NEW YORK, Oct. 1 /PRNewswire/ — Standard & Poor’s today placed its single-‘B’-plus long-term foreign currency sovereign and senior unsecured ratings and its double-‘B’ long-term local currency sovereign credit rating of the Dominican Republic on CreditWatch with negative implications. Standard & Poor’s also placed its single-‘B’ short-term foreign currency rating of the Republic on CreditWatch negative. At the same time, Standard & Poor’s affirmed the single-‘B’ short-term local currency rating of the Republic. The CreditWatch action reflects the Dominican Republic’s fragile external liquidity position that leaves it ill-prepared to face the challenges of reconstruction after Hurricane Georges destroyed much of this year’s crop, which represents 14% of GDP and 7% of exports. The country’s low level of reserves, estimated at one week’s import coverage (including free trade zones) using a pre-hurricane figure of US$168 million for net international reserves, prompted the central bank to seek rescheduling of US$125 million of Paris Club debt service due in the coming three months. Standard & Poor’s expects the ensuing deterioration of the Dominican Republic’s trade balance (projected before the disaster to reach 13% of 1998 GDP) to be partly mitigated by increased remittances and payments on insurance premiums, keeping a revised current account deficit below 5%. The Dominican Republic’s tourist infrastructure also has not been badly damaged as originally feared. Standard & Poor’s expects the current account deficit to be financed by accelerated disbursements and new money from official creditors and by donor aid. However, the country’s external liquidity position is weak: international reserves amount to only 22% of the country’s 1999 external financing requirements. The Dominican Republic’s ratings remain constrained by: — A delicate external liquidity position, at one week of import coverage. — A lack of fiscal flexibility stemming from continued institutional weaknesses, mounting transfers to loss-making public enterprises, higher fixed costs associated with public salary increases, and existing debt arrears to suppliers accumulated in prior administrations. — The expectation of continued legislative standstill on tax and energy reform. — A central bank, which under current and proposed legislation, lacks autonomy, thus potentially subjecting monetary policy to political objectives. The ratings remain supported by: — Political transition leading toward greater accountability and decentralization, including improvements in the judicial appointment system, both of which should continue to attract foreign investment and restore private sector confidence; — Continuing strength of free-zone areas and tourism, which generate foreign exchange and contribute to dynamic GDP growth; — Efforts to improve the policy environment for foreign investment and the development of more traditional sectors of the economy; — Improving macroeconomic volatility cycles under the Fernandez administration, including relatively tight fiscal policy and single-digit inflation; and — A relatively moderate external debt burden and correspondingly low debt service ratios. Standard & Poor’s expects to resolve the CreditWatch action in the coming months. Although this external shock worsens the sovereign’s external position, most of the Dominican Republic’s other macroeconomic indicators compare favorably with those of other sovereigns in the single-‘B’ category. If the government’s policy responses are robust and secure adequate official-creditor financing, the ratings could be affirmed at the current level. If the country’s net international reserves continue to fall, however, the ratings could be lowered modestly, said Standard & Poor’s– CreditWire.
