US embassy cable - 03SANTODOMINGO5564

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 005564 
 
SIPDIS 
 
DEPARTMENT FOR WHA/CAR/GILROY AND EB FOR A/S WAYNE 
TREASURY FOR OASIA/NANCY LEE; 
NSC FOR TOM SHANNON 
 
E.O. 12958: DECL: 10/08/2013 
TAGS: ECON, EFIN, EINV, ENRG, DR 
SUBJECT: DOMINICAN PRESIDENT AND TOP ECONOMIC TEAM WORRIED 
ABOUT IFI DELAYS 
 
REF: SANTO DOMINGO 5391 
 
Classified By: CHARGE LISA J. KUBISKE; REASON 1.5 (B AND D). 
 
 1.  (C) SUMMARY: DURING AN OCTOBER 8 MEETING AT THE NATIONAL 
PALACE, PRESIDENT MEJIA TOLD THE AMBASSADOR THAT HE IS 
CONCERNED ABOUT DELAYS IN DISBURSEMENT UNDER THE GODR'S 
STANDBY AGREEMENT WITH THE INTERNATIONAL MONETARY FUND (IMF), 
DELAYS IN DISBURSEMENT OF A $1OO MILLION INTER-AMERICAN 
DEVELOPMENT BANK (IDB) SOCIAL DEVELOPMENT LOAN, AND APPROVAL 
OF WORLD BANK ELECTRICITY SECTOR LOANS.  THE ECONOMIC TEAM IS 
WORRIED THAT UNCERTAINTY OVER RELEASE OF IFI FUNDS IS 
EXACERBATING THE COUNTRY'S FINANCIAL DIFFICULTIES AND SENDING 
THE ECONOMY TOWARD COLLAPSE.  THE PRESIDENT OUTLINED GODR 
ARGUMENTS FOR THE GODR BUYBACK OF ELECTRICITY DISTRIBUTION 
COMPANIES.  HE PROVIDED A COPY OF A LETTER THE GODR HAD SENT 
TO THE IMF OCTOBER 7 AGREEING TO A KEY IMF REQUIREMENT THAT 
AN INDEPENDENT COMMISSION BE CREATED TO REVIEW THE GODR'S 
RECENT AGREEMENT WITH UNION FENOSA, THE SPANISH COMPANY 
BOUGHT OUT.  IN SUBSEQUENT SEPARATE MEETINGS, THE THREE 
CABINET OFFICIALS MOST DIRECTLY INVOLVED IN THE IMF AGREEMENT 
EACH TOLD CHARGE' THAT THE GODR WAS ON TRACK WITH (OR AHEAD 
OF) ALL OF THE IMF CONDITIONS FOR RELEASE OF THE SECOND 
TRANCHE OTHER THAN THE CRITERIA RELATED TO ADDITIONAL 
SOVEREIGN DEBT (THAT RESULTED FROM REPURCHASING THE 
ELECTRICITY DISTRIBUTION COMPANIES), AND A REQUIREMENT TO 
IDENTIFY A SOURCE OF REVENUE IF THE GODR CHOOSES TO OFFSET 
ELECTRICITY TARIFF INCREASES.  THEY EACH CONFIRMED THE GODR 
REMAINED FULLY COMMITTED TO THE AGREEMENT AND TO FREE 
TRADE/OPEN ECONOMIC POLICY.  END SUMMARY. 
 
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PRESIDENT MEJIA AGITATED 
------------------------ 
 
