US embassy cable - 04SANTODOMINGO5437

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 005437 
 
SIPDIS 
 
DEPT FOR S/S, WHA,WHA/CAR, WHA/EPSC 
 
E.O. 12958: DECL: 09/30/2010 
TAGS: PGOV, PREL, EFIN, DR 
SUBJECT: DOMINICAN REPUBLIC SCENESETTER FOR POSSIBLE VIP 
VISIT 
 
 
Classified By: DCM Lisa Kubiske.  Reason: 1.4 (b) and (d). 
 
 1.  Following is a backgrounder for a possible VIP visit to 
the Dominican Republic: 
(U) Background.  The Dominican Republic, just 70 miles from 
Puerto Rico across the treacherous Mona Passage, is a 
heavyweight in the Caribbean, a strong trading partner, and a 
helpful ally in the Caribbean.  The U.S. government has used 
its prestige and resources to assure that elections here are 
conducted fairly and with close international observation. 
We made possible the OAS election observation for the May 
presidential elections with our $225,000 contribution, and we 
spent more than $1 million in USAID funds to support the 
highly effective civil society observations that put 60,000 
trained Dominican observers in the field.  Leonel Fernandez 
knows that we were vital in keeping the May 2004 presidential 
elections honest and thereby in making possible his victory. 
(U) The Returning President.  Leonel Fernandez was president 
during the boom years of 1996-2000, when GDP growth exceeded 
7 percent, thanks to a reorientation to exports just as the 
U.S. economy boomed.  He took office on August 16, 2004 in 
drastically different circumstances -- with 40 percent 
inflation, a weakened currency, widespread electricity 
blackouts, and financial and fiscal disarray, including an 
inoperative IMF standby and a budget deficit for 2004 of more 
than 7 percent of GDP.  He set the tone with a resounding 
inaugural speech promising a new orientation to Dominican 
government, stern enforcement of laws against corruption, 
resolute measures to confront economic crisis, and a new, 
socially conscious and market-friendly approach to 
government.  Fernandez said that the country would pursue 
peace and security through multilateral means, at the UN and 
the Organization of American States. 
(SBU) The inaugural celebration brought a giddy rush of 
confidence in the future.  With this optimism, the peso has 
strengthened nearly 20 percent against the dollar since then, 
and the Central Bank has been able to place its certificates 
for much longer terms at lower rates, suggesting that 
investors believe 40% inflation will evaporate. The 
president,s economic manager, Technical Secretary 
Temistocles Montas and his team have actively consulted with 
the IMF, the U.S. Treasury, the Paris Club and New York 
financial advisors. The new administration has kept up 
payments on sovereign debt and seeks a friendly 
restructuring, stretching out repayment to gain time for 
financial stabilization. 
A New Broom Sweeps 
(SBU) Fernandez appointed to his cabinet a range of 
reasonably qualified, experienced supporters.  Many are in 
the same jobs that they held in his first administration. 
Last time they held office during boom times, when few 
questions were asked.  In the new, grim Dominican reality, 
they will be subjected to closer scrutiny by everyone. 
 (C) Fernandez made excellent choices in appointments in law 
enforcement, especially for Attorney General, Police Chief, 
and head of the Armed Forces.  Last week he responded quickly 
to USG concerns and removed a senior manager in the National 
Intelligence Agency. 
(SBU) Four appointments to high ranked advisory jobs without 
managerial responsibility went to individuals whom the 
previous administration charged with embezzlement but never 
brought to trial.  Fernandez maintains these four were the 
victims of unfounded political persecution. 
Urgent Problems 
(U) This new/old administration is struggling with urgent 
problems.  Chief among them: 
- - (SBU) Getting back to the table with the IMF.  The 
Fernandez team worked hard with cooperation from the outgoing 
administration, to construct a "fiscal reform package," part 
of the effort to get back to negotiations with the IMF. The 
Congress took two months to debate it, water it down, and 
pass it.  Fernandez has announced cuts in government 
expenditures but must do more to repair the budget, likely to 
finish 2004 with a deficit equivalent to more than 7 percent 
of GDP.  IMF technicians visited during the last week of 
September but serious negotiations await convincing Dominican 
actions. 
- - (SBU) Free trade.  Fernandez urges long-term investment 
in education, science, and infrastructure to improve 
competitiveness and strongly endorses the need to get a free 
trade agreement with the U.S. and Central America.  Fiercely 
protectionist sugar interests grafted into his tax reforms a 
25 pct tax on soft drinks and refreshments made with fructose 
-- a measure directly counter to the newly negotiated 
DR-CAFTA free trade agreement and in breach of WTO 
commitments.  The USG has vigorously warned the Dominicans 
that this would be a "deal killer" for free trade. Fernandez 
promulgated the bill as delivered while promising to seek 
repeal of the protectionist measure.  He is systematically 
seeking consensus from concerned sectors on an approach to 
placate sugar while still preserving the prospect of an 
agreement. 
- - (SBU) Convincing the Paris Club.  The Paris Club one-year 
deal struck last March for $189 million in rescheduling was 
contingent on government measures for "comparability of 
treatment" for private sector creditors.  To date the 
government hasn,t identified its approach to "comparable 
treatment," though it has an offer of a syndicated $100 
million loan through Citibank that might be construed to 
fulfill the requirement.  The Paris Club expects an answer in 
early October. 
- - (SBU) Getting to restructuring.  The government owes 
arrears to bilateral creditors, international financial 
institutions and to the private sector.  Fernandez,s team 
says earnestly that they will clear these, as required by the 
IMF and the Paris Club, and they,ve found funds with which 
to avoid catastrophic defaults on sovereign bonds and 
sovereign guarantees, although at times only by a matter of 
hours.  They are seeking lenders to deposit dollars with the 
Central Bank to bolster reserves. 
- - (C) Solving the crisis of energy supply and pricing.  The 
electricity sector is almost completely without capital. 
Fernandez has borrowed USD 50 million from domestic banks, 
enough to pay a small percentage of overdue government debts 
so generators can purchase fuel over the next three months. 
He says he has asked Venezuela,s Hugo Chavez to sell him 
petroleum at a 25 percent discount over six months, with 
15-year terms for financing.  At best, this might be a 
six-month respite; at worst, it could provide a point of 
leverage for Chavez,s regional political agenda (note, 
however, that Fernandez has shown absolutely no sympathy for 
Chavez,s views).  The administration is seeking to limit the 
costly subsidy on cooking gas only to household purchasers. 
The transport sector could strongly oppose this initiative. 
- - (C) Corruption and Banking Fraud.  Fernandez has very 
good people in law enforcement. Our first in-depth 
discussions suggest that the Central Bank aggressively pursue 
cases against bankers who embezzled breath-taking sums 
(equivalent to 20 pct of 2003 GDP) and thereby caused the 
current financial imbalance.  The Attorney General has barred 
the principal accused from leaving the country.  Assistant 
Secretary Noriega and Ambassador Hertell have urged the need 
 
