US embassy cable - 05SANTODOMINGO4210

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004210 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: DR, ECON, EFIN 
SUBJECT: DOMINICAN PROJECTS CONSIDERED BY EXIM 
 
1. (SBU) SUMMARY:  Just less than one year after their last 
visit, Export Import Bank (ExIm) Senior Vice Presidents 
Jeffrey Miller and John McAdams traveled to Santo Domingo to 
review debt collection and new projects.  Prepared for 
positive news by optimistic economic reporting in the 
international press, ExIm was not surprised by reports by the 
Dominicans that the economy is well and reform is on track. 
Despite this, ExIm ended the visit only guardedly optimistic, 
interested in a $4.5 million deal for patrol boats for the 
Navy and considering guarantees on a portion of a low-income 
government-housing program.  End summary. 
 
The Economy 
------------ 
 
2. (SBU)  Eleven months after they last came to the Dominican 
Republic, ExIm Sr. Vice Presidents Jeffrey Miller and John 
McAdams visited Santo Domingo July 25-27 to meet with 
government and private sector officials to discuss the status 
of debt and ExIm's prospective projects for the Dominican 
Republic.  Central Bank Governor Valdez Albizu, Finance 
Minister Bengoa and Technical Secretary Montas each quoted a 
list of positive economic statistics, as if reading from the 
same set of notes.  High growth, low inflation and the strong 
peso, goes the reasoning, mean that the climate is good again 
for lending. 
 
3. (SBU) President of Banco Popular Manuel Grullon had a less 
optimistic view, commenting that growth is being driven by 
the telecommunications sector and that the number of 
unemployed today is greater than it was two years ago. (Note: 
in fact, according to Central Bank statistics, at 18.4 
percent, unemployment is higher than at any time since 1993.) 
 Grullon said that only wealthy consumers have maintained 
their purchasing power, construction and real estate are 
flat, and free trade zones are still contracting.  He 
suggested that government growth figures (released last week 
at 5.8 percent for the second quarter) are overstated. 
 
4. (SBU) Grullon said that many sound businesses have 
suffered due to currency fluctuations over the past two 
years.  Many good companies are consequently low-graded for 
loans and banks are therefore required to maintain 
unreasonably high reserve requirements (up to 50 percent) 
when loaning them money.  Miller suggested that a possible 
fix would involve Dominican banks establishing a relationship 
with a correspondent bank in the United States with backing 
by ExIm guarantees.  Grullon said that Banco Popular would be 
interested in pursuing this strategy. 
 
Unexpected Arrears 
------------------- 
 
5. (SBU) Bengoa and Valdez Albizu indicated that the country 
has resolved its debt problems and they were surprised when 
McAdams informed them that as of June 30 the government is $9 
million in arrears to ExIm.  Neither the Finance Ministry nor 
the Central Bank seemed aware of the amount outstanding prior 
to the meeting with ExIm.  Following some discussion, it 
appeared that the $9 million figure represents a 2005 
installment of rescheduled debt that the Dominican Republic 
hopes will be rescheduled during September meetings with the 
Paris Club.  Miller and McAdams made it clear to both Bengoa 
and Valdez Albizu, and later the president, that ExIm would 
be unable to enter into any new agreements as long as the 
Dominicans remained in arrears. 
 
New Projects 
------------ 
 
6. (SBU) President Fernandez prioritized potential ExIm 
guaranteed loan projects.  He said that a National Police 
project ($85 million), Public Employee Housing ($88 million), 
Electoral Equipment ($63 million) and a modified, cheaper 
transportation system for Santo Domingo (one year ago being 
planned as a costly subterranean metro) are tops on the list. 
 
 
7. (SBU)  The National Police project includes provision of a 
$24 million digital radio system, for which the Embassy 
understood the Dominicans to have already chosen Motorola. 
However, Finance Minister Bengoa told ExIm that the entire 
project had been returned to his office by Legal Counsel to 
The Presidency Cesar Pina Toribio with instructions that it 
be put out for public bid. Pina Toribio confirmed this at a 
later meeting. 
 
8. (SBU) ExIm said it will go forward with guarantees for a 
$4.5 million loan for the Dominicans to purchase four 
fourteen-meter fast patrol boats from Louisiana manufacturer 
Swift Ships, which built them for a Venezuelan deal that fell 
through.  The Ambassador and DCM expressed concern over past 
experiences with Dominican purchases from the same company of 
craft where the Dominicans failed to follow up with proper 
training of sailors and maintenance of ships, resulting in 
damaged, sometimes unserviceable  equipment.   ExIm told the 
President it would also consider a project to provide 
low-income public housing, but only after the contracting 
firm breaks it down into smaller, less costly parts.  The 
project is expected to be spread over three years. 
 
Structural Reforms 
-------------------- 
 
9. (U) Technical Secretary Montas said that the IMF 
obligation receiving the most attention is structural reform, 
specifically, centralization of budget planning, a process 
now in the hands of the Technical Secretary.  A long-term 
characteristic of Dominican government has been that the 
President has discretionary power to spend budget surplus 
funds.  IMF has argued that use by the President of surplus 
funds should be restricted.  A bill intended to limit the 
President,s discretionary spending ability will be sent to 
Congress in September.  Montas said that the bill will create 
a new ministry responsible for budget planning and will also 
define broader budgetary strategies. 
 
