US embassy cable - 04SANTODOMINGO1866

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 001866 
 
SIPDIS 
 
SENSITIVE 
 
DEPT. FOR WHA/CAR/MCISAAC AND EB/IFD/OMA/WONG; 
NSC FOR HCRUZ; 
TREASURY FOR OIASA/LEE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, DR 
SUBJECT: DOMINICAN REPUBLIC MOSTLY ON TRACK TO MEET IMF 
MARCH PERFORMANCE CRITERIA 
 
 
------------------- 
Summary and Comment 
------------------- 
 
1.  (SBU) The GODR will likely meet International Monetary 
Fund fiscal targets for March, but faces difficulty meeting 
the target for reductions in the monetary base, according to 
the IMF's local representative March 19.  IMF Mission's 
recent visit to Santo Domingo was brief and confirmed GODR 
leadership's commitment to the IMF program.  Comment: With 
the help of the IMF program, the economy is showing some 
improvement - a strengthened peso that perhaps reflects some 
boost in confidence, increased solvency in the banking 
sector, and continued good performance of exports and 
tourism.  Pressure on the government to keep within budgetary 
targets will continue to be fierce during this presidential 
campaign season that concludes wither May 16 (assuming a 
first-round victory) or June 30 (if a second round is 
needed).  End summary and comment. 
 
----------------------- 
Fiscal Targets on Track 
----------------------- 
 
2.  (SBU) According to International Monetary Fund (IMF) 
Representative Ousmene Mandeng, the GODR will likely meet its 
March fiscal targets under the revised IMF Standby Agreement 
approved in February.  During a March 19 meeting with 
Econoff, Mandeng said that GODR expenditures are slightly 
below program level, and revenues are better than expected. 
Mandeng cautioned that the recent spike in inflation -- 
cumulatively around 20 percent for the first two months of 
the year -- and "off-budget" expenditures contributed to some 
uncertainty.  He explained that there had been an increase in 
GODR projects financed externally that were not included in 
the budget and said that he was unsure about the impact of 
those projects on the fiscal accounting. 
 
3.  (SBU) Mandeng said that he was in frequent contact with 
the GODR budget director and members of the economic team and 
was reassured by their apparent continuing commitment to the 
program.  He reported that an IMF team met with senior GODR 
officials during the team's March 11-12 visit to the 
Dominican Republic and that the Government was clear about 
its intent to meet the performance criteria. 
 
 
------------------------------- 
Monetary Target Needs More Work 
------------------------------- 
 
4.  (SBU)  Mandeng said the GODR would likely miss "by eight 
or nine billion pesos" the RD67.5 billion target for 
reduction of the monetary base   He suggested that in light 
of solid GODR efforts, missing that target might not be too 
serious of a problem from the Fund's perspective, but would 
be a negative signal for other observers.  Mandeng said if 
GODR did not meet the March performance criteria, the Fund 
would probably not issue any statement until after the next 
review, scheduled for May, potentially leading to negative 
speculation about the GODR's performance. 
 
5.  (SBU) Mandeng suggested steps the GODR could still take 
to meet the monetary target.  First, as an accounting 
measure, the Central Bank could transfer bank reserves to 
long-term CD's.  The Central Bank would also need to raise 
bank legal reserve requirements at the same time.  The 
problem with this proposal, Mandeng noted, is that there is 
asymmetry in bank liquidity and no interbank borrowing 
facilities.  Some banks could meet increased reserve 
requirements, but others would not be able to.  The liquidity 
issue, he said, essentially eliminated this as a policy 
option. 
 
6.  (SBU) An alternative to raising bank legal reserves would 
be for the Central Bank to convince exporters to purchase 
peso certificates, thereby sterilizing their sales of 
dollars.  However, there does not appear to be sufficient 
market for Central Bank certificates, which are 
undersubscribed even at a short-term rate of 59 percent. 
Mandeng also suggested that the government could transfer its 
deposits in government-owned Banco de Reservas to the Central 
Bank and force Banco de Reservas to meet its liquidity needs 
through borrowing, preferably offshore. 
 
---------------------------- 
IDB Loan Will Boost Reserves 
---------------------------- 
7.  (SBU) The Fund representative also noted that the 
Dominican Congress did not pass the programmed $100 million 
IDB financial sector loan until President Mejia personally 
intervened March 18.  (Note: The loan was passed March 20. 
$40 million of the loan proceeds are to be used to increase 
Central Bank Reserves.) 
 
----------------------------------------- 
Banking Sector Audits Show Solvent System 
----------------------------------------- 
 
8.  (SBU) Mandeng reported that the IMF-imposed banking 
sector audits were nearly complete and that the preliminary 
results showed a healthier sector than anticipated.  He said 
there are still some questions concerning quality of assets, 
and that some capital may be "re-circulating," but that the 
system was solvent.  Mandeng noted that as a next step, banks 
are required to submit a business plan to demonstrate how 
they will meet more stringent capital requirements.  Banks 
will initially have to meet a 10 percent capital adequacy 
ratio using local standards, and within three to five years, 
meet a 10 percent capital adequacy ratio in conformance with 
international standards.  Mandeng said the business plans 
would reveal which banks are viable. 
 
 
---------------------------- 
Paris Club - No Good Options 
---------------------------- 
 
9.  (SBU) Looking ahead to April's Paris Club negotiations, 
Mandeng said that the GODR had recently agreed not to make 
further payments to its private sector bondholders as part of 
its commitment to comparability of treatment.  Mandeng said 
that Paris Club refinancing presented a dilemma for the GODR 
and questioned whether the Paris Club should require 
comparability of treatment.  He explained that the GODR might 
not have sufficient time following negotiations to complete 
an orderly restructuring of its bonds before the April 27 
bond payment is due and therefore would be forced to default. 
 He said that the relatively small benefit of $80 to $100 
million in private sector cash flow (out of a total of $300 
million benefit from refinancing) was not very practical in 
terms of cost, especially if the GODR were forced to default. 
 However, Mandeng did not offer an alternative source for the 
funds. 
 
HERTELL