Reuters: Financial Services and Real Estate: TEXT-S&P affirms Dominican Republic ratings

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TEXT-S&P affirms Dominican Republic ratings Apr 27th 2012, 21:41 Fri Apr 27, 2012 5:41pm EDT (The following statement was released by the rating agency) Overview -- 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'. Rationale 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 management. 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 2012-2014. 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 culture. 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. Outlook 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) Link this Share this Digg this Email Reprints

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