Another report on the DR's Economic Situation

frederic

DR1 Expert
Jan 1, 2002
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eFlash from: Standard New York Securities, Inc. (Miami Branch)
DominicRepublic- Too Little, Too Late?
-11 February 2003-

The deterioration in domestic confidence that we highlighted in our last report (Nov. 25, 2002) continued into 2003. The Dominican consumer has since been hit with skyrocketing prices of oil, energy and other imported goods, resulting in rising inflation and diminishing purchasing power. This, combined with the very sluggish recovery in the external sector, placed further pressure on the DOP, which has depreciated beyond our original expectations. The recent bout of FX weakness has led the currency to reach almost DOP 26 per US$. Accordingly, a series of policy measures were announced last week, which, in our opinion, fail to address the root of the problem. On February 7th, the Monetary Board announced a package of monetary measures which, through a combination of higher reserve requirements, increased use of open market operations and dollar lending limitations, aim at draining market liquidity and curtailing FX depreciation. However, we believe the solution to the current crisis of confidence - engendered and aggravated by a combination of policy imbalances and external shocks - lie in the fiscal sector and that the monetary measures, though expected to be transitory, will likely have a longer-term negative impact on the economy, in our view, and will do little to solve FX pressures.

Following the monetary policy tightening, President Mejia announced fiscal cuts on Sunday. However, Mr. Mejia's speech concentrated on blaming the current instability on the weakness in the external environment, particularly the sharp increase in oil prices, and failed to deliver the much-awaited orthodox fiscal measures needed to instill confidence. The expenditure cuts announced by Mr. Mejia appear inadequate and transitory:

? Reduction in usage of air conditioning in public buildings during February, March and April
? Suspension of public sector purchases of motor vehicles during 1H03
? Suspension of import tax exemptions on motor vehicles during 1H03
? Suspension of official international trips as long as oil prices remain at current levels
? Suspension of government advertising expenditures for three months

In addition, the commitment to make a monthly deposit of DOP 100 mn (around US$ 4 mn) at the Central Bank is not likely to have a material effect (nor would the additional one-time DOP 300 mn the government would be sending to the Central Bank) and it is not clear where would these funds be coming from. On the revenues side, Pres. Mejia announced a 10% tariff increase on selected imports, but a clearer definition of the exempted goods is needed in order to define its potential contribution to the fiscal accounts. In any case, increasing import tariffs feeds directly into inflation via more expensive imported goods (imports represent 46% of GDP). The government's apparent lack of willingness to implement more structural, permanent savings is likely to further damage the administration's credibility, dampening economic expectations that may in turn lead to an increase in dollar demand.

On balance, the combination of monetary and fiscal policy measures recently announced are unlikely to deliver the much-needed confidence shock and are not likely to have the intended stabilizing effect on the FX rate.In addition, the potential longer-term negative impact should not be overlooked. The reduction in liquidity and the consequent increase in interest rates are likely to result in a further deceleration in economic activity and a decrease in private investment and consumption, which would in turn affect the fiscal accounts via reduced tax revenues. Furthermore, the potential effect on the banking system could be important. The most important impact of higher interest rates will be felt on asset quality: DR banks typically re-price their loans on a quarterly basis, which provides a high degree of flexibility to adapt to changing economic conditions. But an increase in interest rates translates into a higher debt burden for borrowers who under the current economic environment, characterized by declining private sector purchasing power, will increasingly face greater difficulties in servicing their debts. We note that bank credit to the private sector was 34% of GDP as of Dec. 2001. As a result, past due loans are likely to increase as well as provision costs, which ultimately pressure profitability.

DR banks were already adapting to the changes in past due loan classifications introduced last June, which increased the reported amount of past due loans (as the new classification includes both the overdue installment and the loan balance) and decreased loan loss reserve coverage to below 100% at many banks. Preserving asset quality, increasing reserves to more comfortable levels and managing foreign currency positions will be a more difficult challenge for DR banks amidst a weakening economic environment. We will be visiting the country in the coming days and will be updating our view as we gain more insight into the impact of the recently announced measures on the Dominican economy and the banking sector.

A word on Dominican Republic Sovereign Debt

Despite the recent DOP depreciation and deterioration experienced by the Dominican economy, we believe the likelihood of default remains low. Public sector debt remains low at around 21% of GDP, with external debt service around a manageable 10% of exports. Furthermore, the government has US$ 315 million (out of the recent issuance of the US$ 600 million sovereign bond) to face short-term debt service payments coming due in 2003. We also note that Dominican bonds tend to be dominated more by market technicals rather than by fundamentals, so we do not expect a material impact on debt asset prices unless further deterioration in the banking sector becomes evident. On the longer-term outlook, we advise caution as the risks of a further deterioration in the country's economic fundamentals have increased.
 

socuban

New member
Nov 24, 2002
509
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bad, bad ,bad

This should be translated, mass printed and hand delivered to every Dominican voter.
 

Golo100

Bronze
Jan 5, 2002
2,138
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The dollar is over $26 now

Everytime Hippo opens up his big mouth the dollar goes up. For instance, he insulted the top businessmen of this country yesterday from Mouna Ayoub's sailboat. He stated "I don't need their advice and I can do as I please. What is done is done. I don't have to apologize to anyone. This is why I am the chief"

Result: The dollar went up and I am buying any dollars you guys can offer me. The peso is dead as long as Hippo is in power.

TW
 

mondongo

Bronze
Jan 1, 2002
1,533
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This looks like an accurate report. I thought debt/GDP was higher than 21%, especially since a lot of the debt is owed in US$. They claim that the risk of default is low; but that will change in the very near future as the economy falters and the principal of old loans come due. I'm glad to see CONEP beginning to stand up to The Bald Buffoon.
 

andy a

Bronze
Feb 23, 2002
532
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Good point rasilm.

As I stated in previous threads, when the BIG one hits (devaluation), the banco banditos will find it irresistible to take all the dollars they're sequestering for themselves and leave the depositors with pesos.

It's happened in other places. The only thing that might save the dollar holders would be the fear by the banks and the government that doing so would do more harm than good - scaring away foreign investment permanently.

With the peso in virtual free fall, it can't last much longer.