Fitch: Fiscal, Electricity Reforms Key for Dominican Republic

NEW YORK--(BUSINESS WIRE)-- Re-elected president of the Dominican Republic (DR), Danilo Medina, will start the term with a lower fiscal deficit than other recent presidents, Fitch Ratings says. However, he will have to contend with structural challenges in public finances, including a low tax burden and persistent losses in the electricity sector. Low oil prices and continued domestic demand growth will continue to provide a relatively favorable backdrop for growth.

Dominicans went to the polls on Sunday to elect a president for the 2016-2020 term. The initial official results point to the victory of President Danilo Medina's party (PLD) with close to 62% of the vote, thus securing a second term in office. His main challenger, Luis Abinader , could have obtained 35% of the votes. A PLD-PRD coalition in the legislature is expected to ease Medina's policy agenda through the national congress.

Historically, campaign spending has contributed substantially to the general government deficit for incoming presidents to manage at the beginning of their terms. 2012 election spending was high and pushed the general government deficit to 6.4% of GDP. Fitch expects this year's deficit will be more moderate at 3.3% of GDP. This is in part thanks to lower oil prices, normalization of public investment after the 2012 election, and the commanding popularity of President Medina during his first term. Maintaining the 2016 budget deficit close to target would another step toward improving fiscal policy predictability.

The DR posted a nearly 3% of GDP general government deficit in 2015, according to the central bank's estimate. This was above the 2.6% of GDP deficit forecast in November, though broadly in line with expectations for 2015-2016. The country's progress of gradual fiscal consolidation was key to assigning a Positive Outlook to the 'B+' sovereign rating in December.

However, budget flexibility for the second Medina administration is limited, as it tries to strengthen the structure of public finances and reduce chronic losses in the electricity sector. Despite record economic growth, total tax revenues have not kept pace with growing expenditures. Government revenues decreased to 14.8% of GDP in 2015 from 15.1% in 2014.

Moreover, expenditure growth could outpace that of revenues. Interest payments on government debt could reach 20% of revenue in 2016. The electricity sector's inefficiencies cost the budget an average of 1.5% of GDP per year during 2011-2015 due to technical losses, low tariffs and relatively low collection levels. Continued increase in interest payments due to a prospective rise in external rates as well as higher debt burden could continue to hamper fiscal flexibility over the medium term.

Revitalizing two reforms could lower budget expenditures and raise tax revenue. The electricity and fiscal pacts were arranged in 2012 by former President Fernandez. Various proposals have been discussed under the electricity pact but none has yet materialized. A selective tax reform plan contributed to a 1% rise in tax revenue from 2012 to 2014. However, a broader fiscal plan that is in line with the country's development needs has yet to materialize. We remain focused on the impact of these reforms in terms of supporting sustained fiscal consolidation, improving revenue levels and the quality of spending, and stabilizing the GG debt burden.

The DR currently enjoys a lower debt burden than its peers, high growth, low inflation, and favorable external accounts dynamics. Sustaining fiscal discipline that enhances the credibility of fiscal policy through the electoral period will be a key area of focus for the country's future rating trajectory. Continued strong investment and growth performance relative to peers without increasing macroeconomic imbalances and reduction of external balance sheet vulnerabilities would be other important future rating drivers for the rating.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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