Fitch affirms Dominican Republic at ‘BB-‘; outlook stable
New York.- Fitch Ratings has affirmed Dominican Republic’s Long-Term, Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
The ratings balance Dominican Republic’s favorable macroeconomic performance and narrow current account deficit with its weak public finances, higher net external debt than ‘BB’ peers, limited monetary policy effectiveness, and lower governance and social indicators than ‘BB’ peers.
Fitch expects the economy to return to above-potential growth of 5.8% in 2018 (after dipping to 4.6% in 2017) and to average 5.2% in 2019-2020, driven by investment, tourism and remittances.
Inflation is moderate within the central bank’s 4%+/-1% target band at 3.87% yoy in August, up moderately from 3.3% on average during 2017 as a result of higher fuel import prices.
Fitch expects the current account deficit (CAD) to remain below 2% of GDP and financed by net FDI over 2018-2020.
Dominican Republic’s public finances are weak relative to the ‘BB’ category. Revenues are low at 14.9% of GDP; there is limited transparency of capital spending, the electricity subsidy, and projects generating supplier arrears, adding to gross financing needs beyond the budget.
The quasifiscal component of the non-financial public-sector (NFPS) balance has averaged 0.4% of GDP in addition to the central government average deficit of 3.0% of GDP over the past five years.
Fitch expects the general government (NFPS) deficit to moderate to 2.6% of GDP in 2018 from 3.2% in 2017, driven by tax administration gains. However, the general government deficit is expected to widen to 2.8% of GDP during 2019-2020 reflecting higher external interest expense and increased capital outlays during the 2019-2020 pre-election period.
The general government debt/GDP ratio (considered in Fitch’s baseline debt analysis) is par with the ‘BB’ median at 39.5% in 2017, but it is expected to remain on a gradual upward trajectory.
The interest burden, 17.9% of revenue in 2018, is nearly double the ‘BB’ median. Debt is vulnerable to currency shocks, as more than 65% is U.S. dollar-linked, and to real interest rate pressure. Central bank securities totaling 13.3% of GDP in 2017 are a contingent liability. Consolidated public debt (consolidating the NFPS and central bank liabilities) totaled 49.9% of GDP at end 2017.
The government has issued nearly USD3.1 billion in external bonds during 2018 to meet estimated gross financing needs of USD4.2 billion (5.4% of GDP). This included Dominican Republic’s first peso-denominated global bond in February. Fitch expects that the third USD1.3 billion issuance in July will alleviate pressure on the local market, which resulted in some rejected auction bids during April-June, and that the government will be able source its remaining 2018 needs in the domestic market.
Dominican Republic’s external balance sheet is weaker than the ‘BB’ median, as a result of its higher net external debt/current external receipts (CXR) ratio, 55% in 2018, and foreign-currency share of government debt than the ‘BB’ median.
However, its external debt service metrics are in line with the category, and its external liquidity is gradually improving.
President Medina’s second (PLD) administration has not pushed forward key economic and fiscal reforms, in Fitch’s view. Although the government has achieved tax administration gains to lower tax evasion, structural reforms to strengthen the fiscal framework (outlined by the PLD in a 2012 national strategy) have not advanced.
Furthermore, an electricity pact is not expected to meaningfully reduce (debt-creating) distributor financial losses. A successor strategy to recapitalize the central bank after the previous 10-year plan elapsed remains under political discussion.
Political attention has turned to the 2020 elections with the PLD-led congress’s passage of a political parties law in August. Competition to lead the governing party is creating political uncertainty about the PLD’s election prospects and potential election coalition configurations.
Competitive elections in 2012 contributed to a widening in the general government deficit to 6.9% of GDP. The 2016 deficit was contained, in part due to limited competition pressures that resulted from an election coalition the PLD brokered in 2015. No major reforms are expected ahead of the 2020 elections.