US embassy cable - 03SANTODOMINGO7134

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 007134 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR WHA/CAR AND EB/IFD; PLEASE PASS TO USTR 
SCRONIN AND AID/LAC. TREASURY FOR OASIA/RTOLOUI; NSC FOR 
HCRUZ; COMMERCE FOR VDEES. 
 
E.O. 12958: DECL: 12/05/2005 
TAGS: EFIN, ECON, ECIN, DR 
SUBJECT: DOMINICAN PESO STEADY ONE WEEK AFTER PRESIDENT 
TAKES STEPS TO KEEP EXCHANGE HOUSES IN LINE 
 
REF: SANTO DOMINGO 6999 
 
Classified By: EcoPol Counselor Michael Meigs.  Reason: 1.5(b) and (d). 
 
 1.  (SBU) Summary: The Dominican Peso (RD) continues to hold 
steady against the dollar one week after President Mejia 
talked it down while appointing a commission headed by 
military and police to counter alleged irregularities in 
trading(reftel).  Foreign exchange houses and banks were 
buying dollars for between RD37.50 and RD38.60 in light 
trading December 8, and the spread between "buy" and "sell" 
had narrowed from 300-400 basis points prior to the 
President's action to between 30 and 200 basis points. 
Although companies report that dollars are readily available, 
there still seems to be uncertainty in the market.  The IMF 
has expressed concern over the latest steps by the GODR.  End 
summary. 
 
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President Hanging Tough 
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2.  (SBU) Weekend press reported that Mejia has given 
exchange houses five days to account for all of their 
currency trades over the past 11 months.  Mejia also 
reiterated over the weekend that the peso should be valued at 
RD30 per dollar.   The GODR is reportedly establishing 
communication links between the tax authorities and Customs 
to strengthen control of foreign exchange and to stem tax 
evasion.  Embassy has not seen or heard any evidence, 
however, of military or police or other GODR authorities 
interfering or intimidating people exchanging money. 
 
 
3. (C) Armed Forces Secretary LTG Soto Jimenez told DCM and 
DATT on December 8 that military involvement in the 
President's campaign was limited to intelligence efforts to 
identify unlicensed exchange houses and irregular currency 
exchange practices, plus some technical involvement in 
auditing firms.  He says that tomorrow's press will carry a 
list of all firms authorized to deal in foreign exchange for 
the public. 
 
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Banks Remain Calm 
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4.  (SBU) Officials from two major Dominican banks and others 
from the only two foreign banks operating here remain 
seemingly unconcerned about what many have described as 
heavy-handed tactics by Mejia. Each affirmed that his bank 
does not take positions in dollars except to cover capital 
requirements and immediate financing needs, so they are 
relatively indifferent to the actual peso/dollar exchange 
rate.  Bankers who attended last week's meeting with the 
President told similar stories.  They said that there is 
somehow a perception that the dollar should be trading for 
around RD30, and exchange traders in the meeting told the 
President this was an achievable goal.  One banker theorized 
that there had been hoarding of dollars, but following the 
President's appointment of a commission, people are again 
selling dollars for fear the peso may actually continue to 
appreciate. 
 
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The IMF Still Concerned 
------------------------- 
 
5.  (SBU)  The IMF team currently in country negotiating a 
new standby agreement has achieved some progress on issues 
such as tightening monetary policy and narrowing the fiscal 
deficit. The IMF resrep said that Mejia's repeated 
pronouncements that the peso should trade at RD30 appeared to 
be in violation of the general obligations of IMF members 
(Article VII of the IMF Articles of Agreement).  He commented 
that this might delay an agreement. 
 
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Comment 
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6.  (SBU) There are several possible reasons for the peso's 
recent appreciation: First, Mejia's effort came concurrent 
with the seasonal influx of dollars from holiday remittances 
and the high tourism season. Second, some are dumping dollars 
out of concern that the rate could be forced lower.  However, 
the depreciation over the past year was largely attributable 
to dramatic increase in the money supply and a decrease in 
confidence.  Those underlying causes remain.  Central Bank 
certificates continue to turn over at high interest rates, 
and few interlocutors believe the GODR can force the exchange 
rate down for very long.  Moreover, if the GODR fails to 
reach agreement with the Fund or fails to meet its pending 
financial obligations, the peso strengthening of the past 
week could reverse rapidly. 
 
KUBISKE