Fernandez First Great Scam, Part I

[mondongo]

--> DR1 news reported that Fernandez plans a 2005 Budget of DR$180Billion.
--> Recent data show that DR presidents tend to spend roughly 10% more than they budget.

--> Therefore, 2005 actual spending should be nearly DR$200Billion.
--> In 2000, the government spent DR$53.7Billion.

--> Between 2000 and 2004, inflation + real GDP will have increased by 150%.
--> Inflation, as calculated by the Central Bank, appears to closely follow (at least on the upside) the exchange rate.

--> If inflation follows the exchange rate, and if we assume that the exchange rate will settle in the mid 30's next year, then 2005 inflation should really be a deflation of about 30%.

--> This means that accumulated inflation + GDP form the Year 2000 through the year 2005 should be +120%.

THEREFORE: the 2005 budget should be DR$118Billion. If Fernandez was as fiscally prudent as he was at the end of term, then his budget sould be DR$118Billion. Unless Fernandez uses accounting gimmicks, the 2005 federal government spending will be nearly 40% of the economy. Tha is beyond scandalous. Fernandez is spending DR$82Billion more than he should.

 

[Barnabe]

Unless Fernandez uses accounting gimmicks, the 2005 federal government spending will be nearly 40% of the economy. Tha is beyond scandalous.

Not many people will disagree with your point that DR government's spending is bad value for money.

Now, there is a point that is open to discussion:

--> DR1 news reported that Fernandez plans a 2005 Budget of DR$180Billion.
--> Recent data show that DR presidents tend to spend roughly 10% more than they budget.

--> Therefore, 2005 actual spending should be nearly DR$200Billion.
--> In 2000, the government spent DR$53.7Billion.

--> Between 2000 and 2004, inflation + real GDP will have increased by 150%.
--> Inflation, as calculated by the Central Bank, appears to closely follow (at least on the upside) the exchange rate.

--> If inflation follows the exchange rate, and if we assume that the exchange rate will settle in the mid 30's next year, then 2005 inflation should really be a deflation of about 30%.

I am not sure your calculation is really fair, because, imho,
- you should compare average exchange rate for 2005 (say 35) with the 2004 figure. The 2004 figure will well below 50.
- more importantly, I don't know what is the % of government's internal (ie without external debt payments)spendings that are really in USD, but I would say it is only a minor part. For its part, the payroll is in RD$. You think Fernandez should cut wages by a 30%?

Also, in your calculation, you are "forgetting" 4 years. You should compare 2005 spendings with 2001, 2002, 2003, 2004. As I don't have the figures, I don't know what would come out, but I would think that these spendings increased a lot during the Hippo's years..

I would say the scam is more in the deputies wage increase, for instance.

Barnab?

 

[mondongo]

My data obtained: bancentral.gov.do

1997: 16%
1998: 16%
1999: 17%
2000: 16%
2001: 18%
2002: 19%
2003: 17%
2004: 19%
2005* 28%

Above figures show what percentage of economic output (in DR$) is taken and spent by the central government in the form of taxes, fees, etc.

2005 is an estimate based on two statements issued by the Fernandez administration: 1) he expects inflation to be in the single digits next year, 2) the 2005 budget suggestion is DR$180Billion . Over the last 8 years, the total nominal GDP in DR$ has followed DR inflation plus DR real GDP.

Note that the 28% for 2005 assumes that the average exchange rate in 2005 will be over 40. If the exchage rate does settle in the 30's, then the 28% could easily climb to 40%.

What does this mean?

This means that the central government will have firm control of the economy. Just as a reference, the US federal govt absconds with 20% of economic output...and a lot of us feel that number is way too high.

 

[MrMike]

Alot of the money they are spending is payment of loans, they have alot more debt now than ever before so the budget is going to be higher for that reason alone if nothing else.

 

[Texas Bill]

OK, so what will happen......

Now that the DR has been "un-docked" from he DR/CAFTA agreement???
Bear in mind that in January (I think) the quotas will be lifted reference clothing imports from the "free trade zones" and many of those factories will probably be moved out of the country leaving a huge void in the GDP, reference the wages currently enjoyed by the employees (who will be out of a job and UN-employed) from whom taxes are derived. Not to mention the taxes on exports, etc., etc.
Which milleau will the DR turn to to balance the income lost by those/that event???
I'm wondering if the Legislative bodies have even given any of that a thought??? I very much doubt it since they don't seem to think beyound the end of their collective noses, if that far!

