Fitch Ratings affirmed the Dominican Republic's long-term
foreign and local currency Issuer Default Ratings (IDRs) at 'B+'.
The issue ratings on the Dominican Republic's senior unsecured
foreign and local currency bonds are also affirmed at 'B+'. The
Rating Outlooks on the long-term IDRs are Stable. The Country
Ceiling is affirmed at 'BB-' and the Short-term foreign currency
IDR at 'B'.
KEY RATING DRIVERS
The Dominican Republic's ratings are underpinned by its higher
per capita income and more diversified economic structure than
peers. The country has a record of resilient growth and
macroeconomic stability and benefits from diverse external
financing sources. These credit strengths are balanced by the
vulnerability of the country's external balance sheet due to its
relatively high external financing needs, large exposure of
sovereign debt to currency risks, and low international reserves in
the context of limited exchange rate flexibility. A narrow revenue
base, budgetary rigidities and election-related spending have
affected fiscal policy predictability and increased the public debt
burden.
The Stable Outlook factors in the positive impact from lower
international oil prices on the country's burdensome fuel imports
and electricity subsidies in addition to the boost to trade,
investment, remittances and tourism inflows from the recovery in
the U.S. These tailwinds are likely to support economic growth,
external accounts and public finances in 2015-2016. However, higher
interest rates in the U.S. could increase borrowing costs and
currency volatility. Moreover, the uncertainty surrounding the
length and competitiveness of the upcoming electoral campaign poses
risks to the fiscal accounts.
The Dominican Republic has demonstrated resilience through
adverse domestic and external cycles. The country's five-year
average growth reached 5.2% in 2014, well above the 'B' median of
4.4%, driven by robust private consumption, investment in public
infrastructure, mining and tourism exports. In the absence of
productivity-enhancing reforms, Fitch expects economic activity
will remain robust decelerating to 4.9% in 2015-2016.
Cyclical and structural factors are improving the Dominican
Republic's balance of payments. The current account deficit (CAD)
will continue narrowing to 2.5% of GDP on average in 2015-2016,
driven chiefly by low near-term oil prices and strengthening
current account receipts (CXR). Fitch forecasts that an improved
external amortization schedule coupled with the lower CAD could
reduce the Dominican Republic's gross external financing needs to
92% of international reserves in 2015-2016, albeit higher than the
'B' median, 75%.
However, the country's external balance sheet remains
vulnerable. International reserve coverage has increased in recent
years but, at 2.4 months of current external payments in 2014,
provides limited buffer against external shocks in the context of
an actively managed exchange rate regime. Moreover, net external
debt as well as amortization and interest payments, 63% and 16% of
CXR in 2014, are higher than the respective 'B' medians.
Fiscal consolidation is proceeding in line with government
targets. The general government deficit fell to 2.8% of GDP in
2013-2014 from the unprecedented 6.4% in the 2012 electoral year
through tax reform and cuts to capital investment. Under Fitch's
base case, the general government deficits will moderate to 2.5% of
GDP in 2015 driven by lower energy subsidies and increase to 3.4%
in the run-up to the general elections in May 2016.
Fitch expects the general government to achieve a small 0.2% of
GDP primary surplus in 2015, with public debt coming down
moderately to around 35% of GDP, below the 'B' median of 50%, due
to the recent liability management operation that redeemed
PetroCaribe debt. The government's financing flexibility has
increased with international capital market and multilateral access
and steady development of local capital markets. However, the 73%
foreign currency-denomination of public debt and non-resident
participation in the local debt market expose the sovereign to
foreign exchange (FX) and capital market volatility risks.
Inflation is likely to remain subdued near 3% for end-2015,
lower than the official 4.0%+/-1% target, reflecting low oil import
prices, exchange rate stability and slower domestic demand. While
transitioning toward an inflation-targeting monetary regime,
monetary policy flexibility remains constrained by quasi-fiscal
losses, rapid pass-through of imported costs, and financial
dollarization.
The 2016 election cycle could slow progress on the reform
agenda, particularly as a constitutional amendment to permit
consecutive presidential terms takes political precedence in 2015.
While the authorities honored the legal mandate to raise funding
for education and increased investment in power generation,
progress on adjusting tariffs and tackling theft in the electricity
sector, and a fiscal pact will be difficult before the
elections.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and
downside risks to the rating are currently balanced. The main
factors that individually, or collectively, could trigger a rating
action are:
Positive:
--Strong growth and investment performance relative to peers
without increasing macroeconomic imbalances;
--Fiscal restraint through the electoral cycle;
--Reduction of external vulnerabilities;
Negative:
--Fiscal slippage and growth underperformance leading to
deteriorating debt dynamics;
--Erosion of foreign reserves and increased macroeconomic
instability;
--Emergence of financing constraints.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of
assumptions:
--Fitch forecasts that average U.S. growth of 2.9% in 2015-2016
will support the Dominican Republic's economic growth and external
accounts, given the strong trade and financial linkages between the
two countries.
--The Dominican Republic's fiscal and external forecasts assume
that annual gold production is sustained at 1 million ounces and
international prices average USD1200 per ounce in 2015-2016,
benefiting exports and mining royalties. Fitch's latest projections
also factor in adjustment of the average Brent oil price to USD65
per barrel in 2015 and USD75 in 2016, resulting in reductions in
the country's fuel import bill and electricity transfers.
--Fitch assumes that the normalization of monetary policy rates
in the U.S. proceeds in an orderly manner and there are no large
capital outflows or external market financing constraints for the
Dominican Republic in 2015-2016.
Additional information is available on www.fitchratings.com
Applicable Criteria
Country Ceilings (pub. 28 Aug 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194
Sovereign Rating Criteria (pub. 12 Aug 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985587
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystCesar
AriasDirector+1-212-908-0358Fitch Ratings, Inc.33 Whitehall
StreetNew York, NY 10004orSecondary AnalystKelli
Bissett-TomAssociate Director+1-212-908-0564orCommittee
ChairpersonShelly ShettySenior Director+1-212-908-0324orMedia
Relations:Elizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com