The latest report from Bear Stearns suggests that the case for restructuring the Dominican Republic’s sovereign debt is very weak. The international investment and banking firm believes that the costs (reputational, legal and financial) will be high in relation to the need as measured by the financing gaps. For example, the balance of payments gap, as identified by the IMF for 2004, is US$300 million. This compares to roughly US$8.5 billion in expected exports of goods and services this year, and between US$1.3 and US$2.4 billion in capital flight. The best way to close the balance of payments gap, according to BS analyst Franco Uccelli, is to take measures to increase confidence in the peso, rather than provoke a debt default. On the fiscal side, the central government is expected to run a surplus this year under the provisions of the IMF program. The fiscal weakness in the public sector stems from the quasi-fiscal deficit of the Central Bank (nearly 4% of GDP). The most effective way to deal with the fiscal gap, says Bear Stearns, is to restructure the Central Bank CDs into longer-term instruments. Nevertheless, continues the report, it is prudent to consider debt-restructuring scenarios, given all the current noise about Paris Club comparability of treatment. The report considers variations on three possible restructuring scenarios, which it calls the (Paris Club) NPV equivalence solution, the US$300-million solution and the balanced budget solution. To call any of these “solutions,” however, is a gross misnomer in view of the costs of default, but they all represent moderate debt arrangements “that are consistent with our assessment of the DR’s ability to pay.” The conclusion of Bear Stearns’ analysis is that DR global bonds (’06s and ’13s) are currently undervalued, but they abstract from issues such as “deal risk” – the legal battles that could make a restructuring acrimonious – political risk and the risk that the DR falls out of compliance with the IMF program in the near term, all of which could negatively affect bond prices. The analysis implicitly assumes that the “restructuring process” is more akin to Uruguay’s (2003) than Argentina’s (2001-) or Ecuador’s (1999-2000).
For full details of the report, see http://dr1.com/news/2004/Bear_Stearns.pdf.