VZCZCXYZ0000
PP RUEHWEB

DE RUEHDG #0050/01 0161443
ZNR UUUUU ZZH
P 161443Z JAN 09
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC PRIORITY 2097
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHLP/AMEMBASSY LA PAZ JAN 0475
RUEHPU/AMEMBASSY PORT AU PRINCE PRIORITY 4916
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY 1776
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SANTO DOMINGO 000050 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USAID FOR LAC/AA 
TREASURY FOR SARA SENICH 
LA PAZ FOR A/DCM 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EAID DR
SUBJECT: DOMINICAN ECONOMY SLOWING DOWN; GODR RUNNING OUT 
OF MONEY 
 
REF: A) 08 STATE 134465 B) 08 STATE 134459 C) 08 
     STATE 134905 D) 08 SANTO DOMINGO 1610 E) 08 
     SANTO DOMINGO 1917 F) 08 SANTO DOMINGO 1974 
 
¶1. (U) Summary: The recent economic slowdown and global 
financial crisis are now showing its affects on the economy 
and finances of the Dominican Republic.  There were a large 
number of layoffs in December in the textile, mining and 
tourism sectors.  Economists predict that the full impact of 
the U.S. slowdown will hit the country in 2009 through 
decreases in remittances, tourism and investment.  The 
International Monetary Fund (IMF) forecasts that Dominican 
GDP will grow 1.8 percent in 2009 compared to an estimated 
4.8 percent in 2008.  The GODR is facing serious challenges 
in funding the 2009 budget and is seeking budget support 
assistance from the Inter-American Development Bank (IDB) and 
the World Bank (WB).  Post does not expect our assistance 
priorities to change as a result of the crisis; in fact, the 
programs supporting rural agriculture and sustainable tourism 
development will be even more important in helping the 
economy to become more diversified and competitive.  End 
Summary. 
 
----------------------------- 
Unemployment up, exports down 
----------------------------- 
 
¶2. (U) December was a rough month for workers in the DR as 
the largest textile apparel company, the largest nickel mine, 
and the largest tourism investment project all announced 
significant layoffs (ref E).  According to the Labor 
Ministry, 120,000 people lost their jobs in the last 24 
months in the formal sector.  However, the formal sector only 
represents 44 percent of the total labor force in the 
country.  The Dominican textile industry has been losing 
competitiveness for some time due to increased competition 
from China and the high cost of doing business in the DR. 
The closure of the Falconbridge nickel mine in August 2008 
was originally supposed to have been only for four months, 
but has now been extended indefinitely as a result of 
decreased world demand for nickel.  While overall the tourism 
sector seems to be holding steady in the current high season 
(due to advanced bookings), the industry is bracing for a 
tough year.  The largest tourism investment project, Cap 
Cana, has suspended all operations pending its ability to 
obtain additional international financing (ref F). 
 
¶3. (U) Exports from the U.S. to the DR increased by about 15 
percent in 2008, to over USD 5.6 billion, while DR exports to 
the U.S. dropped by about 5 percent.  A great deal of 
attention has been given to the overall decrease in exports, 
largely due to textiles, however the CAFTA-DR trade agreement 
has also created new opportunities, with sharp increases in 
exports to the U.S. of nontraditional agricultural products 
and other items such as footwear, cosmetics and dairy 
products.  Overall the commercial and economic relationship 
between the Dominican Republic and the United States was 
strengthened by CAFTA-DR, but the Dominican consumer has not 
seen many tangible benefits from the agreement, mostly due to 
the lack of competition and continued protection of basic 
food items in the Dominican market.  Foreign Direct 
Investment (FDI) from the U.S. to the DR increased by 16.4 
percent in 2008.  The U.S. Commercial Service office in Santo 
Domingo continues to see increased interest from U.S. firms 
in the Dominican market, with CAFTA-DR being a big factor in 
generating that interest. 
 
