Geoff Gottlieb, associate economist for Goldman, Sachs & Co, disagrees with comments made by Finance Minister Vicente Bengoa who this week declared that the DR has cleared its arrears with external creditors after paying off US$362 million in the last four months. Sachs does not believe this is true and writes that the situation is likely more complicated.
He is primarily skeptical that the appreciation of the peso and strong recovery in output that has improved tax collection has provided the sufficient fiscal over-performance to clear arrears at the level mentioned by Bengoa. “Until we see fourth-quarter fiscal numbers, it will be hard to know whether the aforementioned clearing of arrears has a) even occurred or b) has been financed through better fiscal performance rather than an accumulation of other arrears, which is our suspicion,” he writes.
Furthermore, Gottlieb adds that “the main reason no IMF program is going forward is the lack of a clear plan on financing. In addition to ongoing delays regarding the passage of the budget, the authorities remain unable to articulate what the current size of the financing gap is (2005 shortfall plus current arrears) nor what combination of debt exchanges, new money, and reschedulings will ensure that the gap is closed. An IMF program by end-January remains possible but increasingly difficult.”
He explains of a third complication. “If the authorities want an exchange of external debt (which is our base case), there is some question about the likelihood of success. Unlike Uruguay, investors may find the threat of default questionable given sharply rising reserves, 2-3% growth, and very small bonded coupon payments in 05. Furthermore, the need for relief from external creditors may seem strange to investors when a) the gap is solely domestic not external and b) getting domestic creditors to simply maintain exposure would easily fill the gap.”
Gottlieb continues: “To date, investors have remained optimistic on the Dominican Republic, partly due to abundant liquidity in emerging market debt. Indeed, this is part of the reason that we now think a 10.5-11% exit yield would be possible on an exchange. But investors should keep in mind that government control of Congress has been weak, government handling of the financing situation including the IMF has been slow, and government needs in terms of participation in a possible exchange may be particularly high (80-90%) for success.”
Gottlieb expects surprises, however. He concludes: “Watch for this process to evolve in coming months in possibly unpredictable ways. As we mentioned in our November 4 piece, the government could eventually opt against a debt exchange, meet the 2005 gap via better domestic rollover rates and meet the 2006 bullet maturity by returning to the market. Provided emerging market liquidity remained abundant through the middle of the year and the authorities were able to demonstrate decent performance under the IMF program, such a scenario is not out of the question.”