Standard & Poor’s ratings services said today it has lowered its long-term foreign and local currency sovereign credit ratings for the Dominican Republic from B- to CCC. With its continued negative outlook, credit analyst Richard Francis says the DR faces a severe liquidity crisis. He explains: “There is a substantial risk that delays restarting its two-year US$600-million standby program with the International Monetary Fund will further depress investor confidence, lead to additional capital outflows and heighten the risk of default to private creditors. Public sector external debt service totals nearly US$900 million in 2004, while the Central Bank currently holds less than US$280 million in liquid international reserves. Nearly 20% of this debt service is due to private creditors and, hence, subject to a default.”
Francis points out that the government is already running arrears with bilateral creditors and is applying unorthodox moral suasion on economic agents to support the foreign exchange rate. Standard & Poor’s estimates that the government’s 2004 borrowing requirement will approach 20% of the GDP, including refinancing of Central Bank certificates of deposit. This gap will be difficult to fill without multilateral support. Francis does not hold much optimism on the situation.
“To date, the government’s policy has failed to respond adequately to the deepening financial and economic crises,” he notes. “Even if the government successfully presents a proactive policy strategy to reverse the crisis and re-establish its programs with multilateral creditors, there is a substantial risk that poor policy implementation could derail the program anew, particularly in the run-up to the May 2004 Presidential elections,” he concluded.
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