It would appear that we're back to square one in economic forecasting.

Any answers/comments???

Texas Bill

 

[mondongo]

MrMike, that's a good point. A lot of that money could presumably be used to pay the debt. According to my scenario, that totals to between US$1Billion and US$2Billion excess spending for Fernandez in 2005. That would be more than enough to cover all interest and principal payments due over the next year+.

The prbolem with that assumption is two-fold:

1) Fernandez has already stated that a lot of the debt coming due during his term will be re-negotiated and paid back over a longer period of time.

2) A lot of the Fernandez machinations and genuflecting is to court the money at the end of the IMF rainbow. According to the Central Bank website, once the new Stand-By agreement is signed, Fernandez will be rewarded with a US$1,000Million loan.

What does this tell me?

By the end of his first year, along with nearly US$500Million in loans already submitted to congress, Fernandez will have added US$1,500Million in debt. Where is this money going? Since he is deferring, rather than paying off most of the debt...the money is not going there.

His 2005 budget contains an excess US$1-2Billion? Where is this money going?

These are the same questions I was asking about Mejia 3 years ago....before it became chic or obvious. For the sake of those of you living there, I hope I am wrong.

 

[mondongo]

Texas Bill, the contribution to GDP from the free trade zone is only 2.7%. CAFTA is also insignificant to the average Dominican. I actually read a good portion of the CAFTA text a while ago. That agreement could be boiled down to the following: the DR excecutive branch would negotiate with US companies and give them contracts to exploit DR natural resources or other profitable ventures.

Removing tariffs that do not de-stabilize the local DR economy would be a good thing, though.

 

[Porfio_Rubirosa]

1997: 16%
1998: 16%
1999: 17%
2000: 16%
2001: 18%
2002: 19%
2003: 17%
2004: 19%
2005* 28%

(Emphasis added.)

If this is correct, then Leonel will be through. The economy would collapse. Even Leonel would know that Leonel would be through. So there must be more than meets the eye.

 

[mondongo]

The 28% in 2005 number came from several assumptions. The most important was the proposed 2005 Fernandez budget of DR$180Billion. Based on historical precedence, the government will spend more than DR$180Billion.

To bring the 28% number down to 19%, the DR economy would have to generate approximately DR$1,000 Billion in output during 2005.

The output in 2004 will be approximately DR$700Billion, an increase of about DR$200Billion from 2003. Note that this increase will be all due to the 39% accumulated inflation in 2004.

To get DR$1,000 Billion in 2005, an increase of DR$300Billion from 2004 is needed. This represents a 43% increase. Increases like these are usually the product of inflation.



Therefore,
in order to maintain government spending at only 19% of the economy, you will have 43% inflation next year.

Furthermore,
since DR GDP, when priced in US$, will not change much this year (~US$15Billion nowadays), in order to maintain government spending at 19% of the economy, your real exchange rate next year will be about 1,000/15 = 66.66.

 

[Barnabe]

1997: 16%
1998: 16%
1999: 17%
2000: 16%
2001: 18%
2002: 19%
2003: 17%
2004: 19%
2005* 28%

Above figures show what percentage of economic output (in DR$) is taken and spent by the central government in the form of taxes, fees, etc.

2005 is an estimate based on two statements issued by the Fernandez administration: 1) he expects inflation to be in the single digits next year, 2) the 2005 budget suggestion is DR$180Billion . Over the last 8 years, the total nominal GDP in DR$ has followed DR inflation plus DR real GDP.

Note that the 28% for 2005 assumes that the average exchange rate in 2005 will be over 40. If the exchage rate does settle in the 30's, then the 28% could easily climb to 40%.

What does this mean?

This means that the central government will have firm control of the economy. Just as a reference, the US federal govt absconds with 20% of economic output...and a lot of us feel that number is way too high.

At first sight your figures seem to show that Hippo had public spendings under control when Leonel is pushing the country towards 1st world-like figures.

