With growth outpacing the rest of the region and recent ratings upgrades, the Dominican Republic is positioning itself to maintain its presence in the local markets and tap new international investors. Magín Díaz, vice minister of public credit, spoke to LatinFinance about the sovereign’s outlook for 2016. The following is an edited transcript of the conversation.
LF: Describe the Dominican Republic’s latest approach to public debt management.
MD: The Dominican Republic has come a long way in the last few years. The management is much more professional and it’s something the IMF and the IDB have emphasized in the reports in the last few years. Now we’re a regular issuer in the capital markets, we borrow basically each year to cover our financing needs. We also have been very successful in developing the local bond markets.
We now have an office of investor relations, on the website for the public credit office and the central bank, all the economic and financial information for the country is given. That was not the case six, seven years ago. Now transparency is key. And there’s an indicative plan, financing plan for the whole year, which is a mix of issuing global bonds, domestic bonds, and multilateral financing and it’s outlined in the budget.
For the last three years, Congress has given the Ministry of Finance complete flexibility to change the mix of financing throughout the year. That was not the case before. But we talked to Congress and explained the importance of giving that flexibility to the ministry. Congress approved a ceiling on the gross financing needs of the country and after that the ministry is free to change the mix as it sees fit, without going to Congress in the middle of the year. So I have my financing needs approved for the year. According to market conditions, I can issue more local bonds, bonds in pesos, bonds in dollars, I can go to multilaterals.
That has allowed us, for example, to lower the yields on domestic bonds. A couple of years ago, the ministry was issuing bonds at domestic rates of 16% to 17%. Now we’re able to issue yields below 10% in domestic currency. A couple of years ago we issued three to five-year bonds in local currency and now we issue 10 to 15-year bonds in local currency. Yields have been around 10% to 11%.
We think it’s a combination of better economic fundamentals, and better management of the debt, and taking advantage of the opportunity that we have seen in the market in the last couple of years. That’s why we decided for the first time to issue a 30-year bond in global markets.
LF: How will the Dominican Republic meet its funding needs in 2016?
MD: The funding needs, which are explicit in the budget, are around $3.6 billion.
It’s a mix. In the budget, we have around $1.25 billion in global bonds, around $1 billion in the domestic market and the rest is multilaterals.
First, we’re always ready to issue in the global markets. We have all the documentation ready to issue at any time. Before, every time we did an issuance we needed to prepare for three months, four months. Now, we’re ready basically the whole year, we’re looking for the right windows. Since we’re a regular issuer, we don’t do roadshows to issue. In the last couple of years, we’ve done two or three non-deal roadshows to inform the market about the economic debt and the plans. Basically, we’re ready throughout the whole year to issue both in the local and global market and then we look at windows of opportunity.
LF: What do you think the biggest challenges are for the Dominican Republic in terms of funding or its fiscal strategy for the next 12 to 18 months?
MD: Well, rates are increasing in the global markets, and that’s expected. I think we were very successful in taking advantage of lower rates.
The advantage is that the increase is going to be gradual. This year, for the next six to eight months, there’s still a window. Even though rates are higher, they’re lower than the long-term that is expected by the market. But that’s a challenge, not as big of a challenge as it was a couple of years ago because now it will impact the new issuance, but because now 85% of our debt is in fixed rates. We fixed rates that were variable so that the increase will not affect outstanding debt service.
But it’s an opportunity to continue improving the fundamentals because we can improve ratings and that way we can compress yields a little bit. Rates increase but we are able to increase our rating, and actually two of the ratings agencies did improve the ratings in the last 12 months.
Another improvement will come after the elections. The rating agencies are waiting to see if there’s going to be a fiscal disaster. We’re happy with our strategy with the ratings agencies because we’re sure that’s not going to happen.
All of the credibility of the president has been put on the fiscal target, which has been met every year. When we took office in 2012, we had a primary deficit of 5% of GDP and now we have a primary surplus, three years later, of almost 1% of GDP. The president has put all of his political objectives in second place behind meeting the fiscal target and we’ve been very successful. We’re not going to play around with that. Probably at the end of the year, we’re going to have an improvement in the ratings and that will help.
LF: Are there any areas you are prioritizing in terms of funding, strategy, any markets you’re focusing on?
MD: For the rating agencies, and for us, it’s very important to keep improving the local markets issuance. At some point it will be interesting to explore the market for global bonds in domestic currency, I think there will be demand for that.
LF: Like the Euroclear deal that Mexico did?
Also in the last 15 years, because the economy is so dependent on oil prices, the ministry was never able to do some kind of hedging operation or future transaction with oil, and we did it last year. We’re completely hedged on increases in oil prices and the budget is safe. We took the opportunity that prices were lower this year, and we did a hedge operation with oil.
MD: Yes, euroclearable bonds in domestic currency, that’s something that we’re looking at. I think the Dominican Republic is a good case study of how you do things gradually. In the domestic market, we started issuing three-year bonds. Three or four years later, now we’re issuing longer bonds. Our law didn’t allow for liability management operations and we were able to convince congress to approve, with the budget, the minister to do liability management. Our objective was to do a $100 million liability management operation to show that it was good for the country to do more sophisticated operations. We ended up doing a $4 billion liability management operation.
That was one of the reasons why the ratings agencies improved the rating because now we’re showing them we’re managing fiscal accounts in a responsible way.
LF: What is your perspective on global volatility and potential impact on FDI and the Dominican Republic’s debt plans?
MD: Volatility is always a concern but the country is more prepared. Twelve years ago, we had a major banking crisis which had a huge cost in terms of GDP, around 20%. With the financial crisis of 2008 to 2009, there were no problems in the banking or financial sector for our banks. We have a healthy financial sector, it’s not an issue, and it hasn’t been an issue after the crisis. We have better management of the fiscal accounts, we have a good independent central bank, and we’re a very small open economy. What happens outside will definitely affect us but I think we are very prepared, much better prepared than before.
10 years ago, international reserves were zero and I think they ended 2015 around $5 billion. For us to get to two months of imports, it was always a challenge in terms of reserves. Now we are almost at four months of imports. Other countries are higher, but for us to get to three or three and-a-half months [of cover] was a challenge and each year we are improving. We haven’t had volatility in the exchange rate in the last 10 years. Everything that happens outside will be a challenge, but the country is much more prepared than it was 10 years ago. LF