Dominican Republic credit ratings downgraded

Sunday, February 1, 2004

NEW YORK, USA: Fitch Ratings, the international rating agency, has downgraded the ratings on the Dominican Republic's foreign currency obligations to 'CCC+' from 'B'. The ratings remain on Rating Watch Negative. 

The action partly reflects the government's inability to make a US$27 million payment on the scheduled Jan. 23 coupon date. Although the government maintains that it was not able to make the payment due to technical reasons, Fitch is concerned that this situation could potentially be a reflection of underlying financial stress of the sovereign. The government intends on paying the coupon before the grace period expires in 30 days. 

In addition, given the Dominican Republic's fragile liquidity position, Fitch is also concerned about the implementation risk of the government's Stand-by program with the IMF due to pre-electoral politics and the possible implications this could have for multilateral disbursements. Divisions within the ruling Partido Revolucionario Dominicano (PRD) party over who should be their presidential candidate have complicated the political environment. With US$504 million in public sector medium and long-term debt amortizations due this year (versus an estimated US$260 million in reserves), the Dominican Republic can ill afford to lose multilateral financing. 

Although Fitch estimates that by year-end 2003 gross public sector and external debt (including private sector) increased to 43% of current account receipts (CXR) and 53% of CXR, respectively, this is still very low relative to other sovereigns in the 'B' rating category. In addition, debt service is also low relative to peers as more than 70% of the debt is due to multilateral and bilateral creditors and benefits from concessional terms, which leaves Fitch to believe that in spite of low liquidity, meeting the sovereign's financial requirements is manageable as long as multilateral support continues. 

Fitch will continue to monitor the Dominican Republic's discussions with the IMF. Any additional disbursement delays could make meeting even modest debt service requirements difficult. Continued pressures on the sovereign's slim international reserve position, as well as new developments in the electricity and/or financial sectors that could result in additional public finance pressures would also be negative for the ratings. In addition, if the missed coupon is not paid within the 30-day grace period on the 2013 bond, then the Dominican Republic's ratings would be downgraded to default. 

Conversely, successful reviews of the country's Stand-by Arrangement with the IMF and a smooth transition to the next government could ease pressures on the ratings going forward.

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