This action followed the downgrade of the Dominican Republic’s long-term foreign currency rating to ‘C’ from ‘CCC+’, stemming from the announcement of a distressed sovereign debt exchange on $1.1bn in bonds due 2006 and 2013. Fitch explains the affirmation of the banks’ ratings by the fact that they do not currently hold debt that is due to be exchanged in the aforementioned transaction and therefore it should not have a significant impact on these institutions.

Also, given that the liquidity position of the Dominican Republic is likely to improve following the debt exchange, the banks’ prospects are also likely to improve in the medium to longer term, the rating agency predicts.

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“The rated banks’ financial profile, while still relatively weak, has improved considerably in the past few months, which places them in a better position to benefit from the economic recovery in the Dominican Republic, when and if this takes place,” a Fitch media release says.

Better position

Considering the position these banks were in two years ago, even such qualified praise is a welcome change. A banking crisis, which shattered confidence and all but halted investment flows, hit its peak with the collapse in May 2003 of the private Banco Intercontinental (Baninter), the Dominican Republic’s third largest bank. The situation quickly spiralled out of control.

Canada-based Scotiabank, which snapped up some of the assets of the bankrupt institution, is now beefing up its operations in the Dominican Republic and has sent over a hotshot general manager from Chile – both indications of confidence in the country and trust in the Fernández administration.

Other foreign banks are reportedly sniffing around the Dominican Republic with an eye to opening local offices. (Citibank is already in the market though not terribly active.) “That means people are returning and looking at the Dominican Republic as a place where they can do business,” says Juan Jose Arteaga, executive vice-president of Grupo Progresso, a Dominican bank which escaped the crisis unscathed.

As much as this foreign interest is needed and appreciated, it is equally, if not more important, that the locals have faith in their own banking institutions. Mr Arteaga sees this happening already. “It’s important that the natives of the Dominican Republic believe in the country,” he says. “We can share with foreign investors but we like Dominicans to trust their own banks.” Dominican depositors once again putting their deposits in local banks indicates the trust is coming back.

Top appointment

The appointment of the well-thought-of Hector Valdez Albizu as governor of the central bank has helped reassure foreign investors as well as local depositors. “He is a man of experience and was well received by the international community,” Arteaga says. “He is not a politician; he is a man of numbers. That sent a sign to the outside – to the Paris Club, IMF, World Bank, etc – that we have somebody there who has been in touch with them before and who has a done a good job in the previous administration. And he is showing the economic world that he is doing a good job now.”

It was a mix of weak regulatory supervision, inadequate management skills and rife corruption that led to the banking crisis in the first place so it follows that those are the factors that need to be addressed in order to prevent a repeat. The government has already tackled the regulation problem with a strict new system of supervision of the banks crafted along with the input of the IMF.

It is an excellent start; now the new rules just need time to work. “The reforms taken in accordance with the multinational organisations are sufficient,” Mr Arteaga says. “We will see what else we need to do but so far they are tough enough.”