Bear Stearns and Standard & Poor’s have issued their monthly reviews of the Dominican economic situation. Standard & Poor’s Rating Service released a report yesterday that looks at the economic challenges facing the signatories of the DR-CAFTA free trade agreement. The report looks at the complementary agenda at the core of DR-CAFTA and looks at some of the important issues and challenges ahead for these countries. The report is called “Credit FAQ: DR-CAFTA’s Success Depends On Meeting A Challenging Agenda.” In summary, the report says that if these nations cannot properly address the important issues, it will be denied much of the promised economic improvement. Analyst Roberto Sifon Arevalo said that addressing these issues will be costly and difficult because the region, including the Dominican Republic, has high social needs and one of the lowest levels of tax revenue among all of the sovereign nations rated by S&P. Sifon Arevalo said that there is a “fiscal rigidity, that added to the expected loss of income due to the elimination of trade tariffs,” which creates a restrictive scenario for just what can be done within the complementary agenda. The key point of the analyst’s report is the requirement for a “unique partnership between the public and private sectors to help bolster growth, strengthen public finances and improve regional creditworthiness.” Sifon Arevalo pointed out that the free trade agreement would mean little if the region’s producers can’t “move their products in a quick, easy and cost-efficient manner.” He also signaled the need to provide an educated work force that is well prepared to join the more technologically intensive markets in agriculture as well as in manufacturing. There is a stark warning that says that the region may not survive, let alone compete with China and India, if it does not face these realities. On the more positive side, the analyst says that the region’s financial sector is “quite liquid” and capable of facing a large demand for credit, but it is extremely important for the region’s controls on banking, supervision and credits be “deepened and integrated to provide transparency, better efficiency and reduce risk and the cost of doing business.” He warns that the DR-CAFTA agreement is not a magic solution for the area’s problems, and that important adjustments are needed in order to obtain suitable results.
The most recent Bear Stearns Emerging Markets Sovereign Journal Weekly notes that the Dominican Republic has announced that it reached an agreement with a group of international commercial banks known as the London Club. The agreement will allow the deferral of US$180 million worth of debt payments due in 2005-2006 for up to five years. As part of the agreement the Dominican Republic paid out US$35 million in overdue payments that were owed to commercial banks that had accumulated as of December 2004. The Fernandez administration now has to send the agreement to Congress, which it has not yet done, according to Bear Stearns. However, the delay was apparently caused by the overlong time that the bank’s lawyers took in reviewing the contracts and the supporting documents. Sources say that earlier this week the papers were sent to the proper authorities and it is now up to Congress to approve the deal in a timely fashion. Bear Stearns says that any delay in the agreement’s approval will produce negative waves in the financial community, generating undue “financial uncertainty”, and this could promote negative feeling for both international and national investors and bring the improving ratings of the Dominican Republic to a halt. Bear Stearns also looked at the tax reform proposal that was passed in the Chamber of Deputies yesterday. The report from Bear Stearns says that passage of the legislation is a key part of the IMF agreement and the market is following the progress of the legislative process quite closely.