Calificaciones de riesgo a largo plazo de la República Dominicana aumentan a «BB-» dado a estabilidad fiscal y monetaria. Perspectiva estable.

Calificaciones de riesgo a largo plazo de la República Dominicana aumentan a «BB-» dado a estabilidad fiscal y monetaria. Perspectiva estable.

A continuación el texto íntegro de la mejora en la calificación de riesgo de Standard & Poor’s del riesgo a largo plazo de la República Dominicana.

 

 

 

 

 

 

 

 Transcripción en inglés:

OVERVIEW
• In our opinion, the Dominican Republic has a growing track record of
• sound monetary policy execution under an inflation-targeting regime.
• Lower fiscal deficits since 2012 (on tax reform, higher mining revenues,
• and containment in spending) and cash- and debt-management practices by
• the Treasury have also strengthened the Dominican Republic’s fiscal
• position.
• We are raising our long-term sovereign credit ratings on the Dominican
• Republic to ‘BB-‘ from ‘B+’.
• The stable outlook is premised on our assumption that the government will
• contain preelection-related spending–in contrast with the previous
• presidential election–and that the debate about allowing consecutive
• presidential terms will not disrupt the economy.

RATING ACTION

On May 20, 2015, Standard & Poor’s Ratings Services raised its long-term sovereign credit ratings on the Dominican Republic (DR) to ‘BB-‘ from ‘B+’. The outlook is stable. At the same time, we affirmed the ‘B’ short-term rating. We also raised our transfer and convertibility (T&C) assessment to ‘BB+’ from ‘BB’.

RATIONALE

The upgrade stems from our improved assessment of monetary policy in the DR. In 2012, the central bank became operationally independent and moved to an inflation-targeting regime, improving its policy track record. Inflation has averaged 3.1% since then, near the central bank’s target. The central bank has allowed the DR peso to float more freely, although like many central banks, it intervenes in the market to smooth volatility. That said, ongoing quasi-deficits of the central bank and the low level of private-sector domestic credit (25% of GDP in 2014) dull the monetary transmission mechanism.

An improved fiscal stance is another reason for our upgrade. The DR’s fiscal deficit has declined during the past several years, the increase in debt has slowed, and debt management continues to strengthen. The general government deficit fell to 4.5% of GDP in 2014 from 8% in 2012, which had reflected a run-up in preelection spending. The administration of President Danilo Medina has been able to reduce the deficit while increasing social expenditure following a tax rate hike in 2013 and higher mining royalties (owing in part to renegotiating its contract with Barrick Gold), as well as cuts in capital
expenditure. Increased social spending has focused on its «4% of GDP for education program.»

In 2015, we expect the general government deficit to decline toward 4% of GDP given lower oil prices and steady electricity tariffs, which will benefit the electricity sector. In the past, fiscal results have deteriorated during election periods. We expect some modest election-related spending in 2016 to generate a somewhat higher deficit next year, but our upgrade is premised on an assumption that it will be significantly lower than in 2012. Nearly 4% of GDP of our figures for DR’s general government fiscal deficit pertains to transfers to the broader public sector or its imputed losses. These include 1.5% of GDP of losses at the central bank (a legacy of bank bailouts in 2003), 0.7% of GDP of interest costs on recapitalization bonds injected into the central bank to reduce these losses, 1.4% of GDP of transfers to the electricity sector, and 0.4% of GDP of losses at nonfinancial public enterprises.

