VZCZCXYZ0000
RR RUEHWEB

DE RUEHDG #1610/01 2912016
ZNR UUUUU ZZH
R 172016Z OCT 08
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC 1588
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC 1756
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SANTO DOMINGO 001610 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV DR
SUBJECT: DOMINICAN ECONOMY VULNERABLE TO GLOBAL CRISIS 
 
REF: SANTO DOMINGO 1608 
 
¶1. (SBU) Summary: The global financial crisis has not yet had 
a serious impact in the Dominican Republic where the banking 
system appears to be in relatively good shape as a result of 
stronger regulatory measures put into place after the 2003 
banking crisis.  However, the private sector is publicly 
expressing concern over the potential economic impact in the 
DR of a prolonged slow down in the U.S. economy, especially 
in the areas of tourism and foreign direct investment, and 
has called on the government to prepare a strategy to address 
the problem.  In addition, the private sector has been 
increasingly critical of the government,s deficit spending 
and has called on the Fernandez administration to reign in 
government expenditures, including the electricity subsidy 
which could total as much as USD 1.2 billion this year.  So 
far, the Dominican government has been unusually quiet, 
making few statements on the ongoing global economic crisis, 
despite recent dire warnings from the IMF and UN that 
developing economies such as the DR could suffer the most. 
End Summary. 
 
Government Response 
 
¶2. (SBU) The response of the Dominican government to the 
global financial crisis has been muted despite extensive 
coverage by the Dominican media.  On October 3, President 
Fernandez spoke at a conference in Miami and acknowledged 
that the financial crisis could limit the amount of credit 
available to the country; however, he has not made any other 
public comments on the ongoing crisis.  Fernandez,s main 
priority at the moment is his proposed constitutional reform 
package (reftel) which is being considered by the Congress. 
The rest of his economic team has also been relatively quiet, 
thus giving the impression that they are unengaged.  The 
government initially planned to send only a low-level 
delegation to the annual IMF and World Bank meetings in 
Washington with Finance Minister Vicente Bengoa only deciding 
to attend at the very last minute. 
 
¶3. (U) On October 7, the Minister of Economy, Development and 
Planning Temistocles Montas held a videoconference for 
government officials with the United Nations Conference on 
Trade and Development (UNCTAD) to discuss the global crisis 
and the potential effects on the DR.  UNCTAD was very clear 
in its warning that the economic impact for the DR could be 
severe given the DR,s dependence on the U.S. economy and 
this message was widely covered in the press.  The IMF also 
warned that the Dominican economy is at risk and placed the 
DR in a category of countries most vulnerable in face of the 
global economic crisis.  In response, Finance Minister Bengoa 
told the media the IMF needs to intervene in the U.S. economy 
which &has more problems than the Dominican economy.8 
 
¶4. (U) As a result of the external oil and food price shocks 
this year and increased spending in the lead up to the May 
2008 Presidential election, the Dominican government,s 
fiscal deficit has grown.  The private sector has repeatedly 
called on the government to cut spending, especially 
subsidies.  The subsidy for the electricity sector is 
expected to be as much as USD 1.2 billion this year.  The 
government response so far has been to maintain a restrictive 
monetary policy to keep interest rates high, to try to curb 
inflation and maintain a stable exchange rate.  The Finance 
Minister announced on October 15 that government tax revenues 
were projected to fall this year, in part due to reduced 
consumer spending and the temporary closing of the 
Falconbridge mine as a result of low nickel prices in the 
world market.  He described September as one of the worst 
months ever for the government fiscal situation. 
 
