Publication date: 12-Jun-2001
Reprinted from RatingsDirect
News
Dominican Republic Cures Local Currency Debt Defaults; Rating Raised to 'B+', Outlook Positive
Analyst: Richard Francis, New York (1)-212-438-7348; Laura Feinland Katz, New York (1) 212-438-7893
NEW YORK (Standard & Poor's CreditWire) June 12, 2001-- Standard & Poor's today raised its long-term and short-term local currency sovereign credit ratings on the Dominican Republic to single-'B'-plus/single-'B' from 'SD'/'SD' (selective default) and its short-term foreign currency sovereign credit rating to single-'B' from single-'C'. Standard & Poor's also affirmed its single-'B'-plus long-term foreign currency sovereign credit and senior debt ratings and revised both rating outlooks to positive.
The upgrade of the local currency follows the government's action of curing the default on five unrated bonds held by the private sector: the RD$25 million 5% 'Reforma Agraria' notes of 1972 due 1987, the RD$10 million 5% 'Fiebre Porcina Africana' notes of 1978 due 1988, the RD$25 million 5% 'Desarrollo Agropecuario' notes of 1977 due 1992, the RD$50 million 5% 'Huracan David' notes of 1979 due 1995, and the RD$50 million 5% 'Capitalizacion de CDE' notes of 1981 due 2000. In addition to clearing these financial debts, the government is acting to consolidate past due supplier and contractor payables equivalent to 1.4% of GDP with support from bilateral and multilateral aid.
The positive outlook reflects an acceleration of structural reform under the new administration of Hipolito Mejia, whose term began in August 2000. His party has a majority in the Senate and a plurality in the lower house, paving the way for important reforms in areas such tax and tariffs and social security after years of political gridlock. Furthermore, the recent tax and tariff reform will likely improve the government's fiscal flexibility. This combined with recent privatizations, which will aid in staunching losses in the public sector, should allow the overall public sector deficit to fall from 2% of GDP in 2000 to 1% in 2001 on an accrual basis.
The ratings are constrained by:
The low level of international reserves, making the country vulnerable to external shocks. Reserves cover just one month of imports and the country's gross external financing gap to reserves stands at well over 250%.
Weakness in the institutional arrangement of the monetary authority. The central bank incurs losses of about 0.5% of GDP annually and lacks formal independence. The bank has many functions, which fall outside the role of a traditional central bank, such as the development and funding of tourist projects, and promotion of technology and rural development. A monetary and financial reform bill, which would give more formal independence to the central bank (among other things), remains tied up in the Congress (although there is a good chance of passage this year).
Shallow local capital markets and high cost of capital. Capital markets are undeveloped, in part due to the poor track record of the government in its debt management practices. Lack of domestic financing sharply reduces the government's fiscal flexibility and has led in the past to supplier arrears.
Poor social indicators. The average years of schooling is 4.6 years with only 54% of the population attending secondary school. Health statistics generally are lower than the Latin American and Caribbean averages also, with infant mortality at 40 per thousand live births (versus 31 for the region) and 80% of children immunized for measles (versus 93% for the region) according to the World Bank.
The ratings are supported by:
A favorable macroeconomic environment compared to many of its peers. The Dominican Republic has experienced rapid growth from 1995 to 2000 averaging more than 7% in real terms, nearly double the double-'B' average while maintaining a relatively low inflation level. Although growth should slow to 4% in 2001, structural reform such as private participation in the electric and sugar industries, free trade agreements with the Caribbean and Central America (in addition to the Caribbean Base Initiative with the U.S.), and social security reform and fiscal reform aimed at repairing the government's finances should place the Dominican Republic's growth prospects at the top end of its rating cohort in the medium term.
Low stock and favorable structure of external debt. Public sector external debt is expected to fall to 20% of GDP in 2001. More than 80% of public sector debt is with multilateral and bilateral lenders with longer maturities and concessional rates.
OUTLOOK: POSITIVE
With central bank or other key reform and improved external liquidity, the ratings of the Dominican Republic could be raised to the double-'B' category. On the other hand, renewed slippage of international liquidity or newly incurred supplier arrears could lead the ratings to stabilize at the current level. -- CreditWire
This report was reproduced from Standard & Poor?s RatingsDirect, the premier source of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingsDirect Web site at www.standardandpoors.com/ratingsdirect. Standard & Poor?s.
Setting The Standard.
Published by Standard & Poor?s, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2001 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor?s from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor?s or others, Standard & Poor?s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.