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for effective prosecution and exemplary punishment.  U.S. 
authorities have been working with the Central Bank to help 
this happen. 
Your Presence and Your Message 
(U) The Department and the U.S. Government should acknowledge 
and support Fernandez,s efforts to set things right: 
cooperation during the transition, efforts to renew the IMF 
standby and initiatives for reforming subsidies and the 
electricity sector.  He would respond well to a public 
message of U.S. support. Fernandez is an orthodox thinker, 
studious and reaching out for counsel. 
(C) The Ambassador hopes that the Secretary can further 
underscore the importance of the already negotiated free 
trade agreement, which Fernandez declared on September 30 is 
"important not only for free zone exporters but for the 
economic future of the country."  A positive boost from the 
Secretary will strengthen his hand with Congress and better 
 
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arm him to manage the recalcitrant powerful Dominican sugar. 
(C) Other themes to stress : 
- -  effective economic adjustment is premised on imposing 
austerity quickly and decisively 
- -  corruption undermines democratic institutions, and 
- - the international community expects both executive and 
judicial branches to prosecute and punish those responsible 
for the massive bank frauds that so damaged the country,s 
finances and economy. 
2.  (U) Drafted by Michael Meigs. 
3.  (U) This message and our other series of reporting 
messages can be viewed on on our SIPRNET site 
http://www.state.sgov.gov/p/wha/santodomingo< /a> 
along with extensive other material. 
 
HERTELL