Franco Uccelli, who reports on the DR market for Bear Stearns, issued a release commenting on the effects of the appreciation of the DR currency. He concludes: “Fundamentally, the DR is today in better shape than it has been for a long time.” In his opinion, the country has entered into a recovery phase after the severe crisis and that the appreciation of the peso is the result of increased trust in a more sensible government and its judicious economic policies that have allowed a myriad of the country’s key macro variables to improve and stabilize over the past few months.
Uccelli writes: “A tight monetary policy, a flexible and competitive exchange rate regime, and enhanced consumer and investor confidence in the Dominican government and its management of the economy have allowed the Dominican Republic’s currency to notably appreciate and to achieve a degree of stability not seen since before the country’s most serious economic and financial crisis in recent times erupted in May 2003. A stable currency has underpinned improvements in a number of macroeconomic variables, all of which are contributing to a reinvigorated climate of stability in the country.”
He compares the peso now trading since November at around RD$30-US$1 to the RD$42/US$ level in 2004. In his opinion, “given the country’s improved general outlook, country risk will likely continue to be on the upside.”
He focuses on how a stable and stronger currency is easing the burden of servicing the external public debt. He says that the appreciation could translate at the going rate to debt service savings for 2005 close to 20%. The government had transacted with the IMF at a rate of RD$37-US$1.
Another positive, he explains, is the build-up in foreign reserves that has led the DR to significantly outperform its IMF reserves target for the first quarter. He notes that the DR’s net international reserves (Central Bank methodology) have more than doubled since the Fernandez administration began in August 2004, increasing from US$350 million at the time to more than US$800 million at the start of February 2005. “The impressive build-up in foreign reserves has put the Dominican Republic on track to significantly outperform its IMF reserves target for the first quarter. Indeed, the country’s current reserves level has put it close to meeting its target for the year as a whole,” he writes.
He also comments on the effect the stronger currency has had on consumer prices. He mentions that the yearly rate of inflation has dropped to 18.8% in January, compared with 28.7% in December, and that it may fall to around 8% this month due to base effects. Forward-looking inflation is now running in the 7%-9% range, suggesting the country could-if current trends are sustained-outperform its 11%-13% IMF inflation target for this year.
Bank loans are also down as a result of the strengthening currency. He comments that after these climbed to almost 60% in mid-2004, the average interest rate paid by Central Bank CDs has dropped to around 25.5%, where it has remained since early December. “A positive side-effect of this will be a decline in the size of the country’s quasi-fiscal deficit, which is estimated to fall from 4% of GDP in 2004 to 3.2% this year,” he forecasts.