Global ratings agency Fitch Ratings has granted the Dominican Republic a “B” rating, stating that the country’s ratings and stable outlook are underpinned by its resilient and diversified economy, high per capita income, track record of macroeconomic stability and sustained access to official lending and international capital markets. These strengths are balanced against structural weaknesses in fiscal accounts such as a narrow revenue base and rigid budget expenditure, rising government debt and external financing needs, and a weak external liquidity position.
They state that the Dominican economy has shown resilience through adverse external and domestic cycles. The country’s five-year average growth is at par with the ‘B’ median of 4.5% in 2013. Economic growth could average 4.2% in 2014 – 2015, supported by improving consumer confidence, higher public spending and the dynamism of tourism, free trade zones and gold mining.
The Central Bank is committed to preserving price and currency stability. Inflation reached 4.7% in October 2013 and is likely to end the year within the official target band of 5% +/- 1%. Exchange rate flexibility is constrained by domestic economic actors’ sensitivity to sudden exchange rate movements, as evidenced by the temporary pressures on the Dominican peso in the third quarter of 2013. This highlights the importance of maintaining policy credibility and adequate international reserves to support the economy’s resilience to external shocks.
The post-electoral fiscal adjustment is proceeding in line with Fitch’s expectations. The incoming Medina administration brought the central government deficit down to an estimated 2.9% of GDP in 2013, from 6.6% in 2012, through a combination of public investment cuts and tax hikes. A narrow revenue base and spending rigidities, chiefly burdensome electricity subsidies and transfers, are likely to impede further deficit reductions.
General government debt doubled from 18% of GDP in 2007 to an estimated 36% of GDP in 2013, driven by recurrent primary fiscal deficits and issuance of central bank recapitalization bonds (5.3% of GDP). The debt and interest burden could reach 241% and 17% of fiscal revenue in 2013, well above the respective ‘B’ medians. Dominican Republic’s debt tolerance is constrained by its narrow revenue base, low domestic savings rates and poor record of debt restructuring.
Rising mining production enhances the already diversified structure of the Dominican economy and contributes to mitigate near-term fiscal and external imbalances. Despite this, external financing needs will remain among the highest in the ‘B’ category at 134% of reserves in 2014, driven by high current account deficits and hefty amortizations on official loans. Foreign reserves approached US$4 billion in October 2013, 2.5 months of current external payments, one of the weakest coverage ratios in the ‘B’ category.
Maintaining market access and multilateral support are key for the Dominican Republic. The sovereign issued US$1.5 billion in global bonds in 2013 and intends to raise the same amount in 2014. The government also relies heavily on preferential loans from Venezuela under the Petrocaribe agreement.
http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=809516