US embassy cable - 04SANTODOMINGO5154

C O N F I D E N T I A L SECTION 01 OF 04 SANTO DOMINGO 005154 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA; DEPT PASS 
EXIMBANK; NSC FOR SHANNON AND MADISON 
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY FOR 
OASIA-LAMONICA 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: DECL: 09/15/2014 
TAGS: PGOV, EFIN, DR 
SUBJECT: DOMINICAN PRESIDENT AND ECON TEAM SEEK TO REASSURE 
EXIMBANK 
 
 
Classified By: DCM Lisa Kubiske.  Reason:  1.4 (a) and (d). 
 
1. (U) Summary: During the September 8 visit of EXIMBANK Vice 
President David Miller Dominican President Fernandez and his 
advisors stressed that the country,s economic crisis was one 
of liquidity rather than insolvency.  They indicated their 
commitment to meeting the country's debt obligations and 
added  that much planning is needed to achieve a solution. 
Fernandez said optimistically that he sees three steps to 
solving short term liquidity  problems, so he can get on with 
the development plans from his first   administration.  End 
summary. 
 
2.  (U) EXIMBANK Senior VP for Finance Jeffrey Miller and 
Senior VP for Credit and Risk Assessment John McAdams 
accompanied the Ambassador on September 8 to  call on Finance 
Secretary Vicente Bengoa and Central Bank Governor Hector 
 
SIPDIS 
Valdez Albizu before meeting with President Fernandez.  The 
Ambassador hosted a lunch for Ex-Im officials to meet local 
business leaders. 
 
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Our country is not insolvent 
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3. (SBU) Finance Secretary Vicente Bengoa said that the 
Dominican Republic,s economic crisis does not reflect 
insolvency, but rather signifies that the country is facing a 
liquidity problem.  He said that devaluation of the peso 
caused an adjustment in the current account, traditionally 
running in deficit  and offset by strong foreign investment 
shown in the capital account.   Investment has diminished 
sharply since the crisis began.  Bengoa commented that the 
root of the problem is a shortage of pesos in the country, 
and that  the solution is tax reform designed to raise peso 
revenues. 
 
4.  (SBU) On the topic of its debt troubles, Bengoa said that 
debt ceiling will  be renegotiated with IMF.  He had no 
specifics to offer, indicating that the  new government is 
still in the planning stages on its approach.  He said that 
the GODR would shortly be sending a mission to the IMF, which 
would include  himself, the Central Bank Governor Hector 
Valdez Albizu, and staff of the 
President. 
 
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Priorities and help from private banks 
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5.  (SBU) Central Bank Governor Hector Valdez Albizu said 
without elaboration  that funds that were earmarked for 
service of international debt "were not used  for the stated 
purpose by the previous government." The consequences are 
evident in the current crisis. Valdez Albizu said the 
administration must set  up priorities, the first being to 
normalize streams of payments to creditors.   The Governor 
reiterated Finance Secretary Bengoa,s message that the 
problem was 
one of liquidity rather than one of solvency, and said that 
while tax reform  was part of the answer to the country's 
problems, funds from private investors  could be a more 
immediate source of relief. 
 
6.  (SBU) The solution for avoiding immediate default, Valdez 
Albizu commented, was to turn to private banks.  There were 
local investors willing to offer assistance in the form of 
cash to be deposited in the Central Bank; the Bank has 
already received commitments of USD 125 million.  He sees 
this potential assistance from commercial banks as the best 
hope to resolve the immediate liquidity problem.  These funds 
could meet the "comparability of treatment" 
criteria of the Paris Club, he said, and the only other 
alternative would default.  When asked about prospects for 
default, Valdez Albizu responded that the "Central Bank 
supports the urgency of paying its debts to investors." 
(NOTE: That same day and the following morning local Citibank 
manager Ignacio Jasminoy urgently asked EcoPol counselor 
whether the administration had expressed its intention to 
accept the banks' offer.  He, for one, is waiting for a firm 
signal. Citi would put together a package for up to two years 
at 12 pct per annum.) 
 
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Who is responsible for debt? 
---------------------------- 
 
7.  (U) Both Finance Secretary Bengoa and President Fernndez 
confirmed newspaper reports that effective October 1 the 
responsibility for managing debt payments will be shifted 
from the Central Bank to the Secretary of Finance, where it 
has traditionally remained.  Central Bank Governor Valdez 
Albizu commented shortly that the responsibility was "shared, 
and both the Bank and the Ministry would be responsible for 
paying the debts. 
 
