Taking the Next Step

The Dominican Republic may be a tiny Caribbean country but what it lacks in size, it makes up for in ambition and determination. Just days after the September 2001 terrorist attacks in New York and Washington, lead bookrunners JP Morgan and Morgan Stanley sold the country’s first international sovereign bond, a $500 million, five-year issue with a 9.5% coupon. The Dominican Republic is hoping to return to the international capital markets soon. Andrés Dauhajre, executive director of the unit in charge of the government’s medium-term external financing program, says the country is considering proposals from nine investment banks and could come to the market as early as the end of this year. He says the sovereign wants to build out its yield curve and retire more expensive short-term debt. The Dominican Republic has $163.4 million in debt with maturities less than a year, which represents 29.3% of public external debt, and $3.5 billion in medium- and long-term debt. The average interest rate in 2000 hovered around 29%, although it declined to 21% at the end of last year. The government estimates it will pay Dominican banks $577.4 million this year in debt payments, around $167.6 million in 2003 and $562.6 million in 2004. “The Dominican Republic is one the few Latin America countries that has not performed a Brady exchange for global bonds and part of the proposal is to see whether the government is interested in doing that exchange,” says Dauhajre. “There are also proposals to do a 10-year or a 30-year bond.” Dauhajre thinks another debt issue also could help the government pave the way for more local companies to tap the international market as well as raise funds for the government’s social and infrastructure projects. “I myself consider that it would be a good thing for the [Dominican Republic] to come to the market again as it would provide the government with ways to finance its structural reforms,” says Dauhajre.

But not everyone is convinced that financing reforms with proceeds from the international capital markets is the best policy. The opposition criticized President Hipólito Mejía for issuing debt to finance infrastructure projects and then questioned the use of the proceeds when the Ministry of Public Works failed to detail the expenditure in its accounts last year. Furthermore, none of the projects would generate additional hard currency streams to match debt service payments.

Dauhajre insists all the proceeds are accounted for and that financing projects that can generate an internal rate of return to repay the bond issue is a sound justification to issue foreign debt. In fact, Dauhajre thinks issuing bonds to finance infrastructure projects in the Dominican Republic will be good for the country’s nascent capital markets. “The government should play an important role in the first stage of the capital markets,” he says. “Someone has to construct the demand and the best candidate to start the construction of the capital markets is the government. We could use part of the funds that the pension funds will generate for longer-term investments, for instance highways.” Dauhajre says revenues from new sovereign bonds denominated in local currency could be used for other infrastructure projects with toll revenues fully guaranteeing payment of the bonds.