Imho these figures come in contradiction with everybody in the Dr has been seeing but, if I suspect there is a bug somewhere, I don't know where as I am too ignorant.

Nevertheless, considering that:
- Hippo's approved budget for 2004 was 121 billion pesos
- the government will give a massive increase to his employees
- I suppose the service of the debt will be go up?
- current government's spendings (purchase of goods, external services, etc) should go up by a 25 to 30% minimum just to follow inflation,

how could the 2005 budget be limited to 118 billion pesos, ie slightly below 2004 budget?

I can't even imagine how they can prepare a budget when there is so much uncertainty about how the dollar and the prices will go in the next months. Even a a simple family level, most people don't know what their standard of living will look like.

Barnab?

 

[mondongo]

Barnabe...sorry long.

-> How could the 2005 budget be DR$118Billion? Great point, Barnabe. The fact that the actual budget will be almost twice as large points out some inconsitencies in Leonels economic projections:

1) his claim that inflation will be in the single digits next year not likely to come to fruition. As you mention, the 30% across the board salary increase may be enough render his inflation prediction useless.

2) a DR$180+Billion budget and a 30:1 exchange rate don't add up. Even the 37:1 exchange rate sanctioned by the IMF is not correct. Here is why I say that:

a) one of the few constants in these calculations is the US$
value of the DR economy. Its around US$15Billion.

b) If the exchange rate is 37 then the 2005 DR$economy=
DR$555Billion. That would place govt spending at 35%
of the economy. This is an unacceptable #, by any
definition.

3) DR$118 is the right number only if next year's true exchange rate, and its accompanying deflationary forces, is in the low/mid 30's. This is further proof of exchange rate manipulation.

**********************************************************
-> Was Hippo more fiscally reponsible than Leonel? You make a great point on the anomaly between the Central Bank figures and reality during Hippo's reign. What happened is that Hippo was just plain stealing money and not accounting for it. However, as error prone as it it is, the DR Central Bank data is the best data we have. Commerzbank, as cited by DR1 news ....uses Central Bank data. See # 6 below. Transparency is being forced on Leonel.


When doing research on bancentral.gov.do, local DR online newspapers, googling Paris Club, Dominican Debt and IMF, I found that most of the economic/fiscal policies being put in place by Leonel are coming at the behest of the IMF and the Paris Club. These include:

1) Raising Taxes
2) Maintaining the new stable/strong exchange rate
3) Increasing international reserves
4) Paying interest to international lenders
5) Deferring principal payments, thus extending the life of existing loans
6) Demanding transparency in the DR government's financial dealings

***********************************************************
Finally,
What Leonel gets out of his PAris Club histrionics is a fresh new US$1Billion loan, and the stamp of approval from international banks. This stamp of approval is significant because internatinal lenders will now be more willing (and at a lower interest rates) to lend more money to the DR. Some would say this is a bad thing. Those who follow the history of Argentina would see a parallel. When the IMF stepped in, Argentina's interest rates dropped, their debt proceeded to balloon, and a few years later they had their massive collapse.

 

[Golo100]

Voodoo economics part II

I think you guys are giving to much credit to Leonel's economic planners. There is no such planning. This whole thing is a crap shoot. Leonel is ready to spend upwards of $200Billion next year. He is a big spender and he proved it in 1996-2000. His government payroll will not only face the two-step 30% salary increase, but under this hidden monster, he will cover up his hunger for big government. Remember, these guys are from the old Dukakis school of spending. Already we have as many or more undersecretaries and foreign appointees than ever. Travel and expense accounts have not relaxed. Leonel himself is a flying machine, who will spend many millions, along with his minions enjoying foreign beaches.
The Central Bank is another monster out of control. Their new trick is to continue certificate auction offerings at scaled down interest rates, so that new buyers can refinance old certificates due. The new money, already coming down at levels of 27% for 365 day certificates from as much as 60%, will cover the downscale of the BC pyramid. Banks are having a holiday with interest rates for loans as high as ever. This is a Trojan horse.
The 2005 budget will be built on many more administrative taxing techniques, which will bury us in personal taxes until we have no spending money in our pockets. This is a very hungry government with a good excuse(Hippo left us a blackhole)
But how do you explain the so-called 1.4% growth? Is Hippo responsible for some of that growth? Why not? I don't buy that Leonel confidence factor after 8/16. Growth started before. Of course, Hippo was no factor either. We just grow, because DR grows by itself, even with a donkey running the show.
TW

 

[Lurch]

Pure voodoo economics

I must admit to quite perplexed by the action taken by this new supposed professional government. I was so puzzled that I requested further information from the bankers (US & EU) on a number of issues and the answers still are the same.

