
than half of its 1500-person staff, ceased all construction
(except for projects near completion),and settled debts to
local creditors with in-kind payments of property and
building supplies. Cap Cana now owes USD 200 million,
compared to USD 500 million a few months ago, and is aiming
to cut that amount to USD 100 million. On December 23, the
company solicited consent from its bond holders to extend the
maturation date on a series of notes by up to 45 days. Now,
Spence explained to EconOff, Cap Cana is in a holding
pattern, waiting for the credit climate to improve so the
company can continue its development plans.

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Economic downturn just a speed bump for new developments
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8. While the Cap Cana experience might be expected throughout
the sector, most large luxury development projects are
proceeding as planned, albeit with lower sales. EconOff
visited the construction site of the multibillion-dollar Roco
Ki beach and golf residential development in Macao, north of
Bavaro. The anchor of Phase I of the 2700-acre development
will be two luxury hotels, Westin and Fairmont, and a Nick
Faldo-designed golf course, which opened to outstanding
reviews on December 12. Although none of the residences or
hotels are completed, the golf course opened early as a draw
for prospective buyers. Construction is proceeding as
planned, Roco Ki CEO Nicholas Tawil told EconOff. Tawil
noted that a few buyers have backed out because of the global
economic situation, but overall sales remain strong.


9. On December 11, President Fernandez was on the eastern
shores to help break ground for the Vista Cana Resort and
Country Club, a USD 6 billion-dollar development away from
the shore featuring townhouses and condominiums for retiring
baby boomers with prices starting below USD 150,000. The
project, backed by Venezuelan financiers, is being built by
New Jersey-based Hill International. President Fernandez
returned to the region on December 29 to break ground at
Punta Perla, a USD 1.2 billion marina and golf resort aimed
at the European market. Prince Albert of Monaco, one of the
project's investors, also wielded a shovel at the
groundbreaking.

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Rapid growth with no central planning
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10. Punta Cana-Bavaro has grown into the country's primary
tourist haven with expansion occurring primarily over the
past decade, as U.S., Canadian and European tour operators
and hotels have turned it into one of the Caribbean's top
all-inclusive destinations. But the growth has been
haphazard and insular. Lacking zoning or regularly enforced
local ordinances, Punta Cana's more than 40 hotels have
sprouted up without adequate public services. Furthermore,
the 30,000 hotel rooms in the region are almost entirely
located in all-inclusive resorts from which guests rarely
stray so there has been little impetus for infrastructure
development. The difference in organization between Bavaro,
north of the airport and home to the highest concentration of

all-inclusive hotels, and Punta Cana, south of the airport
and developed by Club Med, Puntacana Resort and Club and Cap
Cana, is striking. Whereas Punta Cana is orderly and has
well-paved roadways with good lighting and signage, roads in
Bavaro are confusing, cluttered, slow and bumpy. The hotels
in Punta Cana have invested in the local infrastructure
themselves rather than depending on the government which has
not given priority to infrastructure development, even in the
tourist areas.


11. The Bavaro-Punta Cana Tourism Cluster has developed an
Ordinance Plan to address this issue. The more recent influx
of second home owners and retirees, as well as the growing
community of local tourism workers, has led to more support
for this plan. A few years ago, Bavaro became its own
municipality, splitting off from Higuey, a sugar cane and
cattle ranching center about 60 kilometers inland.
Fundamental to this plan is the completion of the Tourist
Boulevard, a wide road from Punta Cana to Macao. Parts of
the boulevard are already complete and will vastly shorten
the distance between the locales along the shore. But the
most pressing component of the plan is water management;
dropping water tables indicate that current usage is
unsustainable. Sanchez, the tourism cluster's director, told
EconOff that if this situation is not addressed, Punta Cana's
popularity could wane, as happened in Puerto Plata and
Acapulco. The cluster is seeking GoDR assistance to
construct a wastewater management facility as well as an
aqueduct to bring water from inland areas where there is less
demand. Sanchez said that the municipality and private
sector support the plan but the project is only feasible with
government financing.


12. According to Sanchez, the cluster aims to become the
voice of sustainable tourism for the region, addressing
public goods such as destination marketing, park oversight
and solid waste and water management. He noted that some of
these areas can become revenue generators for the cluster.
For example, if the cluster manages to build the water
management facility, it will be able to charge users.
Likewise, park management generates revenue and the cluster
intends to charge users for solid waste pickups as well as to
generate electricity from the organic garbage. One of the
backers of the nationwide cluster program is USAID's
Dominican Sustainable Tourism Alliance (DSTA).


13. Sanchez and hotel association president Ernesto Veloz
both told Econoff that they detect a different attitude from
new Tourism Minister Francisco Javier Garcia, who replaced
Felix Jimenez in August. Veloz commented that while Jimenez
ignored the region's infrastructure needs to concentrate
state investments in areas where he had a personal stake,
Javier seems like a more professional official and has
expressed interest in Bavaro's needs.
FANNIN