2.  (C) AMBASSADOR AND EMBOFFS MET WITH PRESIDENT MEJIA 
SHORTLY BEFORE THE AMBASSADOR DEPARTED POST FOR MEETINGS IN 
WASHINGTON.  A VERY AGITATED PRESIDENT SAID THAT HE WAS 
CONCERNED ABOUT THE IMPACT FURTHER DELAYS IN RELEASE OF THE 
SECOND IMF TRANCHE WOULD HAVE ON THE FRAGILE ECONOMIC 
CONDITIONS IN THE DOMINICAN REPUBLIC.  HE ACKNOWLEDGED THAT 
THE GOVERNMENT'S REPURCHASE OF SPANISH INTERESTS IN TWO OF 
THE COUNTRY'S THREE ELECTRICITY DISTRIBUTION COMPANIES HAD 
PRECIPITATED THE DELAY WHILE THE IMF REVIEWED THE IMPACT ON 
GODR FISCAL COMMITMENTS UNDER THE IMF STANDBY ACCORD SIGNED 
IN AUGUST (REFTEL).  MEJIA SAID THAT THE GODR HAD IMPLEMENTED 
TIGHT FISCAL DISCIPLINE, BUT DID NOT HAVE OTHER OPTIONS FOR 
RESOLVING LONG-STANDING PROBLEMS WITH THE SCANDALOUS SPANISH 
COMPANY UNION FENOSA AND HAD TO REPURCHASE THE SPANISH SHARES 
OR RISK COMPLETE BANKRUPTCY OF THE SECTOR.  MEJIA EXPANDED ON 
EARLIER REPORTS THAT THE COMPANY HAD ENGAGED IN BUSINESS 
PRACTICES THAT "ROBBED" THE GOVERNMENT.  HE ALLEGED THAT 
UNION FENOSA HAD EMPLOYED CRIMINALS, INCLUDING U.S. 
DEPORTEES, AND THAT THESE "BANDITS" WERE ORGANIZED AND HAD 
DELIBERATELY PROVOKED RECENT ELECTRICITY RIOTS.  HE DESCRIBED 
THE INITIAL PRIVATIZATION OF THE DISTRIBUTION COMPANIES AS A 
COMPLETE FAILURE. 
 
3.  (C) MEJIA EMPHASIZED THE NEED FOR QUICK DISBURSEMENT OF A 
$100 MILLION IDB LOAN FOR SOCIAL DEVELOPMENT THAT HAD BEEN 
PUT ON HOLD PENDING IMF REVIEW OF THE UNION FENOSA DEAL.  THE 
PRESIDENT POINTED OUT THAT THERE WERE 350 PROJECTS -- SUCH AS 
SCHOOLS, WATER SYSTEMS AND HOUSING -- IN POOR AREAS WHOSE 
COMPLETION WAS "PARALYZED" DUE TO LACK OF FUNDS.  HE 
PRESENTED A LETTER THAT THE GODR HAD JUST SENT TO THE IMF 
AGREEING TO AN INDEPENDENT COMMISSION TO REVIEW THE 
GOVERNMENT'S PURCHASE OF UNION FENOSA AND EXPRESSED HOPE THAT 
THE LETTER SHOULD MEET THE CONDITIONS FOR RELEASE OF THE 
SOCIAL DEVELOPMENT LOAN. 
 
4.  (C) THE PRESIDENT ALSO RAILED AGAINST THE DOMINICAN 
BUSINESS SECTOR THAT HAD "PAID CONGRESS" TO REJECT THE 
RECENTLY-IMPOSED FIVE-PERCENT EXPORT TAX.  HE SAID THE 
COUNTRY DESPERATELY NEEDED ADDITIONAL REVENUE TO MEET IMF 
FISCAL TARGETS.  HE POINTED OUT THAT THE TAX HAD TARGETED 
SECTORS THAT HAD BENEFITED ROYALLY FROM PESO DEVALUATION AND 
QUESTIONED THE PATRIOTISM OF COMPANIES THAT OPPOSED THE 
MEASURE.  HE SAID THE GODR WOULD BE FORCED TO LOOK FOR OTHER 
MEASURES. 
 
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ECONOMIC CABINET CONFIRMS COMMITMENT TO IFI PROGRAM AND POLICY 
----------------------------------------- 
 
