The Big Idea

Dominican Republic | Managing social tension

| August 5, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

To understand Dominican Republic sovereigns, it helps to start with a few comparisons. The country has always been the benchmark for regional relative value along with Costa Rica and, before 2021, El Salvador. As a liquid ‘BB’ benchmark, the country also probably now aligns closer to Colombia. Stagflationary risks and subsequent social backlash have become recurrent themes across the oil importers in Central America and the Caribbean. Those importers have to balance fiscal discipline and governability while cushioning the income shock to the most vulnerable population. DomRep benefits from maximum flexibility on managing the tradeoff between the social and economic pressures. The high popularity of President Abinader, second only to El Salvador’s President Bukele across all of Latin America, also provides an important buffer.

The latest social unrest in Panama and Ecuador serves as a reminder of the impact of inflationary shock.  This shock is more severe to the oil importers in Central America and the Caribbean, where gasoline prices trade close to international prices.  Buit DomRep benefits from budget flexibility, strong economic growth and high government approval ratings to maximize policy flexibility to mitigate these social pressures.

DomRep stands apart as one of the countries in the region with the strongest growth momentum. Effective Covid management allowed the country to stage a full recovery in mid-2021. And trend 5% growth continues with record tourist arrivals in July helping tourism re-trace above 2018 highs. This ultimately serves as the strongest buffer to negative demand shock. The economy is less vulnerable to the secondary impact of weak demand on employment and fiscal revenues.

Analysis of the country shifts to budgetary flexibility with a focus on how to best subsidize the shock of higher fuel prices without compromising fiscal progress in the aftermath of the Covid shock. The subsidy burden has spiked in the latest fiscal data, making up 18% of current spending in April 2022. However, officials plan to minimize the damage to the fiscal deficit by reigning spending, an allocating cash left over from last year and doing more financing from local markets.  This conservative strategy should narrow further growth in the country’s deficit. The rating agencies have already weighed in on the deficit impact of subsidies with no plans for any negative rating action and uniform stable outlooks. The current 2023 budget discussions will provide insight on how the country manages these subsidies, assuming oil shock continues through next year against the multi-year budget estimates of a 2.8% of GDP deficit in 2023.  This fiscal consolidation is necessary to reduce gross financing and dependence on external capital markets.

Negative technicals have dominated fundamentals with a high liquidity penalty for DomRep’s benchmark status of $26.4 billion bonds outstanding. There has been a clear divergence on performance between the liquid and illiquid ‘BB’ credits through the intense risk aversion of last month and underperformance of the higher beta, liquid credits. DomRep still trades wide to Colombia but has regained some ground against Costa Rica on the rebound in external risk as well as the re-pricing of supply risk in Costa Rica.  The attractive relative valuations and still resilient fundamentals should remain an anchor for sponsorship among real money investors.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539
siobhan.morden@santander.us

 

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Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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