We expect net general government debt to average 43% of GDP during 2015-2016 and the interest burden to remain at 16% of government revenues, of which almost one-third accrues on the recapitalization bonds. Cash- and debt-management practices continue to improve. The recently implemented «cuenta unica» centralizes government accounts at the Treasury and serves to manage cash and control expenditures more efficiently. In addition, for the first time, as part of the 2015 budget, congress approved an overall debt issuance limit facilitating more agile debt management, instead of separate limits on external versus domestic financing, and approving individual external bond issuances. It was under this authority that in January and May 2015 the government issued US$3.5 billion in global bonds due in 2025 and 2045. The government used the proceeds to meet part of its 2015 borrowing requirement. It also used US$1.9 billion of the proceeds to buy back, at a 52% discount from par, US$4 billion of 11.4-year debt owed to PetroCaribe, a bilateral lending vehicle of the Venezuelan government. The buyback provided a small net present value savings to the fiscal and cut the headline net general government debt-to-GDP ratio to 41.7% in 2015 from 44% in 2014.

We expect that the government will turn to its domestic markets for at least a quarter of its financing requirement in 2015 and 2016. We consider the DR’s contingent liabilities to be limited, as our criteria define the term. This takes into account Banco de la Reservas’ one-third market share of the DR’s financial system, its relatively small size (gross assets of the banking sector were about 38% of GDP in 2014), and the debt of government-related entities at about 6% of GDP.

The rest of the DR’s sovereign credit profile reflects various institutional weaknesses that are somewhat offset by a diversified economic structure and a track record of solid growth. The DR’s institutions have not consistently supported policy predictability across administrations. The current debate about changing the constitution to permit consecutive presidential terms, which was driven by President Medina’s high popularity, is an example. While a second term for President Medina could reinforce policy continuity, the debate exemplifies the changing nature of institutions in the DR. The constitution was only changed to abolish consecutive reelection in 2010. In addition, policymakers remain unable to resolve long-standing deficiencies in the electricity sector despite their pressure on the government’s budget. That
said, the economy has grown briskly without imbalances, and policymakers have improved monetary and fiscal policy execution during the past several years, underpinning the upgrade.

Standard & Poor’s estimates per capita GDP around US$6,400 in 2015. Real per capita GDP growth averaged 4% over the past five years. We project real GDP to expand by 5% in 2015-2016 following growth of 7.3% in 2014, which was the highest in the region. As in 2014, we expect tourism, mining (with gold production reaching peak output), and construction of social housing to drive growth. Lower oil prices will also boost consumption. We do not see the DR’s tourism offering being materially hurt in the forecast horizon by the greater opening of the Cuban market to American arrivals, given the diversity of origin of the DR’s tourists, the strength of the DR hospitality sector (which is also active in Cuba), and the competitiveness of its tourism.

Assuming that imported oil volume remains stable, oil imports receipts should be reduced by almost 30%. Therefore, we estimate the current account deficit (CAD) closer to 2.4% of GDP in 2015 and 2016, which confirms the improving trend since the CAD peak of 7.5% of GDP in 2011. Growing tourism receipts and gold export volumes also contribute to the lower CAD. An improving CAD and steady foreign direct investment should set gross external financing needs closer to an average 105% of current account receipts (CAR) and usable reserves in 2015-2016. We estimate that external debt net of liquid assets was 84% of CAR in 2014; we expect it to average 81% of CAR in 2015-2016.

Our ‘BB-‘ local currency rating reflects the country’s still limited monetary policy transmission mechanism and small capital markets. The T&C assessment of ‘BB+’ is based on the outward orientation of the Dominican economy, with CAR at 33% of GDP, as well as the fairly unrestrictive nature of the DR’s foreign-exchange regime.

OUTLOOK

The stable outlook is premised on our assumption that over the next year, the government will contain any preelection fiscal slippage and the debate about the immediate presidential reelection will not disrupt the economy.

A more substantial rise in the general government deficit and debt burden than in our base-case scenario would likely exacerbate the DR’s external vulnerability and could lead us to lower the rating, especially if the political willingness to reverse the slippage is lacking. Negative electoral  dynamics that weigh on growth prospects could also put downward pressure on the rating.

We could raise the ratings in the coming years following a reduction in the government’s debt burden and improvements in the country’s external liquidity. Addressing the structural deficiencies in the electricity sector would also help improve the country’s fiscal position, supporting creditworthiness as well.



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