The financial firm Goldman Sachs has issued a report to say the next two months in the DR could be more problematic than expected.
With the IMF agreement on hold and a good chance for the country to default on the upcoming July coupon, Geoff Gottlieb titles his report ?Dominican Republic: One Step Forward, Two Steps Back.? He deals first with a bit of positive information and mentions how the incoming and outgoing authorities are now striving to work together. The two Presidents have signed an accord to submit a fiscal reform package to Congress by 15 July and their respective teams have been meeting for several hours a day in preparation. Gottlieb calls this an ?important breakthrough? that is crucial to resurrecting the IMF program and one that did not seem likely just a few weeks ago.
The financial analyst goes from there, however, to cite a couple of problems that have recently become evident. While Goldman Sachs had predicted a fiscal deficit for the non-financial public sector for the year of 2% of the GDP, it now appears that it will significantly exceed that number ? and fall even farther from mark the IMF has set of 0.2% of the GDP. Secondly, the fiscal reform draft being put together by Leonel Fernandez and his team makes an adjustment that is closer to 1% of the GDP, which the analyst calls insufficient. Furthermore, the tax reform would increase the ITBIS and other taxes and leave gas and electricity subsidies, valued at about 1.5% of the GDP, in place.
Gottlieb says that to win back the IMF and reactivate the financial assistance package, the government must either increase its revenue to make up for the 2-3% GDP loss, find additional financing, or both. The IMF would most likely push for increased government income in the fiscal reform, while realizing that political and economic limitations will make it difficult, if not impossible, to recoup the full 2-3% GDP adjustment in six months? time. Additional financing would be difficult to achieve, especially without the IMF program in effect, unless these funds are provided by the official sector.
While the people at GS believe more IFI money to be unlikely, they do not count it out. Gottlieb says, however, that the quality of reform measures will have to be stepped up during this political interim that he says is suffering from ?a fundamental lack of dialogue, urgency and order.? Confidence-inspiring reforms will be required if the official sector is to step in at all.
With regards to the July coupon, Gottlieb says they had previously believed the payment would be made, given its small amount, the authorities? repeated declarations and the futility of a default at such a time. He says there are two reasons, however, that suggest the necessary funds may not be handed over when due. The first is the government?s claim that the Paris Club, one of the DR?s major creditors, will not allow them to make payment until comparability of treatment is achieved. Goldman Sachs says that this is perhaps being used as an excuse not to make a payment. The second potential motivation for defaulting on the July coupon may be President Mejia?s preference to leave the coupon for the incoming authorities to handle. The grace period would end one week after President Fernandez? inauguration and would allow them only a few days to organize the transaction, however.
Gottlieb concludes by calling the current climate in the DR ?precarious? without even taking into account a host of other economic deficiencies; Central Bank maturities, undercapitalized banks, the electric situation and ongoing blackouts among them. Gottlieb says what is needed is to tackle these issues one by one and address the liquidity concerns for the next few months.
A Goldman Sachs report dealing with other issues is expected next week.