Dominican Republic. Moody s Ba3 / S&P BB- / Fitch BB- 1 Economy: Agriculture 6%, Industry 33%, Services 61%

Transcription

1 Dominican Republic Summary Moody s Ba3 / S&P BB- / Fitch BB- 1 Economy: Agriculture 6%, Industry 33%, Services 61% The Dominican Republic has grown at an average rate of 5.6% from 2010 to 2017, the second highest in Latin America after Panama. The economy is well diversified, and manufacturing goods from export processing zones (EPZs), gold, tourism, and remittances from abroad, mainly the United States, are the country s major sources of foreign currency. President Danilo Medina was re-elected for another 4-year term in 2016 and continues to implement his fiscal reform agenda, including progressive economic adjustments that have strengthened the country s stability. The Dominican Republic s main weakness is the electricity sector, which remains a focus of the government. Relatively low reserves are another concern, as this limits the country s ability to defend its currency, although this is counterbalanced by the country s healthy banking system. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 6,342 6,610 6,833 7,105 7,343 7,705 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank, Haver Analytics, IMF, Ministry of Finance 345

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BB B+ B B- CCC+ CCC BB- CCC- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Dominican Republic EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 346

3 Dominican Republic Strengths Well-Diversified Economy From an external perspective, the pillars of economic growth are tourism, the maquila sector, family remittances, and, more recently, gold exports. Domestically, construction is an important driver of growth. As such, the Dominican Republic is relatively well diversified and does not depend on any particular sector or industry. The industrial sector, including EPZs, is the single largest category, accounting for 24% of GDP, while in the service sector, which accounts for almost 63% of GDP, none of the subsectors has more than 10% participation. 2 EPZs continue to be a major source of exports, accounting for 53.7% of total 2016 exports. The country also benefits from gold exports from the Barrick Pueblo Viejo mine, which began production in 2013 and generates gold exports averaging $1.6 billion annually. 3 The Dominican Republic is by far the top tourist destination in the Caribbean and Central American region and boasts major facilities, including six major airports, most of which have direct flights from the United States. Finally, family remittances totaling $5.2 billion, equivalent to more than 7.0% of GDP in 2016, are an important source of growth. 4 More than one-tenth of the Dominican Republic population, equivalent to 1.4 million people, live abroad, mainly in the United States. They tend to send the bulk of the family remittances. 5 Both tourism and remittances performed quite well in 2017; tourist arrivals from January through October 2017 were 5.6 million compared to 4.9 million in the same period in Dynamic Economy The Dominican Republic is one of the fastest growing economies in the Central American and Caribbean region. From 2010 to 2017, the economy grew at an average rate of 5.6% per year, only below Panama s 6.9%. 7 Moody s for instance, cites the country s robust growth rate as one of the factors for the sovereign upgrade to Ba3. 8 In addition to the construction sector and services, economic performance has been influenced by the performance of the United States, its main trade partner and largest source of tourism. Gradual economic improvement in the United States is likely to have a positive impact on the three external pillars of the economy: tourism, maquila exports, and family remittances. Continued Structural Reforms and Macroeconomic Stability The country has undergone a series of structural reforms that are positive for the economy over the medium and longer term. On the fiscal side, President Medina introduced changes to the tax code and government spending that could eventually lead to a more sustainable economy. Partially as a result of tax reforms and other measures, the budget deficit has declined to a more sustainable level of 3% of GDP. Since 2012, the Central Bank has introduced an inflation-targeting regime that has set a target of 4% ±1% in Inflation has declined and remains well contained, with October 2017 year-over-year inflation of only 3.48%, within the inflation target band. 347

4 Lazard Emerging Markets Debt Solid Banking System The Dominican Republic s banking system is solid, and much improved from its position during the country s financial crisis in Management is more cautious, while regulation and supervision are much better than in the past. The banking system s balance sheet is strong. Deposits have steadily grown for the past couple of years, and credit has also grown at a moderate pace. Reforms have strengthened the banking and financial sectors with better regulatory oversight. The banking system is healthy, and the consolidation of two of the largest banks (BHD and Leon) in December 2013 further strengthened the sector. As of September 2017, the three largest banks accounted for 78% of banking assets. 9 Interest rates have been stable, and the level of non-performing loans is not a cause for concern; as of October 2017 NPLs only amounted to 1.87% of assets. 10 Weaknesses Electricity Sector Problems For all the positive reforms that the country has undertaken, a major bottleneck for further economic growth remains the electricity sector. The primary challenges stem from distribution and transmission, which are largely under the control of the public sector. Among the main problems with the distribution and transmission sectors are electricity sale prices below market levels; low billing collection rates; theft due to unsecured access to equipment; inefficient operation; and old or missing meters, cables, transformers, and overhead lines. The government continues to make progress, such as reducing losses from around 40% to around 33%, but electricity losses remain among the highest in the world. 11 The World Bank continues to provide support for the modernization of the distribution grid in order to reduce electricity loss, and it approved a $120 million loan in December In addition to the obvious effect on GDP when the country experiences blackouts, 40% of all thermoelectric plants, which supply 87% of energy, rely on imported oil. The government is moving ahead with a $2 billion project for the construction of two coal-powered thermo-electrical plants in Punta Catalina that will generate 720 megawatts that is expected to be operational by Low Level of Reserves While the country has been accumulating reserves, the level of net reserves remains relatively low at $5.89 billion as of October 2017 (around 7.8% 2017 GDP), although this is a substantial increase compared to the levels of the early 2000s. The major concern with low reserve levels is that it limits the central bank s ability to defend the Dominican peso or to support the banking system in the event of a shock. If there were a shock, it could trigger macroeconomic imbalances that could impact private investors. For instance, low foreign exchange reserves greatly contributed to the the economic and exchange-rate crisis of At that time, the country s foreign exchange reserves were extremely low, leaving no room for the central bank to adjust. Oil Dependency The Dominican Republic is an oil importer; it imports about 90% 14 of the energy that it consumes, and oil imports typically account for 6% 7% of GDP. 15 Thus, the country is highly vulnerable to adverse movements in oil prices. In the past 10 years, oil import expenditures have quadrupled, from $1.2 billion in 2001 to $4.3 billion in 2013 before the oil shock, even though the actual volume of imports has only marginally increased. 16 On the positive side, the current environment of lower oil prices has benefited the country; oil imports in 2016 were only $2.3 billion, 17 a 47% decrease from 2013 s level of $4.3 billion. 348