Baninter-related obligations 
----------------------------- 
 
10. (SBU)  ExIm seeks repayment for two loans (about $10 
million total) for which it had received secondary guarantees 
from Baninter, the largest of three banks to fail in the 2003 
crisis.  McAdams told the Central Bank Governor that he had 
understood that the Government would stand behind Baninter 
correspondent banking relationships, and cited examples where 
it had paid Baninter debts to European banks.  He said he was 
surprised that it was not honoring similar responsibilities 
to ExIm.  Valdez Albizu responded that the Central Bank 
"wants to honor past government promises," then added, "but 
you deserve the truth.  There is no legal obligation of the 
state (to pay), only a moral one."  Valdez Albizu said that 
the only way to meet the obligations was by selling assets, a 
limitation placed on the Dominicans by the IMF.  Valdez 
Albizu stressed that the Dominicans need to keep doors open 
to foreign development financing; he understood that if the 
government does not pay, it cannot expect to receive new 
loans in the future.  He asked for understanding that he has 
been involved in "a very difficult bank salvage operation" 
(Baninter) and that he is "surrounded by cannibals wanting my 
head." 
 
11. (SBU) President Fernandez was somewhat more thoughtful 
when addressing the Baninter debt to ExIm.  Looking at the 
two loans separately, he said that in one case the borrower, 
as a still economically sound individual, should be held 
responsible, and in the other the Government should make good 
on Baninter,s obligation. 
 
12. (SBU)  ExIm suggested that it recoup its position by 
identifying and re-claiming equipment bought with the 
ExIm-backed money for these projects.  Valdez Albizu said 
that if they proceeded that way, the proceeds would have to 
be shared with the Central Bank, which had also suffered. 
ExIm found this not very satisfactory, given that the Central 
Bank has unconditionally honored Baninter's debt to some 
European banks.  Valdez Albizu noted that the difference was 
that the European banks had secured loans, and insisted that 
it was the IMF requirement that was preventing the Central 
Bank from honoring its ExIm obligations.  It was agreed that 
ExIm would provide the Central Bank with a detailed list of 
items financed under the Baninter guarantee.   ExIm stressed 
that it would condition new projects on fair treatment with 
regard to Baninter, as it did with regard to arrears. 
 
Inefficient Loan Approval Process 
----------------------------------- 
 
13. (SBU)  In a meeting with Presidential Legal Advisor Pina 
Toribio, Miller expressed ExIm's frustration with two 
projects it had agreed to back, earlier approved by the 
Dominican Congress and then subsequently returned to Congress 
by the Technical Advisor for new approval after ExIm signed 
on.  Pina Toribio said the problem was that companies had 
submitted projects to Congress before ExIm was included in 
the proposals.  Not until approval from Congress had been 
secured did ExIm sign on as guarantor and only then was it 
specified in the proposal.  The proposal as modified to 
include ExIm had to be returned to Congress for final review. 
 
 
14. (SBU)  This is an ongoing problem, Pina Toribio 
explained, and there is no alternative to the time-consuming 
procedure unless ExIm is included in the original project 
proposal submitted to Congress.  Miller said that the glitch 
keeps the system from working efficiently and vowed to work 
with the Technical Secretary to resolve the problem, possibly 
by having ExIm included provisionally by companies in the 
draft project proposal. 
 
Multiuso Sports Facilities 
-------------------------- 
 
15. (SBU)  An ExIm-guaranteed project initiated under the 
Mejia administration to build 115 sports/community centers 
dubbed "multiusos" was never completed and is now under 
investigation.  The ExIm guarantee is for $54 million, and 
the Dominican Secretary of Sports indicates that much of the 
project is incomplete, equipment is missing and he is having 
a difficult time documenting what work has been done and what 
should be paid for. 
 
16. (SBU)  The Dominican Attorney General recently appointed 
an investigator to assess the status of the multiuso project 
and to look for illegal activity.  The first payment for the 
loan was due in late July.  When asked whether the Dominican 
government would repay in light of the problems that have 
surfaced, Central Bank Governor Valdez Albizu responded that 
the Central Bank would pay when it received instruction from 
the Finance Ministry to do so.  Given the ongoing 
investigation, however, the order to pay might not happen any 
time soon.  (Note: The Secretary of Sports told economic 
officer on August 7 that his ministry needs more time to sort 
out the status of the project before it can move forward on 
approving payments). 
17. (SBU) Comment:  The message ExIm took away from the visit 
was reflected in its decision to proceed with caution on new 
commitments.  Arriving in Santo Domingo with a portfolio of 
potential new projects amounting to more than $800 million, 
Miller and McAdams left with a commitment to the $4.5 million 
patrol boat project and plans to consider supporting other 
projects worth less than $200 million broken down into 
segments spread over several years and contingent upon 
arrears being resolved. 
18. (U)  This cable was cleared by Eximbank. 
HERTELL