A statement from Frankfurt-based Commerzbank’s Emerging Markets Strategy team, released yesterday, provides detailed analysis of the IMF agreement. It informs about the approval, reported in today’s press, of the $670m program for the DR. The statement provides a summary of the DR Central Bank’s Letter of Intent, which in their words “does not contain any major surprises”.
Commerzbank expresses its continued belief that the most likely scenario is for the government will be to propose a maturity extension for the external bonds. They also believe that this will apply both to the $2006 and the $2013, as both the government and the IMF seem to put much importance on “equal treatment among creditors”. In terms of debt service, continues the statement, the $45m coupon payment on the $2013 due on 23 January has not yet been made, but the government’s intention is to make the payment within the 30 day grace period.
The analysts detail the main targets under the program in the fiscal and structural area. The government deficit is projected to come down to -0.7% in 2005 (from -2.7% in 2004) and move into a surplus of 0.7% in 2006. Adding to this the quasi-fiscal deficit of the central bank, the consolidated public sector deficit would be -3.9% in 2005 (-6.7% in 2004) and -1.8% in 2006. The government will develop a tax reform package by March, which among other things will eliminate special tax regimes in border zones and tourism. The tax reform is designed to make up for revenue losses arising from the implementation of the Free Trade Agreement with the US, which will be approved some time this year.
Commerzbank observes that both the $2006 and particularly the $2013 have rallied since the beginning of the year, bringing yields down to 11.2% and 10.8%, respectively. The strategy team is of the opinion that further upside is now limited for the time being. However, once the bond exchange has been implemented successfully they believe that there is further room for spreads to tighten. Their 2005 outlook forecasts a spread of the DR EMBIG spread of 500 from currently 662.
The EM strategy team concludes that the main risk to watch will be the implementation of the fiscal program. A major effort of the government is needed, according to Commerzbank, to persuade Congress to approve the 2005 budget in line with the IMF program and without new tax exemptions for the sugar industry. These and other spending demands are likely to emerge soon, posing a threat to fiscal adjustment. However, the macroeconomic assumptions of the program (e.g. growth) are conservative and may provide some room for maneuver for the government.