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Rating Action:

Moody's affirms the Dominican Republic's Ba3 ratings and maintains the stable outlook

26 Mar 2021

New York, March 26, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Dominican Republic's long-term issuer and senior unsecured ratings at Ba3 and maintained the stable outlook.

The key drivers of the decision were:

(1) The country's low susceptibility to event risk, with external vulnerability and government liquidity risks contained, given fully financed current account deficits, higher foreign exchange reserves to cover upcoming debt maturities and a proven track record of market access in times of market turmoil.

(2) Relative economic resilience to the coronavirus shock despite the country's relative dependence on tourism, supported by solid medium-term growth prospects and income per capita levels above Ba peers.

(3) Weak fiscal strength, which reflects long-standing credit challenges, given a high exposure to foreign exchange risks and a very high interest-to-government revenues ratio compared to peers. Moody's expectation that fiscal restraint and revenue-enhancing reforms will improve debt metrics partly balances the recent deterioration in metrics.

The stable outlook reflects Moody's view that the Ba3 rating captures the balance of risks to the Dominican Republic's credit profile. Moody's expects that the government's debt levels will rise only moderately after a significant increase in 2020 and anticipates that the government will pursue revenue-enhancing reforms that will alleviate fiscal constraints stemming from a limited tax base. The rating agency expects balance-of-payments and government liquidity risks to remain contained and projects economic growth will return to its pre-pandemic rate of around 5% in the medium term. The stable outlook is also supported by a banking sector that remains resilient despite an anticipated deterioration in asset quality.

The local-currency (LC) country ceiling remains unchanged at Baa3, maintaining the existing gap between the sovereign rating and the foreign-currency (FC) ceiling. The three-notch gap with the sovereign rating reflects relatively weak, albeit improving, government institutions that are increasingly more predictable and reliable, a small government footprint in the economy and financial system, low political risk and moderate external imbalances. The FC country ceiling remains unchanged at Ba1. The one-notch gap with the LC country ceiling reflects moderate external indebtedness and improved foreign exchange reserve accumulation.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Ba3 RATING

FIRST DRIVER: LOW SUSCEPTIBILITY TO EVENT RISK, WITH EXTERNAL VULNERABILITY AND GOVERNMENT LIQUIDITY RISKS CONTAINED

The Dominican Republic has seen a reduction in external risks over the past decade, with a current account deficit of 1.2% of GDP on average over 2016-20 compared to 4.6% over 2011-15. While the country continues to be dependent on fuel imports, the current account deficit has declined significantly owing to lower oil prices, efforts to diversify the energy mix, as well as the accumulation of foreign exchange reserves. Reserves have risen steadily since 2014 and reached $10.7 billion at the end of 2020.

Looking ahead, ongoing efforts to further diversify the energy mix and structurally reduce the Dominican Republic's dependence on oil imports will continue to lower the current account's exposure to oil price movements.

In 2020, the severe global economic contraction negatively affected the Dominican Republic's external accounts via a fall in tourism receipts as well as depressed external demand. However, strong growth in remittances combined with a stronger import compression than the decline in exports limited the widening of the current account deficit. As in previous years, the current account deficit is fully financed by foreign direct investment, which reached $2.5 billion in 2020 despite the pandemic, driven primarily by the communication, mining and real estate sectors.

Moody's anticipates that government liquidity risks will be contained. During the pandemic, the Dominican Republic demonstrated funding flexibility through its uninterrupted capital market access at favorable rates as well as financial support from multilaterals to cover the large financing gap last year.

The Dominican Republic's exposure to cross-border financing will remain high as well as its reliance on foreign-currency funding since the government will likely continue to prioritize lower funding costs over currency risk. As a result, its balance sheet will maintain a relatively high exposure to exchange rate risk -- about two-thirds of the government's debt is foreign-currency-denominated. Moody's expects gross financing needs to decline in 2021-23 to around 9%-10% of GDP, similar to 2018-19 and down from 14% of GDP in 2020.

SECOND DRIVER: DOMINICAN REPUBLIC'S ROBUST MEDIUM-TERM GROWTH PROSPECTS

Since 2002, economic growth in the Dominican Republic has averaged more than 5% annually and GDP per capita (PPP basis) has more than doubled, surpassing the Ba median. The pandemic had a severe negative impact on growth in 2020, with an estimated 6.7% contraction driven by the combination of a sharp decline in tourist arrivals and lower domestic consumption amid the pandemic-induced social distancing and quarantine measures.

That said, the economic contraction was not as large as in regional peers and other tourism-dependent countries. This partly reflects a more modest exposure to tourism compared to peers, with tourism's total contribution at 16% of GDP compared to 25% or more in Caribbean peers. Even though the industry took a significant hit in the second quarter of 2020, activity resumed partially by the summer and given strong collaboration between the government and the private sector to minimize contagion and assist tourists, the sector saw a rise in bookings for the end of the year -- total arrivals in 2020 were shy of 40% of the level registered in 2019, peaked at 58% in the last months of 2020 and preliminary government numbers for early 2021 show a sustained recovery trend.

Moody's has raised its growth projection for 2021 to 6% from 4.8% mainly due to a higher positive carryover effect than previously expected, and due to the country's fast vaccine rollout, which is currently ahead of several Latin American and Caribbean countries in terms of total doses administered per 100 people. The fast pace of the vaccine rollout will support a faster reopening of domestic activity, including construction, commerce and other services, and will support a faster recovery in the tourism sector. The latter is also related to the tourism sector's favorable structure, since it is not as exposed to cruise ships as other destinations in the Caribbean and around 30% of the tourists come from the US, where Moody's expects growth to rebound strongly this year.

