When the Mejía government came to power in 2000, it accelerated international borrowings to the extent that in the first two years Congress approved more than $2.6bn in foreign loans, although fortunately these were arranged on such unfavourable terms that many of the transactions never got off the ground. Nevertheless, the country’s foreign debt doubled between 2000 and 2004. The two bond issues were to all effects the coup de grace that left the Dominican Republic exposed to legal action by hundreds of private sector bond holders and to the fate of the major rating agencies. The country is still labouring under the impact of this unbridled borrowing policy.
Towards the end of April 2005 the Dominican Republic launched its long-awaited offer to exchange $1.1bn in sovereign bonds as part of the programme to drag the country out of the slump. Unlike Argentina, which forced investors earlier this year to accept a write-off of up to 70% when it restructured $81.8bn in defaulted debt, Mr Fernández’s government did not propose a ‘hair cut’ on the principal amount of the bonds and its offer was regarded as market friendly.
The government has now successfully exchanged new 9.50% amortising bonds due in 2011 for all of its outstanding $500m principal amount of 9.50% bonds due in 2006, and new 9.04% amortising bonds due in 2018 for all of its outstanding $600m principal amount of 9.04% bonds due in 2013, thus giving itself breathing space to fill projected financing gaps. Mr Fernández says the exchange was “essential” if the country was to meet its external financing obligations. The arrangement will help the Dominican Republic to meet a requirement by the Paris Club of creditor nations to give comparable treatment to other debt holders in order to go ahead with a restructuring of Paris Club debt. The exchange offer was an overwhelming success, with 93.6% of bondholders’ participation.
The Dominican Republic managed to avoid defaulting on its bonds, which was a key component of its 2005-2006 financing. The package is built into the fiscal and technical targets with the IMF, and the fulfilment of these targets is a condition of the future availability of funds under the country’s 2005 stand-by arrangement with the IMF.
The government’s chief economic adviser, Julio Ortega Tous, says the country would now pursue debt renegotiations with private banks owed about $800m, and with Spanish energy firm Unión Fenosa, owed some $700m after the previous administration brought back under state control two electricity distributors it had owned. Together with a 20% reduction in the public sector workforce, tax increases and spending cuts, the debt measures are expected to help the Dominican Republic recover from the economic crisis.
However, following the announcement of the bond exchange programme, the rating agency Fitch Ratings said it was cutting the country’s issuer credit rating further into junk status. Fitch also cut the credit ratings on the debt eligible for the exchange from C to CCC+ and placed the country on review for a possible downgrade. The agency said the Dominican Republic’s long-term local currency rating remained at CCC+ as local currency obligations are not included in the exchange. The short-term foreign currency rating also remains at C. But Fitch said that upon completion of the exchange it would place the eligible bonds, as well as the Dominican Republic’s foreign currency issuer rating, in a default category.
Earlier, rating agency Standard & Poor’s had cut its debt rating on the Dominican Republic from CC to SD. The decision came as a result of the country’s acknowledgement that it was in arrears on its external bank obligations, which caused the downgrading to ‘selective default’ from ‘high default risk’. The arrears refer to $50m in borrowings owed to a handful of foreign banks and suppliers. Obviously much work remains to be done to convince the outside world that the country is again on solid ground.
Corruption and a top-heavy, inefficient bureaucracy are other lingering issues that need to be addressed as they potentially represent a major deterrent to foreign investment. The government claims it has made strides in cleaning up its act with regard to a problem that has characterised dealings with officialdom as well as segments of the private sector for decades. Nevertheless, corruption and a cumbersome bureaucracy remain a feature of the Dominican business landscape and efforts to attack this problem need to be intensified.
The Santo Domingo Chamber of Commerce and the Senate’s liaison office with the private sector have initiated a dialogue to cut red tape and improve competition through a series of new legal initiatives. The Chamber’s director José Manuel Armenteros said it was necessary to put into force a number of laws similar to what other countries have done, as well as strengthen the role of small and medium-sized businesses.
“It is vital that we give approval to pending legislation in order to modernise our institutions, attract investment, reduce bureaucratic red tape, and ensure greater transparency in our legal system and public expenditures,” he said. The measures now before the Congress include a consumer rights law, a competition law and a law to guarantee transparency in international commercial negotiations.
So far it looks like the new government has achieved its initial goal of putting the economy back on an expansionist trajectory. GDP grew by 2.0% last year after contracting by 1.9% in 2003, a year in which GDP growth for the Latin American region averaged 2.0%. The IMF is forecasting an increase of 2.5% in 2005 followed by an accelerated trend next year that should lead to 4.3% GDP growth.
The IMF also expects the country to hold inflation at 8.9% this year, a remarkable achievement after last year’s 51.5% increase in prices. Inflation should register another modest fall to 8.4% in 2006.
The international community acknowledges the government’s efforts to restore the economy to health. UK ambassador Andy Ashcroft, for instance, says that the recent stand-by agreement signed with the IMF, along with fiscal austerity, a reduction in the exchange rate and macroeconomic stability all indicate that the government is making the right moves to open the country’s doors to investment.
Mr Ashcroft says the IMF accord would require two years of austerity for the Dominican people, but he added that this was the price required to achieve macroeconomic stability and confidence. “The way the government is managing the economy is generating confidence in the international community, and this is important for the development of the country’s capital markets,” he says. British investment in the country has increased and one of the most recent examples is a $25m project to build 80 tourist villas in Miches.
However, despite the government’s best efforts the project has come up against the institutionalised problem of bureaucratic hurdles, as the government land authorities have so far failed to approve requests for the transfer of property ownership to the investors.
Pesos and cents
A realistic exchange rate is another of the government’s priorities and this is reflected in the results achieved in the first eight months of the current administration, during which time the Dominican peso has appreciated against the dollar from 41.7 to 28.6 pesos to the dollar.
The Central Bank’s net reserves now cover almost three months of imports, a remarkable improvement compared with the two-week level they stood at in December 2003. Reserves grew by $478.6m in this period, of which 60% corresponds to the period since the Fernández government has been in power.
As of March, the country’s foreign exchange reserves surpassed the IMF’s target for all of 2005 by $90m. Foreign direct investment is forecast to grow to $929.2m this year, a 50% improvement on 2004 that is expected to offset a fall in the projected current account surplus. The Dominican Republic’s agreement with the IMF also covers the banking sector and is designed to strengthen the country’s financial system and improve banking supervision. This will entail new rules governing capitalisation, accounting practices, market risk and liquidity levels.
The Dominican Republic looks to stay the economic course it has set out on since Mr Fernández came to power. Mr Bengoa says there is no need to change the government’s economic policies and doing so would lead to a return to inflation and a slowdown in economic growth. “The government is pursuing the right policies,” he says confidently.
INFLATION RATE 1998-2004: