Hot spots: Dominican Republic.(International Section)

Dr. Belcsak is president of S.J. Rundt & Associates, Inc. Telephone: 973.783.5206; fax: 973.744.3073; e-mail: info@rundtsintelligence.com; web site: www.rundtsintelligence.com.

President Leonel Fernandez of the Center-Left Dominican Liberation Party (PLD), who won the elections last May in the first round of voting, wins sworn hl on August 16th. His political honeymoon will be extremely short as he takes over a country in the midst of a slow-moving economic crisis. The departing President Hipolito Mejia, in his waning days in office, not only failed to deal with even the most pressing issues, but was mainly concerned with spending public funds to reward political supporters.

It was under Mejia's watch that the country slid into recession last year, largely due to the collapse of Banco Intercontinental (Baninter) and the government's decision to guarantee all the bank's liabilities, in contravention of local laws. This included offshore deposits, at a cost to the taxpayers of USD 2.2 billion and to the benefit, mainly, of a select few account holders. The action destroyed business confidence and triggered capital flight that eroded the country's meager exchange reserves.

Real GDP declined by 0.4% in 2003, despite Mejia's lavish spending on public works projects intended to make the electorate think favorably of him. Gross domestic product is headed for a decline closer to 1% this year. Capital flight has brought official international monetary reserves down to raider USD 400 million (as of the end of May, the most recent IMF number available) from USD 486.4 million at the start of 2003 and from USD 1,099.5 million 12 months before that. Shortages of gasoline are now idling many cars in the capital. Lack of propane is depriving countless households of much needed energy. In Santo Domingo, lengthy electricity blackouts of up to 20 hours are no longer unusual.

The Dominican peso lost 40.66% of its value in 2003. It has given up another 21.07% so far in 2004. Even though some prices are frozen, inflation in July was up to 50.85% from 27.45% last December and from only 5.22% in 2002. The foreign debt surged under Mejia's stewardship, with dollar-denominated obligations having ballooned to about 33.7% of GDP from 22.3%. The peso's collapse accounted for much of the increase. After being late with a USD 24-million bond interest payment in April, the Central Bank missed another USD 27-million payment in July. It will, presumably, do its best to settle the amount within the 30-day grace period, but the government's continued ability to honor its obligations is becoming more and more questionable.

Conservatively calculated, the country faces a "financing gap" of USD 295 million this year. It succeeded in rescheduling USD 193 million owed to Paris Club creditor nations (USD 155 million in principal and USD 38 million in interest), but this still leaves a hole in excess of USD 100 million. The IMF suspended a USD 600-million aid package last year, after the government perplexed investors by effectively renationalizing an electricity company controlled by Union Fenosa of Spain. A Fund mission went to Santo Domingo in early August to try and determine ...