Peso value is in the high 60's to USD (same as projections 12 months ago). Even with the recent devaluation of dollar.

There has been no action to the 300k+ "useless" goverment employees. I do recall hearing and reading many times that this was to be a first order of business for the PLD goverment.

The RD is considered a Non-Viable/Non Competitive Model. Doubt this? Ask the number crunchers in the FZ and outside companies. Very negative discussions have been underway for the last 2 months. How long can the RD continue running on IMF loans?

Infrastructure issues are still being ignored except to the search for someone to buy the utilities.

Conclusion this PLD president is no better than the PRD group, just a little more subtle.

 

[mondongo]

A few weeks ago, Fernandez said:

1. 2005 budget is DR$180Billion
2. No more loans this year
3. single digit inflation in 2005

Fernandez now says:

1. 2005 budget is DR$207Billion
2. We need US$270Million more in loans by year end
3. double digit inflation in 2005

I wonder what the story will be in a few weeks from now
***************************************
***************************************
Just when I wandered if there were ANY media people in the DR with even a smattering of brains, DR1 News yesterday contemplates Fernandez' "Mega-government".

Additionally, the PRSC seems to be picking up on Fernandez' brazen and wanton economic self-absorption:

http://www.elcaribe.com.do/articulo...d=5BF5CB3863824C04A6F42289D28749E9&Seccion=63

Posters in this forum continue to disappoint me with their deafening silence on this DR$207Billion budget. I don't get it.

 

[Barnabe]

Posters in this forum continue to disappoint me with their deafening silence on this DR$207Billion budget. I don't get it.

Maybe many people are more interested by what they see when they go shopping, get their electrical bill or change their USD/CAD than by a debate about figures?

I agree that it is strange to see a 10% change in a national budget within 2 weeks...

You would like the budget to be 120 billion, based on extrapolated 2000 figures, but in 2000, foreign debt was 3 billion USD or so, and as 10 billion now.

In the 2005 budget, payments of capital and interest will be 75 billion pesos...
To match within the 120 billion, government would have to cut the "daily expenses" (gastos corrientes) by 65%, and invest O pesos..(this is based on BC figures).

Sounds difficult. You think the DR is going into the wall. You may be right, but anyway, what can we do? Wait and see..

Barnab?

 

[Porfio_Rubirosa]

Posters in this forum continue to disappoint me with their deafening silence on this DR$207Billion budget. I don't get it.

Mondongo,

I think you're seeing an over abundance of deference to the guy who, quite impressively, tossed out His Baldness and led economic growth during the late 1990s. Put me in that category too.

I have a hard time believing that Leonel does not know what he is doing. I will grant you that, applying economic theory, hyperinflation and a deep recession should be the result of what Leonel is doing. But the fall back into recession would occur during his term, and that would be political suicide for him. Also, the value of DR bonds have not dropped as a result of Leonel's budget.

So, does he know something that we don't? Does he have a plan or theory that we're not aware of?

Let me just throw out a topic here: Is Leonel trying to be "Keynsian"?

 

[Golo100]

Mondongo

I am as alarmed as you are about this mega-budget. No wonder the PRD legislators are willing to pass it without much fight. They have been promised protection money for their corrupted deals. Corruption by the PLD will take new heights. Corruption will now be legal. Just feed the politicians money to burn legally.
No one will escape the tax bite. Just as I forecasted, expect taxes for everything including the air you breath.
And for those who are waiting for housing prices to fall, don't hold your breath. With the increasing amount of taxes, levies, customs fees, legal fees and so on, decreases in the price of some construction materials will be eaten alive. Besides, the reduction in cement prices(the only material showing some slack) is so timid, it's just tokenism.
This is why you seldom see a "for sale" sign in Santo Domingo. Most people are renting their properties, when not living it. Nobody is selling. Prime properties are still holding their prices. Even in barrios like Alma Rosa prices are going up for new property.
I'm holding on to my landholdings. I am not reducing no matter what happens to the dollar. The dollar has been depreciated artificially. I don't see a $28 to $1 exchange. The real value of the dollar is $50 to $1. Is anybody out there ready to challenge me on this?
When was the last time you saw any imports with lower prices? Have car prices gone down? Canned goods?
No way Jose. This market is for fools only. I'm holding on to my dollars, sink or swim.
TW

 

[Spirit7]

I'm with Golo100.