Looking further ahead, the government's relatively strong and prolonged policy response will likely limit the pandemic's scarring effects on the economy in the medium-term, albeit at a fiscal cost, supporting our assumption of a return to pre-pandemic growth of 5% rate per year over 2022-24.

THIRD DRIVER: WEAK FISCAL STRENGTH MITIGATED BY EXPECATION OF REVENUE-ENHANCING MEASURES AND PROSPECTS OF FISCAL RESTRAINT

In 2020, the government provided prolonged fiscal support on the revenue and the spending side to households and companies amid the pandemic shock, amounting to more than 2% of GDP. Given the estimated economic contraction of 6.7% last year, the fiscal deficit reached 7.5% of GDP, a significant increase compared to 2.3% of GDP in 2019 but lower than our previous estimates of 10.2% of GDP for year-end. The debt-to-GDP ratio increased by 15 percentage points this year to 57.1%, which is slightly below the Ba-rated median.

Moody's expects a gradual fiscal consolidation path beginning this year, with the fiscal deficit declining to around 4% of GDP this year and remaining around 3% of GDP in 2022 and beyond. This implies that the debt ratio will continue to deteriorate, albeit at a slower pace.

Despite a debt-to-GDP ratio below that of peers, the Dominican Republic has two key credit weaknesses that stand out relative to peers: government debt is vulnerable to exchange rate risk given that two-thirds of the total is denominated in foreign currency and weak debt affordability due largely to a very low revenue base, which is related to tax exemptions and loopholes that the most dynamic sectors of the economy, including the tourism sector, are benefiting from. This is the reason why despite debt-to-GDP ratios are below those of peers, interest payments-to-revenue at around 24% in 2021 are the highest in the Ba category.

The new administration is contemplating revenue-enhancing reforms this year, with implementation starting in 2022. Even though details have not yet been made public, Moody's expects reforms will seek to increase government revenue by simplifying the tax system and potentially expanding the tax base. While implementation risks are considerable, Moody's believes the government will prioritize increasing government revenue and maintaining fiscal restraint, cognizant of its importance to maintain debt sustainability in the medium term and favorable market access.

In addition, Moody's notes the government's efforts to streamline expenditures though various measures such as consolidating government entities, better budget planning and improved treasury management. Pro-active debt pre-funding strategies and a more active debt management office has been put in place, which Moody's expects will establish a more rules-based approach to fiscal and debt management policy, leading to fiscal savings.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that the Ba3 rating captures the balance of risks to the Dominican Republic's credit profile. Moody's expects government debt levels to rise only moderately and assumes the government will pursue revenue-enhancing reforms this year to be implemented beginning next year, which would address the country's fiscal constraints due to its limited tax base. The rating agency also expects balance-of-payments and government liquidity to will remain contained, and projects economic growth of around 5% on average in the medium-term.

The stable outlook also takes into account an institutional framework that is improving, in tax administration and collection, budget and treasury management and in efforts to strengthen the judicial system. An overhaul of the electricity sector, already underway, will contribute to lower losses and reduce its impact on fiscal accounts. Moody's also expects the banking sector to remain resilient to the foreseen deterioration in asset quality. Financial depth is among the lowest in Latin America, with total loans equal to one-quarter of nominal GDP. Stable deposits and adequate liquidity buffers support financial flexibility.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk.

Dominican Republic's ESG Credit Impact Score is highly negative (CIS-4), reflecting a weak governance issuer profile score with limited financial resilience and relatively high exposure to environmental risk.

Dominican Republic's exposure to environmental risks is moderately negative (E-3 issuer profile score), related to physical climate change and water issues. Lower crop yields because of climate events can harm the agricultural export sector and tourism revenues may be affected by rising sea levels and increased storm severity. However, the geography and extension of the island mitigate the impact as a climate event may affect a region but not all the country.

Exposure to social risks is also moderately negative (S-3 issuer profile score). Social considerations historically have not materially impacted Dominican Republic's credit profile, supported by a sustained period of high economic growth rates and the reduction of poverty levels, but challenges related to education, health, safety and access to basic services will pressure government finances, more so in the context of a very narrow revenue base.

The influence of governance on Dominican Republic's credit profile is highly negative (G-4 issuer profile score) reflecting its weak, albeit improving, government effectiveness, rule of law and control of corruption. Long-standing challenges related to the electricity sector, which has persistent losses, and relatively large revisions in the budget throughout the year affect fiscal predictability.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The credit profile could face upward pressure if there were a significant improvement in debt metrics in general, and in debt affordability indicators in particular. A significant decrease in the government's balance sheet exposure to foreign-currency-denominated debt or the implementation of fiscal reforms that underpin and improve debt sustainability prospects could also lead to an upgrade.

A fiscal response from the authorities that proves insufficient to effectively address the marked deterioration in fiscal and debt metrics observed last year and that falls short in leading the way to a material increase in the government's low revenue base could lead to a negative rating action. Higher funding costs than those we currently anticipate could also lead to a negative rating action given the country's exposure to cross-border financing. A weakening of external accounts that results in a structural deterioration in the current account deficit and leads to a decrease in foreign exchange reserves would exert downward pressure on the Dominican Republic's credit profile.

GDP per capita (PPP basis, US$): 19,898 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.7% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -2.3% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.4% (2019 Actual) (also known as External Balance)

External debt/GDP: 42% (2019 Actual)

Economic resiliency: ba1

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 23 March 2021, a rating committee was called to discuss the rating of the Dominican Republic, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed. Other views raised included: The issuer's governance and/or management, have materially increased.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ariane Ortiz-Bollin
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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