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New bonds and oil but no new debt 
---------------------------------- 
 
8.  (SBU) President Fernandez was alone with the visitors 
throughout their 75-minute discussion with him.  He said that 
his administration would focus on three steps to extricate 
the DR from its tight spot while avoiding taking on 
additional debt.  The first was the assistance mentioned by 
both Bengoa and Valdez Albizu, to come in the form of cash 
from private investors.  Fernandez says he believes that the 
administration should be able to raise USD 500 million in 
relatively short order.  He had met with representatives of 
financial advisors Bear Stearns to discuss a swap of USD 500 
million in ,06 bonds for bonds with a maturity date of 2011. 
 He expects to issue new bonds at the same rate of interest, 
and he argued that bondholders would be willing to accept the 
later maturity date rather than face the country's immediate 
default. 
 
9.  (C) The third step and most significant source of funds 
suggested by Fernndez would come from a proposal already 
been made to the government of Venezuela. Referring to the 
San Jose Pact under which Mexico and Venezuela have been 
selling oil to various Central American and Caribbean nations 
since 1980, he said the administration has proposed that 
Venezuela provide oil at a 25 percent discount off market 
price and finance the remaining 75 percent at favorable terms 
over 15 years.  Fernndez asserted that this would not 
increase Dominican debt, as the equivalent of the financed 
amount would be deposited in the Central Bank to bolster 
reserves and to assist in managing the money supply. 
Fernandez said that the deal will be worth about $750 million 
over six months, or USD 1.5 billion over a year.  The 
Venezuelans have not yet accepted 
the proposal. 
 
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We will pay 
------------ 
 
10.  (SBU) At each meeting, Ex-Im officials stressed the 
importance of clearing arrears of between 9 and 12 million to 
EXIMBANK.  If these amounts are not paid in the next several 
weeks, Ex-Im will shut down all activity in the Dominican 
Republic.  Each Dominican interlocutor strongly asserted that 
the government would pay before the deadline.  President 
Fernandez was adamant that the government "should pay right 
away." 
 
11.  (SBU) Miller raised the topic of five pending projects 
worth $130 million, ready for signature at Ex-Im.  Loans for 
three water projects, improvements for a hospital and funding 
for a gold mine projectwere previously authorized by the 
Dominican Congress, but Mejia administration indicated that 
they planned to cancel the loan requests. The cancellation 
letter was never sent. Neither Bengoa nor Valdez could 
respond, but President Fernandez was familiar with each 
project.  He asked for the water projects go forward but 
decided to cancel the other two as too costly. 
 
----------------------------------- 
Energy and a vision for the future 
----------------------------------- 
 
12.  (SBU) Regarding the energy sector and its capitalization 
problems, Fernandez said his strategy is to assure an 
uninterrupted supply of electricity - - no blackouts - - and 
then to raise electricity tariffs.  His staff had met with 
investors interested in transporting to the Dominican 
Republic two partially completed coal-fired electric plants 
now located in Houston. Each plant has a capacity of 70 
megawatts and can be on line in one year, as opposed to the 
five years to build a plant. (He did not explain how the 
additional capacity would help resolve a cash-flow problem; 
current installed capacity in the Dominican Republic is more 
than adequate to meet current demand.) 
 
13. (SBU) Regarding future projects, President Fernandez 
noted that he wants "to build what is good for the country, 
not just do what businessmen want to do."  He said he plans 
to pursue construction of a light rail system to provide 
reliable transport for the population and to help alleviate 
the worsening traffic problems of the city.  Fernandez 
estimated that the project would cost between USD 250 and 300 
million and would improve the lives of many.  He acknowledged 
that such a project would not likely be self-sustaining and 
the government would have to subsidize riders, but added that 
the country would benefit in fuel savings and benefits such 
as cleaner air. 
 
14.  (SBU) A second project he wants to support is a housing 
plan that would move around fifteen thousand families away 
from the flood-prone banks of the Ozama river on the eastern 
side of Santo Domingo to a government subsidized housing 
development in a safer area.  The vacated river banks could 
be made environmentally sound and the government would 
undertake an urban renewal project bringing hotels, parks and 
tourists to the new attraction.  The estimated cost of the 
project is  USD 70 million. 
 
15.  (C) While Fernandez was clear in his understanding that 
the Dominican economy faces more urgent issues that must be 
dealt with first, he seems dedicated to the idea of taking on 
the types of projects he finds most appealing. 
 
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COMMENT 
- - - - - - - - 
 
15. (C) Although these were certainly cordial contacts, they 
raise some misgivings for us.  Dominican technicians had been 
closeted with the Fund up until September 3 trying to craft 
solutions to the financial impasse, but during this visit 
none of our Dominican interlocutors talked numbers. A 
reasonable explanation is that the man with the real 
responsibility for making these decisions and securing the 
funds wasn't there -- Technical Secretary for the Presidency 
Temistocles Montas.  He, along with chief economist Julio 
Ortega, had been speaking to the Paris Club two days earlier 
and were returning to the Dominican Republic via New York, 
where they were consulting with financial advisors.  Montas 
and Ortega have an appointment to call on Treasury DAS Nancy 
Lee on Thursday, September 16; given their access to 
Fernandez and their expertise, we expect a much clearer 
message. 
KUBISKE