 
5. (C) IN SUBSEQUENT SEPARATE MEETINGS, TECHNICAL SECRETARY 
CARLOS DESPRADEL, FINANCE SECRETARY RAFAEL CALDERON, AND 
CENTRAL BANK GOVERNOR JOSE LOIS MALKUN EACH AFFIRMED TO 
CHARGE AND ECONOFF THAT THE GODR WAS ON TRACK WITH (OR AHEAD 
OF) ALL OF THE IMF CONDITIONS FOR RELEASE OF THE SECOND 
TRANCHE OTHER THAN THE CRITERIA RELATED TO ADDITIONAL 
SOVEREIGN DEBT (THAT RESULTED FROM REPURCHASING THE 
ELECTRICITY DISTRIBUTION COMPANIES), AND A REQUIREMENT TO 
IDENTIFY A SOURCE OF REVENUE IF THE GODR CHOOSES TO OFFSET 
ELECTRICITY TARIFF INCREASES.  THEY SAID THAT THE GODR HAD 
(1) LIBERALIZED THE FOREIGN EXCHANGE MARKET, (2) TAKEN STEPS 
TO STRENGTHEN THE BANKING SECTOR, (3) CUT FISCAL EXPENDITURES 
AND (4) CUT CAPITAL EXPENDITURES.  CENTRAL BANK GOVERNOR 
MALKUN ALSO EXPLAINED THAT THE SUPERINTENDENT OF BANKS WAS 
WORKING WITH THE IMF FOR A TEAM TO CONDUCT AN AUDIT OF THE 
BANKING SECTOR, AS REQUIRED IN THE AGREEMENT.  THEY EACH 
INDEPENDENTLY AFFIRMED THAT THE GODR WAS COMMITTED TO THE IMF 
PROGRAM AND TO FREE TRADE/OPEN ECONOMIC POLICY, UNDER WHICH 
THE DOMINICAN REPUBLIC HAD PROSPERED IN THE LAST DECADE. 
MALKUN WENT SO FAR AS TO SAY THAT THE GODR WOULD COMPLETE THE 
REQUIREMENTS "INDEPENDENT OF THE IMF TAKING FURTHER TIME TO 
REVIEW." 
 
--------------------------------------------- - 
UNION FENOSA: THE MAIN OBSTACLE TO IFI SUPPORT 
--------------------------------------------- - 
 
6.  (C)  WITH REGARD TO THE ELECTRICITY SECTOR, THE ECONOMIC 
TEAM WAS IN AGREEMENT THAT THE GODR HAD TO TAKE STEPS TO 
CORRECT THE SITUATION WITH UNION FENOSA.  MALKUN CONFIDED 
THAT HE HAD ADVISED THE PRESIDENT TO WAIT THE THIRTY DAYS THE 
IMF HAD REQUESTED BEFORE SIGNING THE AGREEMENT, BUT EACH DAY 
THE ELECTRICITY SITUATION WAS GETTING WORSE, AND THE 
PRESIDENT HAD APPARENTLY ALREADY MADE COMMITMENTS THAT HE 
FELT HE HAD TO KEEP.  TECHNICAL SECRETARY DESPRADEL TOLD THE 
CHARGE THAT THE PRESIDENT HAD INTELLIGENCE REPORTS ABOUT 
UNION FENOSA EMPLOYEES PROVOKING RIOTS.  DESPRADEL ALSO 
POINTED OUT THAT AT THE SAME TIME THE IMF WAS ASKING FOR 
THIRTY DAYS TO REVIEW THE AGREEMENT, THE IDB WAS DEMANDING 
REPAYMENT OF ITS LOANS.  HE EXPLAINED THAT THE ONLY WAY THAT 
PAYMENT COULD BE MADE WAS THROUGH AN AGREEMENT WITH UNION 
FENOSA.  ALL OF THE ECONOMIC TEAM MEMBERS NOTED THAT THE IMF 
HAD ORIGINALLY NOT CONSIDERED THAT AS A PARTNER WITH UNION 
FENOSA, THE GODR WAS OBLIGATED FOR HALF OF THE DISTRIBUTION 
COMPANIES' DEBTS ALREADY.  THEY CLAIMED THAT THE GODR DEBT 
OBLIGATION ACTUALLY DECREASED UNDER THE REPURCHASE AGREEMENT, 
SINCE UNION FENOSA RETAINED SOME OBLIGATIONS. 
 
