Bear Stearns official report on the DR election is out:
DomRep held congressional elections last week and preliminary results indicate that President Fernandez's PLD party did much better than we had expected. While pre-election polls had indicated that the ruling PLD would significantly increase its representation and become the single largest party in congress, they did not, however, show that it would win an outright majority. But the evidence at hand suggests otherwise. The PLD appears to have easily defeated in both the Senate and the Chamber of Deputies a coalition formed by the PRD and the PRSC, the country's second- and third-largest parties, which came together as part of a concerted effort to improve their electoral chances against the PLD. We believe that by giving it a stronger mandate a PLD majority in congress would enhance the governability prospects of the Fernandez administration as it enters the second half of its term. This, in turn, should improve the government's likelihood of making significant progress on its economic and institutional reform agenda, which seeks to modernize DomRep's business environment and promote foreign investment in the country by strengthening state institutions, at least until campaigning for the 2008 presidential election heats up and makes DomRep's political climate less amenable. Moreover, we believe that the PLD's electoral victory, which we view as a sort of referendum on Fernandez's presidency, should help the government implement the legislative framework necessary to enter DR-CAFTA while keeping any ensuing fiscal imbalances in check. Accordingly, we view the outcome of the May 16 legislative election in DomRep as positive for the credit.
The good political news is coming at a time when the Dominican economy continues to deliver better-than-expected results. Real GDP expanded by a whopping 12.6% in the first quarter of the year, driven by the construction, communications, financial services and the commerce and transportation sectors. Meanwhile, foreign direct investment (FDI) was up by 6% during the period to top US$245 million, and inflation for the quarter was only 1.5%, putting it right on track to meet the 5%-7% target for the year as a whole. Net international reserves currently stand at US$1.6 billion, their highest recorded level ever. Lastly, after appreciating by more than 6% during the first quarter, the Dominican peso has remained remarkably stable and continues to trade at around 32.5 pesos per dollar.
DomRep's exceptional economic performance and brighter political prospects underpin the outperformance of its bonds, which have returned almost 5% so far this year, compared with the much more subdued 0.24% returned by our BSEMIX sovereign index and the 0.66% returned by its Latin American component. We continue to like DomRep's fundamental credit story. We currently rate the bonds outperform.
Franco Uccelli
561-672-4780