Standard & Poor rating update

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DR Local Currency Bono 119-05 Assigned 'B' Rating
NEW YORK Aug. 22, 2006--Standard & Poor's Ratings Services said today that it assigned its 'B' long-term local currency rating to the bono 119-05 local bond due in 2009 recently issued by the Dominican Republic (B/Positive/B sovereign credit ratings). The bond, issued in two equal tranches on Aug. 8, 2006 and Aug. 11, 2006, totaled DR$1.6 billion.

"The debt issuance represents an important milestone in improving the sovereign's ability to issue debt locally in pesos," said Standard & Poor's credit analyst Richard Francis. "As part of the development of the local market, the government is launching an electronic platform that will allow the exchange of the bonds in real time," he added.

The latest bond issuance was used to pay domestic arrears that had accumulated over the years to a number of local suppliers. Stricter controls by the Ministry of Finance on various ministries and agencies should disallow the government from building similar arrears in the future.

Francis explained that the issue is a significant step in the government's establishing a positive track record and opening up an important source of funding. Pension reform enacted in 2001 (and only implemented in 2003) created a funded pension system to be administered by private financial firms specializing in pension provisions, which have limits on the types of investments they can make. These funds could be an important source of financing for the government if it gains credibility in the local markets.

"Historically one of the sovereign's key constraints has been its poor debt management practices, especially with regards to its local bonds," Francis said. "Prior to 2001, the government was in default on a number of small local issues that totaled less than 1% of GDP. The defaults were due to poor debt management, rather than the sovereign's ability to pay," he added.

According to Francis, the government has made a concerted effort over the last two years to implement critical institutional reform, including improvements in its debt management. As an example, the central government recently took over responsibility for servicing its external debt from the Central Bank.

Standard & Poor's said that the Dominican Republic's positive outlook balances improved economic prospects and moderate government debt levels with weak institutions and the large quasi-fiscal deficits of the central bank that constrain monetary policy. Further improvements in governance, along with sustained economic growth and additional fiscal measures to contain the fiscal deficit, could lead to improved creditworthiness.

"The development of the local debt market is an important challenge for the government. If successful, this could reduce the government's exposure to foreign currency debt and allow the country to further boost its external liquidity," Francis noted. "Finally, it could also provide the government with an important means of funding, enabling it to seriously tackle the problem of the central bank's quasi-fiscal deficits," he concluded.