Fitch Upgrades Dominican Republic IDRs to 'B+'; Outlook Stable

Fitch Ratings has upgraded the Dominican Republic's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'B'. The Rating Outlook on the Long-term IDRs is Stable. The issue ratings on the Dominican Republic's senior unsecured foreign and local currency bonds are also upgraded to 'B+' from 'B'. The Country Ceiling is upgraded to 'BB-' from 'B+' and the Short-term foreign currency IDR is affirmed at 'B'.

KEY RATING DRIVERS

The upgrade of the Dominican Republic's IDRs reflects the following:

- The Dominican Republic has demonstrated resilience through adverse domestic and external conditions. A diversified service-based economic structure and competitive business climate support medium-term growth and investment prospects. Based on revised GDP statistics, Fitch forecasts that real growth will expand by 6.2% in 2014 and 5% in 2015-2016, which is better than the 'B' median five-year average of 4%. The country is well-positioned to benefit from the recovery in the U.S., its main source market for family remittances, exports and tourist arrivals.

- The current account dynamics of the Dominican Republic are improving due to the increasing diversity of its export structure. The start of gold production along with resilient tourism flows is expanding the country's export base. This, combined with the fall in the fuel import bill should reduce the current account deficit to an average of 3.3% of GDP during 2014-2016 compared with the average 6.8% in 2007-2012. Lower current account deficits fully financed by foreign investment and debt disbursements will allow the central bank to meet its reserves target-coverage threshold of three months of imports for the second consecutive year in 2014. Reserve accumulation and lower external amortizations could help bring the international liquidity ratio above 100% in 2015-2016, although well below the 'B' median of 171%.

- Fiscal consolidation remains on track in the second year of the Danilo Medina administration. The authorities brought the deficit down to 2.8% of GDP in 2013-2014 from 6.7% in the 2012, while honoring the legal mandate to allocate 4% of GDP to education spending. Signalling policy continuity, the 2015 budget calls for a further reduction in the deficit to 2.4% and a primary surplus of 0.5%, the first since 2007. The main downside risk to the fiscal outlook is a failure to contain electoral spending in the run-up to the general elections in May 2016.

The Dominican Republic's 'B+' IDRs also reflect the following:

- The economic expansion has not resulted in inflationary pressures. Fitch expects consumer prices to fall to 3.4% in 2014 and hover around the mid-point of the official target band of 3%-5% in 2015-2016. The central bank has room to tighten in the event of external shocks given the healthy pace of economic activity. However, large quasi-fiscal losses at the central bank and active foreign exchange intervention constrain monetary policy.

- The size of the budget adjustment has not been enough to put the public debt burden on a downward trajectory, limiting the capacity to absorb economic shocks. Fitch's sustainability analysis suggests that general government debt will only stabilize at 41% of GDP by 2018 but is likely to stay below the 'B' median of 45% even if the government funds the construction of two coal-fired power generation plants through external borrowing in 2015-2016. Public debt is particularly sensitive to exchange rate devaluations, as 73% of liabilities are denominated in foreign currency.

- Continued market access and multilateral support provide sufficient financing flexibility. The Dominican Republic has placed USD4.5 billion since its return to global markets in 2010 and plans to raise an additional USD1.5 billion in 2015. High levels of non-resident participation in the local bond market and preferential loans from Petrocaribe expose the sovereign to tighter global financing conditions and economic developments in Venezuela.

- Structural features are a credit strength. The Dominican Republic has higher per capita income, social development and governance indicators than peers. The banking sector benefits from adequate capitalization, liquidity and credit quality. Nonetheless, high public sector participation in the banking system increases the risks of contingent liabilities to the government. The reform of the organic law of the state-owned Banreservas could improve the bank's capitalization, dividend policies, and corporate governance practices in the medium term.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that individually, or collectively, could trigger a rating action are:

Positive:

- Sustained improvements in the country's external liquidity and solvency ratios;

- Continued fiscal consolidation resulting in stabilizing government debt ratios;

- Progress on reforms to address fiscal rigidities, electricity sector deficits and monetary policy constraints.

Negative:

- Fiscal slippage and growth underperformance leading to a material increase in government indebtedness;

- Erosion of foreign reserves and increased macroeconomic instability;

- Emergence of financing constraints.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

- Fitch forecasts that U.S. growth of 3% in 2015-2016 will support Dominican Republic's economic performance, given the strong trade, tourism and remittances linkages between the two countries.

- The Dominican Republic's growth, fiscal and external forecasts assume that annual gold production is sustained at 1.1 million ounces and international prices average USD1,250 per ounce in 2015-2016. Fitch's latest projections also factor in a 15% decline in international Brent oil prices to USD95 per barrel by 2016.

- Fitch assumes that the Dominican Republic will maintain access to multilateral lending and global capital markets in 2015-2016.

Additional information is available on www.fitchratings.com

Applicable Criteria:

Sovereign Rating Criteria' dated 12 August 2014

'Country Ceilings' dated 28 August 2014

Applicable Criteria and Related Research:

Sovereign Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=930875

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