Standard & Poor?s Ratings Services issued a commentary on Thursday, 17 June that examines the challenging political environment and difficult economic situation facing President-elect Leonel Fernandez. The article, titled ?Tough Choices and Difficult Challenges Ahead for Dominican Republic President-Elect Fernandez,? says the new government will face significant financing needs over the next two years and effective reform efforts will be necessary to stave off further economic fallout. The rating service also says that Fernandez may find it tough to get the reform approved and implemented.
?With its International Monetary Fund Stand-By Agreement on hold, important decision points on debt payments looming, fiscal reform possibly delayed and a power crisis unfolding, Fernandez will have some hard decisions to deal with even before he takes office on 16 August 2004,? said S&P credit analyst Richard Francis. ?The country?s overall fiscal deficit is running much higher than programmed due to fiscal slippages caused by a weaker-than-expected foreign exchange rate and high oil prices. The fiscal slippages and lack of external financing could raise the government?s estimated financing gap above US$100 million, increasing the risk of a cessation of payments or a comprehensive restructuring of the country?s debt,? he added.
Francis furthermore explained that the need to implement far-reaching fiscal reform to avoid a default is a steep challenge given the current political environment. The current administration has indicated it would prefer to let the incoming government ? with its lack of Congressional support ? present a tax package. ?Even if the government successfully manages the short-term challenges, it will continue to face significant financing needs over the next two years,? Francis noted. He mentions that in 2006 the first US$500-million bond comes due and nearly doubles debt service to US$1.6 billion, from the US$859 million due in 2003.
?A deepening recession, continued devaluation, and increasing reliance on short-term central bank paper with ever-larger quasi-fiscal deficits could put the still-fragile banking system at large under increased risk,? he concluded.
The complete report is available upon request from RatingsDirect at research_request@standardandpoors.com