I think Leonel has good intentions, but this country will never be rid of corruption since it is a deeply-rooted problem in which the three major political parties' interests are intertwined. Even if Leonel's PLD wanted to
do something about 'his baldness's' festival of corruption from 2000 to 2004, he cannot, since the PRD controls the legislative and judicial branches as well as most city halls in the country, thus he needs them in order to govern.

Prices are still way up and have not come down in any ways near the proportion of the devaluation of the dollar vs. the peso, and part of that reason is that many people believe this is only temporary and eventually the real exchange rate could be between 35 and 40 to 1. In any case, in the
DR what goes up doesn't necessarily come down when it refers to prices.

I hope to God Golo is right and this rate gets back up so those of us earning dollars can get back to an even playing field since we are on an uneven field right now.

 

[Keith R]

In 1997, during the first Fernandez administration, my wife's company got a new Big Boss, an American. As part of his efforts to "hit the ground running" in learning the local biz and local biz environment, he invited the head & deputy head of each department for a private, frank, wide-ranging chat. The underlings were encouraged to be candid, whether about the company's ops or the DR government & economy. My wife, a Dominican turned naturalized US citizen, went with her department head, an elder Dominican lady that had worked for the company for over 20 yrs.

At one point the Big Boss asks "Leonel says he's going to eliminate corruption in the DR during his Administration. Do you think he can?" My wife's boss, the department head, gives a very bland, vague "we'll have to see" reply.

Big Boss turns to my wife and says, "what do you think?" My wife laughed. "No way!" Her boss nearly feel off her chair. Big Boss, fascinated, asked why so certain. My wife replies, "Maybe it will after everyone who is alive today in the DR dies. But after generations of conditioning that corruption is culturally acceptable, does anybody seriously think it will be abandoned overnight? I'm not so naive."

I'm not sure it'll take until all who are alive today are dead and buried before corruption is weeded out or minimized in the DR, but I'm afraid I have to agree that it won't happen any time soon. I was more optimistic back in 1999, when I lived in SD, at the end of Leonel's first term, because he had made some real progess. But then I saw Hippo not only reverse all that progess, but send the DR deeper into corruption than I've ever seen it. And so far, Leonel doesn't show signs of the same clean-up zeal that he had in the first term, so....

 

[Texas Bill]

The ONE single thing about......

the new budget is that it will continue to support the massive public employee population which Lionel SAID he would reduce, but instead has even expanded with even more incompetent incumbents!

Almost 6 months into this administration and the government is still essentially disfunctional! You still can't get anything done without 'under the table' contributions! AND, just TODAY Lionel has had the audacity to laud an Anti-corruption scheme and place the DR above other Latin countries as being LOW in corruption! What Next???? I ask myself if the rest of the world, those intimately familiar with the way things are done here in the DR, REALLY BELEVE THIS TRIPE???? Do You???

I'll believe it only when I begin to see the layoffs of surperflous government employees, when a competative exam system for government jobs is innaugerated and carried out transparantly and when the legislative bodies begin to pass laws that are truly effective and beneficial for the nation and not just a select few monopolies and individuals.

I must admit that SOME progress (at least on the surface) has been made to bring to justice those who have used their positions within government to line their own pockets. However, I will wait and see if there is truly to be any honest trials and prison sentences, or if these are merely smoke screen "Paper Tiger" actions to satisfy the current public opinions which will become less and less as time goes on.

Thus far, the only thing I have seen in the realm of progress along the line of fulfilling campaign promises is more of the same!

Needless to say, I'm a little disappointed with the whole scenario.

I know the man needs time. That goes without comment. But he promised action and we're really not getting very much of that.

Texas Bill