¶4. (U) The Executive Vice President of the Dominican Free 
Trade Zone Association Jose Torres told Econoff that he 
expects non-apparel companies in the free trade zones (FTZ) 
to remain relatively static for 2009.  Despite the fact that 
90 percent of the FTZ exports go to the U.S., he said he was 
optimistic that the electronic and medical supply companies, 
as well as the growing number of call centers, would not be 
negatively affected.  Torres acknowledged that efforts to 
attract auto-related businesses would likely suffer.  He 
emphasized the need for the GODR to improve the 
competitiveness of the export sector which faces high costs 
and, in his view, an overvalued exchange rate.  Between March 
2007 and March 2008, 104 new permits were granted by the 
Dominican government to companies to establish businesses in 
 
FTZs, for a projected investment of over USD 5 billion.  How 
much of this investment will be realized in the current 
economic climate remains to be seen.  However, further 
diversification of FTZ products and export markets would help 
mitigate the negative effects of reduced U.S. demand for 
items such as textile products. 
 
----------------------------------------- 
GODR slow to respond to economic concerns 
----------------------------------------- 
 
¶5. (U) In the face of increasing public concern over the 
deteriorating economic situation and after months of denying 
the global crisis would affect the DR, President Fernandez 
gave a speech to the nation on December 8 where he called for 
a national summit to address the economic crisis.  The 
summit, which has been scheduled for January 28, will include 
participants from all of the political parties as well as 
civil society organizations.  The Minister for the Economy, 
Development and Planning, Temistocles Montas, who is in 
charge of organizing the event, told the media the objective 
of the summit is to identify short and long term measures to 
address the negative impacts of the economic crisis. 
However, civil society groups are calling for the agenda to 
include other critical problems facing the country including 
narco-trafficking, corruption, and increasing crime. 
 
¶6. (U) On January 2, the Central Bank lowered its interest 
rates, a move that was welcomed by the private sector in the 
hopes that commercial interest rates would soon follow. 
Further interest rate reductions by the Central Bank are 
expected in early 2009.  Private consumption has slowed 
significantly as a result of higher interest rates in 2008 
and is expected to continue to decline as a result of lower 
remittances and increased unemployment.  The International 
Monetary Fund predicts that Dominican GDP will grow 1.8 
percent in 2009 compared to an estimated 4.8 percent in 2008. 
 In a letter of intent to the IMF that is part of its post 
program monitoring process, the GODR emphasized that it would 
adhere to a realistic fiscal program, including a budget that 
calls for a 1.7 percent non-financial public sector deficit. 
However, the government is optimistically predicting 3 
percent GDP growth and maintains that there will be no drop 
in foreign direct investment.  Despite the government,s 
positive outlook, Standard and Poor,s recently downgraded 
the Sovereign rating from &B plus8 to &B8 due to &the 
country,s future economic prospects and the recent fiscal 
difficulties experienced by the country all within a weak 
institutional context.8  Standard and Poor,s estimates that 
the 2008 deficit will reach 4.5 percent of GDP, or 
approximately USD 1.034 billion.  (The original budget 
projected a primary surplus.) 
 
¶7. (SBU) While the government has attempted to maintain a 
positive outlook on the country,s ability to weather the 
global economic crisis, at the end of 2008, the government 
was forced to revise down its fiscal revenue projections for 
2009 due to the prospects of slowing economic growth while 
expenditures were maintained at levels in the revised 2008 
budget.  The government,s ability to finance the 2008 and 
2009 deficits will be a significant challenge.  Locating 
funding to finance the USD 300 million electric sector 
deficit that was accrued in 2008 continues to be a challenge 
for the Office of Public Credit since local capital is 
expensive (24 percent) and limited, while international 
markets are for the most part closed to speculative &B8 
rated credits.  In addition, the international financial 
institutions are reluctant to provide budget support without 
a demonstration that the government is making the needed 
reforms in the electricity sector.  The need for an 
additional USD 300 million exacerbates the challenge of 
funding the 2009 budget.  The prospect of decreasing fiscal 
revenues places the government in a difficult fiscal 
situation and puts in question whether the GODR will have the 
capacity to meet its social and investment requirements.  The 
high cost of financing will further increase the portion of 
the budget allocated to debt service and result in greater 
rigidities in terms of expenditure options. 
 