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SOME SECTORS STILL PROSPERING 
----------------------------- 
 
7.  (C) FINANCE SECRETARY RAFAEL CALDERON REVIEWED THE 
COUNTRY'S ECONOMIC PERFORMANCE LEADING UP TO THE CRISIS.  HE 
NOTED THAT THE DOMINICAN REPUBLIC HAD WORKED HARD TO ATTRACT 
FOREIGN -- ESPECIALLY U.S. -- INVESTMENT, AND THAT THE 
DOMINICAN ECONOMY HAD LED THE REGION IN GROWTH FOR MOST OF 
THE PAST DECADE.  DESPITE THE MASSIVE BANK FRAUD AND 
SUBSEQUENT ECONOMIC CRISIS THAT PRECIPITATED THE IMF ACCORD, 
CALDERON POINTED OUT THAT CERTAIN SECTORS OF THE ECONOMY 
REMAINED STRONG.  HE AND DESPRADEL REPORTED THAT TOURISM, 
FREE TRADE ZONE EXPORTS, TRADITIONAL EXPORTS AND REMITTANCES 
FROM ABROAD WERE AT RECORD LEVELS, AFTER RECOVERING FROM 
DIFFICULT YEARS FROM 2000-2002, (WHICH HAD BEEN DIFFICULT 
PRIMARILY DUE TO THE SLOWDOWN IN THE UNITED STATES' ECONOMY). 
 
 
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THE ROAD AHEAD 
-------------- 
 
8.  (C) ALL OF THE INTERLOCUTORS STRESSED THE NEGATIVE IMPACT 
THAT THE CURRENT UNCERTAINTY WAS HAVING ON MACRO-ECONOMIC 
STABILITY.  CENTRAL BANK GOVERNOR MALKUN SAID THAT 
BUSINESSMEN HAVE BEEN HOUNDING HIM TO MAKE A REASSURING 
STATEMENT TO THE PRESS TO HELP STEM CAPITAL FLIGHT AND A 
FALLING EXCHANGE RATE.  THE ECONOMIC CABINET SAID IT WAS 
READY WITH THE INFORMATION NEEDED FOR THE IMF TALKS NEXT WEEK 
IN SANTO DOMINGO.  WHAT THEY NEED MOST TO AVOID ECONOMIC 
COLLAPSE, THEY SAID, IS THE SPEEDY RESTORATION OF THE 
ANTICIPATED IFI FUNDING.  THE GODR HAD INCLUDED THE IMF, IDB 
AND WORLD BANK DISBURSEMENTS IN ITS PROJECTIONS AND CLAIMS IT 
CAN NOT HOPE TO MEET IMF TARGETS WITHOUT IT. 
 
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COMMENT 
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9. (C)  WE AGREE THAT FURTHER DELAY IN IFI DISBURSEMENTS WILL 
EXACERBATE A SALVAGEABLE SITUATION.  IN THAT REGARD, THE 
VISIT OF THE IMF TEAM NEXT WEEK IS GOOD NEWS.  ONE MAJOR 
STUMBLING BLOCK HAS BEEN REMOVED WITH GODR CONCURRENCE 
OCTOBER 7 TO CREATE AN INDEPENDENT COMMISSION OF 
INTERNATIONAL EXPERTS TO REVIEW THE ENERGY SECTOR AGREEMENT. 
AT OUR MEETING, WE FOUND PRESIDENT MEJIA CLEARLY FRUSTRATED 
BY THE LACK OF FUNDS THE GODR HAD COUNTED ON TO GET THEM 
THROUGH THE FALL.  HE WAS ACCORDINGLY SKEPTICAL OF THE 
BENEFITS OF THE IMF AGREEMENT AT THAT MEETING.  IN CONTRAST, 
HIS TOP ECONOMIC TEAM -- THE PEOPLE THE IMF WILL WORK WITH 
NEXT WEEK -- WERE CONVINCING IN THEIR COMMITMENT TO FULL 
IMPLEMENTATION OF THE ACCORD.  THE IMF WILL WANT TO WORK 
THROUGH THE DEBT IMPLICATIONS OF THE UNION FENIOSA DEAL AND 
GET ASSURANCE ON HOW THE GODR WILL MANAGE THE ELECTRICAL 
SECTOR AND MEET ITS REVENUE COMMITMENTS. 
KUBISKE