April 27, 2012 / 9:46 PM / 6 years ago

TEXT-S&P affirms Dominican Republic ratings

(The following statement was released by the rating agency)	
     -- The Dominican Republic's economic growth and export prospects are 	
solid, and we expect the government to remain committed to fiscal and 	
macroeconomic stability.	
     -- However, the Dominican Republic has weak institutions and many 	
structural rigidities.	
     -- We are affirming our 'B+/B' local- and foreign-currency sovereign 	
credit ratings on the Dominican Republic. The outlook remains stable.	
     -- We expect the new government (that will assume office following 	
presidential elections on May 20, 2012) to remain fiscally prudent, including 	
implementing early measures to correct a likely worsening fiscal situation in 	
the first half of 2012 and reengaging the IMF.	
Rating Action	
On April 27, 2012, Standard & Poor's Ratings Services affirmed its 'B+/B' 	
long- and short-term local- and foreign-currency sovereign credit ratings on 	
the Dominican Republic. The outlook remains stable. Standard & Poor's transfer 	
and convertibility assessment on the Dominican Republic is unchanged at 'BB'. 	
The recovery rating on the government's bonds also remains unchanged, at '3'.	
The ratings on the Dominican Republic reflect the country's weak institutions 	
and the politicization and opaqueness of decision-making, which lessen the 	
predictability and effectiveness of the government's policies. These 	
inefficiencies result in low tax collection due to widespread tax evasion and 	
excessive tax exemptions and in weak competitiveness due to bureaucracy, 	
corruption, and slow progress in reforming the electricity sector, among other 	
things. Supporting the ratings are the ongoing commitment to correcting fiscal 	
and structural inefficiencies (important advances were made under the recently 	
ended IMF standby program), solid growth potential stemming from the country's 	
well-diversified economy, improving export prospects, and strengthened debt 	
On the fiscal front, the government remains committed to lowering fiscal 	
deficits. It introduced a number of tax measures and controlled spending in 	
2011 to counterbalance continuously low tax collection and 	
higher-than-anticipated electricity subsidies (amid rising oil prices). The 	
fiscal deficit was 2.6% of GDP in 2011, similar to that of 2010. Fiscal 	
performance likely will deteriorate in the first half of 2012 because of 	
preelection spending. Arrears to suppliers are already on the rise. 	
(Presidential elections will be held on May 20, 2012.) However, we expect that 	
efforts to control expenses in the second half of 2012, including a possible 	
new electricity tariff adjustment, should keep the fiscal situation in line. 	
We project a fiscal deficit of 2.9% of GDP this year. The net general 	
government debt is projected to increase by 2.6% of GDP on average from 	
We expect net general government debt to be 36% of GDP (including the central 	
bank's certificates but excluding recapitalization bonds) at year-end 2012. We 	
project a gross borrowing requirement of 5.2% of GDP this year, which we 	
expect the government to cover with proceeds from a $250 million bond issued 	
in 2011, Petrocaribe disbursements, other bilateral and multilateral funding, 	
and domestic financing. We project gross financing needs will increase in 2013 	
and 2014, reflecting the scheduled repayments of International Monetary Fund 	
(IMF) and Inter-American Development Bank (IADB) loans. We expect the 	
government to use new multilateral and external commercial borrowings to 	
finance these repayments. As such, we anticipate that the new government that 	
will assume office in August 2012 will reengage the IMF on a timely basis. The 	
last US$1.7 billion standby program, which ended in February 2012 (two last 	
reviews were not completed), was instrumental in anchoring progress in fiscal, 	
monetary, and electricity areas. But the election has interrupted this 	
positive momentum.	
Continuously high economic growth and improved export prospects as well as 	
greater policy flexibility due to the start of the new government term in 	
August 2012 balance out these risks. We expect real GDP per capita growth of 	
3.1% in 2012 and weighted real GDP per capita growth of 3.9% from 2005-2014 on 	
average. Gains in a variety of productive sectors are responsible for the 	
solid economic growth. A turnaround in the maquila (manufacturing) industry 	
and a start of ferro-nickel (2011) and gold (mid-2012) exports should further 	
boost economic activity and exports. Despite these improvements, external 	
liquidity remains weak, though it has improved over the years as a result of 	
the buildup of international reserves. Usable reserves (excluding reserve 	
requirement on foreign currency deposits) covered 1.4 months of current 	
account payments in 2011, and we forecast that it will stay at the same level 	
in 2012 before declining slightly thereafter. Gross external financing needs 	
(current account payments plus short-term debt and long-term debt 	
amortization) are estimated at 117% of current account receipts and usable 	
reserves in 2012, but they should increase to 121% by year-end 2014, 	
reflecting higher amortization.	
In the electricity sector, reform challenges persist, but managerial changes, 	
tariff increases in 2010-2011, and specific quantitative benchmarks that were 	
set as part of the IMF standby program are slowly bearing some positive 	
results. Meaningful advancement in this sector will only be gradual and will 	
follow de-politicization of decision-making in this sector, investment of 	
additional technical and financial resources, and improvement in the payment 	
On the political front, we do not anticipate shifts in policymaking, 	
regardless of the election outcome. Both candidates signaled the importance of 	
reengaging the IMF, and they are expected to prioritize fiscal discipline and 	
macroeconomic stability.	
The stable outlook reflects the Dominican Republic's solid growth and export 	
prospects and our expectation that the government will continue its efforts to 	
narrow fiscal deficits. We balance these strengths against the risk of fiscal 	
and external deterioration if the government does not implement corrective 	
measures in a timely manner. An advance in addressing the structural 	
deficiencies in the electricity sector, improving tax system efficiency, and 	
strengthening the external profile would benefit the sovereign's 	
creditworthiness. We expect close cooperation with the IMF and a formal 	
engagement in the second half of 2012.	
On the other hand, fiscal slippage, which would likely exacerbate the external 	
vulnerability, would be a negative factor and could put pressure on the 	
rating, especially if the political willingness to reverse the slippage is 	
lacking. Similarly, delays or uncertainties surrounding the reengagement of 	
multilaterals would decrease policy transparency, lower investor confidence, 	
and increase credit risks. Any changes in the Petrocaribe concessional 	
financing (which finances roughly 15% of the country's oil imports) would also 	
be a negative.	
Related Criteria And Research	
Sovereign Government Rating Methodology And Assumptions, June 30, 2011	
Ratings List	
Ratings Affirmed	
Dominican Republic	
 Sovereign Credit Rating                B+/Stable/B        	
 Transfer & Convertibility Assessment   BB                 	
 Senior Unsecured                       B+                 	
  Recovery Rating                       3	
 (Caryn Trokie, New York Ratings Unit)
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