Financial system is sound 
 
¶5. (SBU) Manuel Grullon, President of Banco Popular, the 
largest bank in the country, told Econoff that he believes 
the Dominican banking system is pretty strong.  He added that 
as a consequence of the 2003 financial crisis, banks were 
required to increase capital and reserves and these measures 
are still in place.  Grullon emphasized that the prudential 
regulations put into place after the 2003 crisis strengthened 
the banks balance sheets and also put into place stricter 
requirements for commercial loans.   His one concern was a 
measure which put a 10 percent limit on capital investments 
by Dominican banks in other financial institutions, including 
government treasuries.  Grullon said the bank was considering 
asking the banking regulators to modify this requirement in 
light of the current global crisis since in his view U.S. 
Treasury bills are the safest place to put money at the 
moment. 
¶6. (SBU) Grullon noted that as a result of stricter 
commercial loan requirements, banks shifted their focus to 
consumer and mortgage loans which are now facing pressure 
from higher interest rates.  He added that it is important to 
make a distinction between commercial banks, which faced 
increased regulation after the crisis, and savings and loans 
which were only addressed more recently.  Grullon said the 
savings and loans have a much larger share of mortgage credit 
in the domestic market (30-60 percent of their portfolios) 
than the commercial banks (10-15 percent of their portfolios) 
and therefore the savings and loans are more sensitive to 
interest rates increases.  He commented that Banco Popular is 
trying not to raise mortgage rates too much compared to other 
loans since the bank would lose more if the number of 
mortgage defaults increased.  Grullon pointed to auto loans 
where rates have increased 10 points in four months (from 15 
to 25 percent) and business has dropped significantly. 
Grullon was critical of the Central Banks,s restrictive 
monetary policy which has led to &a home grown credit 
crunch8 in the local market.  He said his most important 
concern is that there is no erosion of confidence in the 
Dominican financial system. 
 
Citibank concerned about economic impact 
 
¶7. (SBU) Max Vidal, General Manager of Citibank, told Econoff 
that he believes the economic impact of the global crisis 
will start to be felt in the DR at the beginning of 2009.  He 
noted that a tightened global credit market will make it 
difficult for investors to fund large projects and they may 
face delays or much higher costs.  Vidal said he has already 
seen a couple of projects delayed and expects the number to 
increase, especially in the areas of infrastructure projects 
and tourism development.  Vidal also commented that he 
believes the local financial system is fairly strong. 
However, he noted that Wachovia is a key foreign 
correspondent bank in the DR and an important source of 
short-term capital for trade.  Therefore, he said the future 
of Wachovia is important to the DR economy.  (Note: This 
conversation took place before Citibank withdrew its offer to 
purchase Wachovia.  In a separate conversation also before 
Citibank,s withdrawal, Jose Obregon, Vice President of the 
Wachovia Representation Office in the DR, told econoff that 
if Wells Fargo purchases the bank he is hopeful that Wachovia 
will remain in the market with little change. End Note.) 
 
¶8. (SBU) Vidal commented that there is a public perception 
that the government is not reacting to the global crisis and 
therefore not taking it seriously.  He warned that the 
government needs to address its fiscal deficit before the 
economic impact of the U.S. slowdown is felt.  Vidal noted 
the ongoing payment crisis in the electricity sector (septel) 
and emphasized the need for the government to find the 
political will to address the problem which affects all areas 
of the economy.  He added that it will be more difficult for 
the government to find financing for this growing subsidy 
which is a huge drain on government resources.  Vidal said he 
expects interest rates to stay high but not to increase much 
more as a result of the government,s efforts to curb 
inflation and maintain exchange rate stability. 
 
Comment 
 
¶9. (SBU) More than halfway through his first 100 days in 
office President Fernandez has shown no intention of taking 
advantage of his new term to address pressing fiscal problems 
such as the large subsidies weighing down the government 
budget.  Instead he appears to be focusing on seeking new 
investment from countries such as Qatar and getting his 
constitutional reform package passed by Congress.  This lack 
of leadership is of great concern to a private sector that is 
already feeling some effects of the global crisis and are 
greatly concerned about the potential impact in the DR.  Most 
people believe it is only a question of time before the 
global crisis hits the local market and they fear the 
government will not have done anything to prepare the country 
for the outcome.  The question is whether Fernandez will take 
decisive action or continue to act out of the fear he has 
expressed to us in the past of "political instability" 
resulting from economic reforms. End Comment. 
 
 
 
FANNIN