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AmericasApril 2 2006

Confidence booster

Héctor Valdez Albizu’s tough reputation in his role as Central Bank governor instils confidence in the market. He tells Tom Blass what plans are afoot to move the economy forward and strengthen the banks.
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Central Bank governor Héctor Valdez Albizu was appointed by president Leonel Fernández’s administration in 2004, giving him his third term in the job. Widely regarded as having brought “sanity” to the macroeconomic situation, he was recently named The Banker’s Central Banker of the Year 2006 for the Americas.

Mr Valdez Albizu’s insistence on taking a tough line against bank executives who were allegedly responsible for the collapse of three of the country’s largest banks has been at the cost of threats and vendettas, earning him a reputation for remarkable impartiality, courage and the ability to keep a cool head. It has been said that his appointment in 2004 was enough to restore confidence to an economy that was feared to be on the verge of meltdown.

He spoke to The Banker at his offices at the Central Bank in Santo Domingo.

Q What were the most difficult decisions that were needed to bring the macroeconomic situation under control when you were appointed?

A There were huge challenges on three fronts: legal, institutional and economic. From the legal point of view, the first challenge was bringing prosecutions against the bankers responsible for fraud [at the banks that collapsed in 2003]. But there were many other challenges, such as the acquisition of bank assets to dispose of them, so that the Central Bank could be recuperated through their sale. In both these challenges, the juridical and human costs were considerable.

From a financial perspective, two major goals needed to be achieved. The first was to design a monetary and financial programme that would allow monetary expansion while tackling devaluation, high inflation and capital flight. This meant a high interest rate to reduce demand for credit. The programme was designed to eliminate excess liquidity through the operation of open markets and banking instruments.

For the second goal, the monetary board approved a programme designed to recapitalise and strengthen banks and other financial institutions that were affected by the crisis. The first measure adopted was an increase in the solvency requirement of 10% in December 2004. The commercial banks that did not comply with these requirements by that time were obliged to supply a plan for doing so in accordance with new monetary regulations and requirements on capitalisation.

Likewise, the superintendent of banks published business plan requirements for banks for the next five years to comply with the new regulations.

Other measures adopted included an Assets Re-evaluation Act and the establishment of a legal framework that allows the effective measurement of risk assumed by financial intermediaries. Mechanisms were also applied to accelerate the application of monetary financial law. And we strengthened the bank regulator to improve supervision through better training and capacity building, carrying out assisted inspections with the participation of international consultants. The aim is to permit a proper evaluation of the banking system in accordance with both domestic, internal rules and the best international practices. These inspections showed that the operational deficiencies in the financial sector were not general, but specific to the three or four banks affected.

Q There have been suggestions that the crisis was not, strictly speaking, caused by macroeconomic factors. To what extent do you think this is true?

A Clearly, the crisis occurred against a backdrop of inadequate economic and political management, high indebtedness, both local and external, delays in foreign debt payments, current expense expansion, indiscriminate use of internal loans and other practices that characterised the former government. This meant that when the crisis occurred, we did not have a favourable macroeconomic atmosphere in which to manage it – which is why it cost us up to 30% of our productivity.

Q How important was the renegotiation of sovereign debt and other international obligations – for example with the IMF?

A The IMF negotiations – and to have the understanding of international and multinational institutions – was a sign that the crisis was being normalised. These negotiations plus the refinancing and restructuring of Paris Club debt opened the way for an important gap to finally be closed.

Evidently, multilateral support strengthened the recovery programme. Even though the former government was not able to complete its commitments under an original IMF standby loan, the present government took over IMF negotiations and in a year has achieved compliance with all the fund’s requirements: meeting all our targets and reducing the public sector consolidated deficit from 7.3% to 3% of GDP. It’s an extraordinary adjustment and has resulted in an increase in GDP of 9.3%.

Q What are the key economic indicators at present?

A Annual inflation is now running at 7%. To December 2004, it was 29%. It was as high as 50% in August 2004. And appreciation of our foreign reserve requirements has increased the value of the peso from 58 pesos to the dollar at the height of the crisis to 33 pesos to the dollar now.

Q How is the valuable stability you have achieved maintained?

A If the government maintains a balanced budget, the Central Bank should be able to use the monetary instruments available to it to keep inflation less than 5% and keep growth at about 6%. We also need to keep a careful eye on monetary supply while ensuring continued soundness, solvency and transparency in the banks and other financial entities.

We have gross reserves of around $2bn, about $1.8bn net reserves. Being able to accumulate and maintain reserves is one of our major accomplishments.

Q What kind of impact will the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) have on the economy?

A The DR-CAFTA will have a profound effect. It enables consolidation of a permanent concessional framework and access to the US market. And it will attract investors, oblige us to improve the legal system, help with institution building and conflict resolution, and force us to be more transparent and competitive in all our economic activities. I hope it will also improve the production capacity of small and medium-sized enterprises

Generally, it improves the investment atmosphere, helps harmonise economic regulation, and increases our economic and political security, both domestically and regionally.

From another perspective it serves as a foundation for the promotion of a regional framework environment beyond the one we have, opening up the possibility of commercial integration for the whole of Latin America, ultimately.

Q Outline some of the economic and social concerns that you have as Central Bank governor and, on that front, what you consider to be the priorities.

A One of these is the price of oil. Oil imports in 2005 cost about $2.451bn. In 2004, they cost $1.67bn, an increase of about 47%. Ultimately, this hits the poor, in the way of increased transport and electricity costs, the price of bringing goods to market and so forth.

One of our priorities has to be reducing unemployment by using fiscal policy and getting the tax structure right. I believe it is the only way for us to improve income distribution. This year has been designated The Year of Job Creation – and it is happening. In October 2004, the unemployment rate was 19.5%. Today it has dropped to 16%. It is quite a significant drop in just over a year.

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