Reprinted from RatingsDirect
News
Dominican Republic Cures Local Currency Debt Defaults; Rating Raised to 'B+', Outlook Positive
Analyst: Richard Francis, New York (1)-212-438-7348; Laura Feinland Katz, New York (1) 212-438-7893
NEW YORK (Standard & Poor's CreditWire) June 12, 2001-- Standard & Poor's today raised its long-term and short-term local currency sovereign credit ratings on the Dominican Republic to single-'B'-plus/single-'B' from 'SD'/'SD' (selective default) and its short-term foreign currency sovereign credit rating to single-'B' from single-'C'. Standard & Poor's also affirmed its single-'B'-plus long-term foreign currency sovereign credit and senior debt ratings and revised both rating outlooks to positive.
The upgrade of the local currency follows the government's action of curing the default on five unrated bonds held by the private sector: the RD$25 million 5% 'Reforma Agraria' notes of 1972 due 1987, the RD$10 million 5% 'Fiebre Porcina Africana' notes of 1978 due 1988, the RD$25 million 5% 'Desarrollo Agropecuario' notes of 1977 due 1992, the RD$50 million 5% 'Huracan David' notes of 1979 due 1995, and the RD$50 million 5% 'Capitalizacion de CDE' notes of 1981 due 2000. In addition to clearing these financial debts, the government is acting to consolidate past due supplier and contractor payables equivalent to 1.4% of GDP with support from bilateral and multilateral aid.
The positive outlook reflects an acceleration of structural reform under the new administration of Hipolito Mejia, whose term began in August 2000. His party has a majority in the Senate and a plurality in the lower house, paving the way for important reforms in areas such tax and tariffs and social security after years of political gridlock. Furthermore, the recent tax and tariff reform will likely improve the government's fiscal flexibility. This combined with recent privatizations, which will aid in staunching losses in the public sector, should allow the overall public sector deficit to fall from 2% of GDP in 2000 to 1% in 2001 on an accrual basis.
The ratings are constrained by:
The low level of international reserves, making the country vulnerable to external shocks. Reserves cover just one month of imports and the country's gross external financing gap to reserves stands at well over 250%.
Weakness in the institutional arrangement of the monetary authority. The central bank incurs losses of about 0.5% of GDP annually and lacks formal independence. The bank has many functions, which fall outside the role of a traditional central bank, such as the development and funding of tourist projects, and promotion of technology and rural development. A monetary and financial reform bill, which would give more formal independence to the central bank (among other things), remains tied up in the Congress (although there is a good chance of passage this year).
Shallow local capital markets and high cost of capital. Capital markets are undeveloped, in part due to the poor track record of the government in its debt management practices. Lack of domestic financing sharply reduces the government's fiscal flexibility and has led in the past to supplier arrears.
Poor social indicators. The average years of schooling is 4.6 years with only 54% of the population attending secondary school. Health statistics generally are lower than the Latin American and Caribbean averages also, with infant mortality at 40 per thousand live births (versus 31 for the region) and 80% of children immunized for measles (versus 93% for the region) according to the World Bank.
The ratings are supported by:
A favorable macroeconomic environment compared to many of its peers. The Dominican Republic has experienced rapid growth from 1995 to 2000 averaging more than 7% in real terms, nearly double the double-'B' average while maintaining a relatively low inflation level. Although growth should slow to 4% in 2001, structural reform such as private participation in the electric and sugar industries, free trade agreements with the Caribbean and Central America (in addition to the Caribbean Base Initiative with the U.S.), and social security reform and fiscal reform aimed at repairing the government's finances should place the Dominican Republic's growth prospects at the top end of its rating cohort in the medium term.
Low stock and favorable structure of external debt. Public sector external debt is expected to fall to 20% of GDP in 2001. More than 80% of public sector debt is with multilateral and bilateral lenders with longer maturities and concessional rates.
OUTLOOK: POSITIVE
With central bank or other key reform and improved external liquidity, the ratings of the Dominican Republic could be raised to the double-'B' category. On the other hand, renewed slippage of international liquidity or newly incurred supplier arrears could lead the ratings to stabilize at the current level. -- CreditWire
This report was reproduced from Standard & Poor?s RatingsDirect, the premier source of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingsDirect Web site at www.standardandpoors.com/ratingsdirect. Standard & Poor?s.
Setting The Standard.
Published by Standard & Poor?s, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2001 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor?s from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor?s or others, Standard & Poor?s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.
