Dominican Republic epitomizes LatAm’s problems and promise
The country’s economy has a good growth record, but it is vulnerable to the effects of Fed tapering and rising interest rates. Can it tap the market for $1.5 billion this year? The authorities certainly think the nation’s story is good enough to guarantee it.
The Dominican Republic perfectly illustrates many of the financial and economic challenges facing Latin America. The country’s recent growth has been facilitated by access to cheap international capital that has financed its current-account deficit: its first international bond in 2009 has been followed by many subsequent deals, all of which lowered the country’s benchmark with every fresh issuance.
Until last year that is, when an October 2013 debt deal worth $500 million priced to yield 6.6%, up sharply from the 5.875% paid for $1 billion in notes with the same tenor six months previously. The years of endless liquidity and record pricing for the region’s sovereigns seem to be over.
The beginning of the withdrawal of the US Federal Reserve’s quantitative easing programme at the end of 2013 and the linked improved growth prospects of the US economy have led to more specialized appetites for emerging market debt to develop. Weaknesses in economies are now focused upon, rather than glossed over.
The Dominican Republic enjoys strong GDP growth and strengthening fundamentals, but has a relatively large current-account deficit – around 4% of GDP – to finance. The country’s foreign-currency reserves are small and it has dollar-denominated external debt that makes the economy financially sensitive to depreciation in the currency.