¶8.  (SBU) The government is expected to request a USD 300 
million emergency fiscal loan from the Inter-American 
 
Development Bank (IDB) for budget support in addition to a 
USD 500 million loan to the Central Bank for a line of credit 
to provide export financing to local banks.  According to 
local IDB representative Manuel Labrado, there is no 
conditionality on the budget support loan which the 
government originally mentioned could be used to pay the 
electricity generators, but now is reportedly considering 
using for other purposes.  The government is also seeking 
additional funding from the World Bank possibly in the form 
of two USD 150 million development policy loans for budget 
support.  Local WB representative Roby Senderowitsch told 
Econoff that one loan proposal to provide social protection 
in the face of the economic crisis and reduce the 
vulnerability of the country has already been made to the 
GODR.  The WB is waiting for a response from government 
officials who have internal disagreements over the conditions 
of the loan.  The WB is seeking assurances that social 
programs will be protected and progress would be made on 
energy reform.  Senderowitsch acknowledged that it would not 
be possible to bring the loan before the WB Board without 
some measures on energy reform given that another energy 
sector loan may be cancelled due to the inability of the GODR 
to meet the reform requirements.  He noted that the second 
proposed loan is in response to a request from the Ministry 
of Finance for additional budget support but the WB has not 
yet identified a topic for the loan. 
 
----------------------------------------- 
USG assistance priorities remain the same 
----------------------------------------- 
 
¶9. (U) USAID currently has two relevant economic growth 
programs, one targeted at increasing exports of fruits, 
vegetables and wood products to global markets and a second 
designed to increase the number of tourists visiting the 
tourism cluster areas.  Both of these programs are 
contributing to the diversification of the Dominican economy 
and improving competitiveness, two important objectives 
during this difficult economic period.  Post does not expect 
the agriculture program objectives to be significantly 
affected because the demand for the products being sold to 
niche markets (especially fruits and vegetables) will most 
likely not decrease as much as demand for other consumer 
products, especially the large consumer items.  However, the 
demand for wood furniture may decrease more than the other 
products because of its higher income elasticity.  On a 
positive note, the fall in global petroleum prices should 
result in lower prices for gasoline and fertilizers.  In 
regard to the sustainable tourism program, while the number 
of tourists coming to the DR this year is expected to fall, 
especially on the high end, there are some opportunities for 
the DR to attract tourists that might otherwise have traveled 
to Europe or Asia.  The long-term goal of diversifying the 
tourism sector and improving environmental protection should 
help the DR become more competitive relative to other 
neighboring countries and contribute significantly to the 
sector being able to weather effectively this current, and 
future, economic crises. 
 
¶10. (U) Beyond the issues outlined above in para 9, Post does 
not expect ongoing assistance activities or priorities to be 
adversely effected by the crisis.  USAID activities in 
health, education, and democracy should continue as planned. 
Under the USAID-GODR development assistance agreement, the 
GODR has committed to contributing resources to joint 
assistance programs.  The contribution is primarily in-kind 
and so should not be at serious risk of being reduced.  Given 
the current economic climate, USAID is monitoring GODR 
compliance with a first step in this regard being a meeting 
scheduled in the coming weeks to further define the 
government,s contribution.  Post will also monitor GODR 
investments in education and health to anticipate any further 
backsliding on the MCC criteria.  Any potential issues with 
regard to host government contributions to the assistance 
program, the MCC criteria, or USG assistance in general, will 
be reported. 
FANNIN