The Big Idea
Dominican Republic | Managing shocks
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The Dominican Republic’s swift approval of major tax reform, stronger-than-expected growth and easing oil prices have reduced near-term fiscal and credit risks. For bond investors, higher structural revenue and continued adherence to the fiscal rule should support spread compression against other ‘BB-‘ sovereigns and revive the prospect of a Fitch upgrade. Intermediate maturities offer the best value, with strong local demand and little extra yield available farther out the curve.
External shocks have had no clear effect on the country’s real economy. Growth averaged 4.5% year-over-year in the first half of 2026, reached 5% year-over-year in the second quarter of 2026 and accelerated to 6.4% year-over-year in June. Mining, construction, services and the free trade zone led gains, while agriculture and local manufacturing lagged. Strong tourism, above-trend metals prices and lower interest rates all help and upside to the central bank’s 3.5% to 4.0% growth range, putting growth closer to the 5% trend.
Fiscal reform was designed to limit growth risk by avoiding consumption taxes and providing temporary relief on select corporate taxes. Conservative revenue estimates leave room to ease subsidies and raise public investment. The revised 2026 budget retains the fiscal rule-aligned deficit target of 3.2% of GDP while allowing broader capex and social spending.
Budget trends continue to help. Revenue outpaced spending through the worst of the oil shock in the first half of 2026, rising at a double-digit rate as the government shifted spending to cover higher fuel subsidies. Oil prices also have retreated from their first-quarter 2026 peak. Fuel subsidies remained modest YTD through the first week of August at 1.0% of GDP for thermal electricity and transportation, compared with 0.9% in the same period last year. Official forecasts show sharply lower subsidies if West Texas Intermediate falls below $85 a barrel.
Credit effects should remain supportive. Higher structural revenue, projected at 16% of GDP in 2026, would lower debt service to 23.3% of revenue from 24%, though that burden remains a key credit constraint. The proactive response to the oil shock could prompt Fitch to raise its ‘BB-‘ rating to align with peers at ‘BB/Ba2.’ Fitch had returned its outlook to neutral from positive during the initial oil price shock in April 2026. The fiscal rule’s spending restraint should remain the main anchor for structurally lower deficits, gradual debt reduction and progress toward investment grade.
The fiscal rule should become more restrictive after primary spending reached its cap, an 8% year-over-year nominal increase based on the approved 2025 budget. Officials already have discussed revisions that would exclude capex. Finance Minister Diaz sees an increase from the roughly 2.5% of GDP capex trend as necessary to sustain 5% trend growth. GFCF/GDP has fallen notably in recent years, though from relatively high levels. Other successful regional rules, including Costa Rica’s, exclude capex once debt falls below 60% of GDP.
That could spur debate over further reforms, but the approaching election cycle may erode support for controversial measures. The next administration would then need to address budget rigidity by cutting fuel subsidies, now about 1.4% of GDP, or raising revenue to sustain high capex while reducing structural deficits.
Near-term trends remain supportive: oil prices have eased from their peak, fiscal reform has raised structural revenue and the economic rebound is lifting cyclical revenue. A rating upgrade also could highlight the stronger policy framework, lowering market beta amid uncertain external conditions and supporting spread compression against other ‘BB-‘ credits by narrowing the liquidity penalty. The intermediate part of the curve offers the best positioning, trading flat to longer tenors and benefiting from core demand by local investors.
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