Frnaco Uccelli of Bear Stearns is optimistic about the DR. “The Dominican economy managed to defy all expectations and expand by a better-than-expected 4%, leading the government to suggest that growth for the year should come in close to that level, rather than the original 2.5% level projected in mid-January. All in all, positive fiscal news and higher-than-expected growth for the first quarter (a sign of resilience, in our view), coupled with consistent evidence of solid monetary performance and a likely successful bond restructuring, bode well for the DR’s medium-term macroeconomic prospects. Accordingly, we are sticking to our outperform recommendation on the credit, which we have had since early November 2004.
Uccelli reports that the RD$5.5 billion surplus (close to US$200 million) at the Non-Financial Public Sector (NFPS) level for the first quarter of the year is leading the Dominican government to revise its fiscal projections for 2005.
Uccelli attributes the positive result to the Fernandez administration’s “unwavering commitment to maintain fiscal discipline and to comply with the terms of its current stand-by agreement with the IMF.” He says this was facilitated by a 16% increase in revenues and a 6% decrease in expenditures during the quarter compared with the same period of 2004.
According to Uccelli, the first quarter’s strong fiscal out-performance has prompted the government to indicate that the country is on track to record a 0.9% of GDP NFPS surplus in 2005, compared with an original deficit target of a 0.7% of GDP. If accomplished, the 0.9% of GDP surplus would imply a rather significant 3.6% of GDP adjustment at the NFPS level from last year, when the country’s NFPS deficit was equivalent to 2.7% of GDP. Moreover, should the government’s 3.2% of GDP quasi-fiscal projection for this year be met, the improved NFPS results would help to reduce the consolidated public sector deficit for this year to 2.3% of GDP, from an original deficit target of 3.9% of GDP earlier in the year and from last year’s whopping 6.7% of GDP fiscal shortcoming.
Uccelli expects the government to ease fiscal conditions during the remainder of the year particularly in the run-up to next May’s congressional election, thus he forecasts the NFPS accounts will more likely be balanced or register a smaller surplus. He also reports that that there is room for the Central Bank to deliver a better-than-expected quasi-fiscal deficit for this year. At the moment, the official quasi-fiscal deficit projection stands at 3.2% of GDP. However, on the back of sharply lower interest rates, he forecasts that the monetary authority may be able to outperform such target by some 0.2%-0.3% of GDP and close the year with a quasi-fiscal deficit in the 2.9%-3.0% of GDP range.
“Should such positive results come to fruition, the country’s consolidated fiscal accounts could conceivably produce a deficit equivalent to only 2.5%-3.0% of GDP, a sizeable improvement on 2004’s result,” he comments.