5 Dominican Republic Low Quality of Education The education quality in the Dominican Republic is among the lowest in the world, a situation the government is trying to improve. The government took an important step toward socioeconomic development in 2012 when it committed to allocating 4% of GDP to the educational budget, 18 but much remains to be done. In the latest OECD Program for International Student Assessment (PISA exam) of 72 countries, the Dominican Republic ranks last in both math and science, and is in the bottom 5 in reading. 19 According to a UNESCO survey, the Dominican Republic ranks 146 out of 148 countries in terms of quality of education, well below the Latin American average, 20 and ranks last in Latin America in terms of literacy, math, and science

6 Lazard Emerging Markets Debt Country Background Size Capital Population 48,670 KM 2 (132th) Santo Domingo 10.7 Million Religion Roman Catholic 95.0%, Other 5.0% Median Age 28.1 Years Literacy Rate 91.8% Independence 27 February 1844 Government Leadership Next Election 2020 Legislative Branch President Danilo Medina Bicameral National Congress Economy Agriculture 5.5%, Industry 33.4%, Services 61.1% Labor Force Agriculture 14.4%, Industry 20.8%, Services 64.7% Merchandise Exports Gold, Silver, Cocoa, Sugar, Coffee, Tobacco, Meats, Consumer Goods Export Partners United States 47.3%, Haiti 12%, Canada 7.8%, India 6.2% Currency As of November 2017 Source: CIA Dominican Peso (DOP) 350

7 Dominican Republic Country Timeline 1966 Joaquin Balaguer, a Trujillo protege and former leader of the Reformist Party (later to become the center-right Christian Social Reform Party (PRSC)), is elected president Silvestre Antonio Guzman (PRD) is elected president and proceeds to release some 200 political prisoners, ease media censorship, and purge the armed forces of Balaguer supporters Another PRD candidate, Jorge Blanco, elected president Balaguer (PRSC) re-elected president Balaguer re-elected, defeating Bosch by a small majority Balaguer re-elected, but agrees to serve only a two-year term after being accused of fraud Leonel Fernandez Reyna of the Dominican Liberation Party (PLD) elected president PRD returned to power with Hipolito Mejia as president President Leonel Fernandez is re-elected Governing Dominican Liberation Party candidate Danilo Medina wins close presidential election over former president Hipolito Mejia President Danilo Medina is re-elected with a large majority. Source: BBC 351

8 Lazard Emerging Markets Debt Notes 1 As of December accessed 28 November accessed 28 November accessed 28 November Prospectus: Dominican Republic 7.45% Bonds due 2044, Goldman Sachs, May Ihttps:// accessed 28 November World Economic Outlook Database, International Monetary Fund, October 2017, external/pubs/ft/weo/2017/02/weodata/index.aspx accessed on 28 November Moody s upgrades Dominican Republic s issuer rating to Ba3 from B1, outlook stable com/research/moodys-upgrades-dominican-republics-issuer-rating-to-ba3-from-b1--pr_ accessed 28 November acessed 28 November acessed 28 November Prospectus: Dominican Republic 7.45% Bonds due 2044, Goldman Sachs, May Dominican Republic- Distribution Grid Modernization and Loss Reduction Project, World Bank, 15 December 2015, accessed 16 December 2015, 13 As of November 2014, Source: Lazard estimates. 14 Energy Imports, net (% of energy use), World Bank, accessed on 16 December 2015, 15 As of December 2015, Source: Central Bank of the Dominican Republic. 16 Statistics, Foreign Sector, Central Bank of Dominican Republic, accessed on 3 October 2014, bancentral.gov.do/index.asp accessed 28 November De Leon, Viviano, Medina: la mejor inversión en el 2013 será en educación, Listin Diario, 27 December 2012, accessed on 16 December 2015, Medina-la-mejor-inversion-en-el-2013-se-hara-en-la-educacion 19 accessed 28 November De la Rosa, Adalberto, República Dominicana ocupa el lugar 146 de 148 países con baja calidad de educación, Diario Libre, 29 July 2015, accessed on 16 December2015, educacion/republica-dominicana-ocupa-el-lugar-146-de-148-paises-con-baja-calidad-de-educacion-ng Sanchez Zinny, Gabriel, Latin America s wake-up call on global school tests, BBC News, 8 April 2015, accessed on 13 December 2015, 352

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