Franco Uccelli, a research analyst for Bear Stearns, writes today in a Dominican Republic market commentary that, despite the partial reversal of the recent rally experienced by Dominican bonds and the continued uncertainties (final approval of next year’s budget, restoration of an agreement with the IMF, the restructuring of the country’s bonds, etc), he believes that “in the end reason will prevail, with each positive development giving the market a small reason to celebrate and to support the country’s bonds.”
Uccelli says that the reversal came “as a bit of surprise” and in his commentary he tries to explain the reasons for the retrenching of the Dominican bond prices. He analyses that not much has changed fundamentally over the past weeks and the DR economy continues to benefit from positive momentum garnered with the change of government. He comments that while fiscal challenges remain, the Fernandez administration’s determination to implement harsh corrective measures give hope that the country’s overall fiscal condition will significantly improve in 2005.
Uccelli tries to explain the reversal as such:
“One explanation could simply be that when the country’s bonds hit target levels (in the mid-90s for the ’06s and in the mid-80s for the ’13s) profit-taking ensued. A second hypothesis suggests that seasonal factors may have contributed to the recent decline in prices. As we enter the holiday season, the market’s attention appears to be focused on year-end matters rather than on potentially risky investments and is already thinking in terms of the New Year. This may have led investors to ease off the accelerator a bit and to shift to a ‘smooth-sailing gear.'” He comments that the market may have opted to take a respite from what has been a rollercoaster ride for Dominican bonds this year.
“Perhaps the last thing that investors want during the relatively slow holiday season is to worry about whether Dominican Republic’s Congress repealed the corn syrup duty, or if the budget was sanctioned as presented, or if a date has been set for the IMF to sign off on the country’s new program. Accordingly, for some, a conservative stance may be warranted.”
He continues to look favorably on investing in Dominican bonds. “For those who can tolerate the risk… this may present some interesting opportunities. Despite the recent noise surrounding the corn syrup duty, we believe that the government’s view is likely to prevail, and that the prospects of Dominican Republic’s inclusion in CAFTA will likely be preserved,” he states.
He is optimistic also that the budget will be approved in time and explains that if this does not happen, the Fernandez administration will have “too much discretionary power to allocate fiscal resources in 2005, something that the opposition-controlled Congress would surely like to avoid.”
As for the IMF program, he comments that the willingness of both the government and the Fund to make things work suggests to us that an agreement may be imminent. He explains that the agreement would then be followed by a presentation to the market of a bond restructuring proposal, one that the Dominican government insists will be market-friendly and will preserve the NPV of the country’s outstanding bonds as much as possible.