Dominican Republic Plans ’13 Bond Sale to Finance Deficit

Dominican Republic's Economy Minister Temistocles Montas
Dominican Republic's Economy Minister Temistocles Montas, right, said, “In the next year we are going to have to finance $1.5 billion and we will very likely finance a large part of that in capital markets.” Photographer: Erika Santelices/AFP/Getty Images

The Dominican Republic will sell bonds abroad next year to finance a $1.5 billion budget gap as growth in the Caribbean’s biggest economy slows, Economy Minister Temistocles Montas said.

The bond sale will be used to finance part of the nation’s budget deficit, forecast to fall to about 2.7 percent of gross domestic product next year from 8.5 percent this year, Montas said in an interview yesterday at the presidential palace in Santo Domingo. A series of tax law changes passed by Congress last month, including an increase in the sales tax, will help narrow the gap, he said.

“In the next year we are going to have to finance $1.5 billion and we will very likely finance a large part of that in capital markets,” the 62-year-old Montas, who has a doctorate in industrial engineering from Spain’s Universidad Politecnica de Madrid, said.

Dollar bonds sold by the Dominican Republic have returned 21 percent this year, the most among 15 countries tracked by JPMorgan Chase & Co.’s CACI index. Latin American bonds have returned 14.6 percent over the same period. The yield on the country’s bonds due in 2027 have tumbled 270 basis points, or 2.7 percentage points, this year to 5.05 percent.

The Dominican Republic’s $57 billion economy is forecast to expand 3.8 percent this year, down from 4.5 percent last year and 7.8 percent in 2010, Montas said. Growth in the country, which shares the island of Hispaniola with Haiti, will slow to 3 percent next year, he said.

“It is not a growth level that we are pleased with, though we understand that growth next year will suffer due to the impact of the tax reforms, which are necessary to implement now to return the economy to a sustainable fiscal path,” Montas said.

Gold Exports

The slowdown will be tempered by gold exports produced at Barrick Gold Corp’s Pueblo Viejo mine, Montas said. The mine, located 60 miles (97 kilometers) northwest of Santo Domingo, is expected to begin producing as much as 1 million gold ounces in 2013 and will account for 20 percent of the island nation’s export sales, according to Trade and Industries Minister Jose Del Castillo Savinon.

Commercial sales are estimated to reach as much as $2 billion annually and the state will collect a 3.2 percent royalty immediately upon production. The mine will also be subject to a 25 percent income tax and 28.75 percent net profits tax, according to a Barrick report that forecast total payments of $7 billion to the government over the life of the project.

‘Great Potential’

“There is great potential in the mining sector in the Dominican Republic in terms of metals such as gold, silver, copper and zinc,” Del Castillo said in Dec. 3 interview. “We will begin to see the importance of the Barrick mine next year when commercial export begins.”

The Pueblo Viejo mine has a life expectancy of 25 years and contains an estimated 23.7 million ounces of gold reserves, 455 million pounds of copper and 88 million ounces of silver, according to Toronto-based Barrick.

The government’s tax package, passed by Congress last month, generated several days of street protests as opposition leaders said it would worsen poverty. The legislation raised the sales tax to 18 percent from 16 percent and raised levies on goods including tobacco and alcohol.

Continued reduction of the fiscal deficit will also hinge on the country’s ability to reduce losses in the electricity sector, which soaks up annual government subsidies of about $1 billion due to evasion and poor distribution, Montas said. The industry, dominated by state-run Corporacion Dominicana de Empresas Electricas Estatales, was referred to as an economic “tragedy” by President Danilo Medina in his Aug. 16 inauguration speech.

IMF Accord

Former President Leonel Fernandez allowed a stand-by agreement with the IMF to expire in February when his government resisted raising energy costs before the elections. The Dominican Republic will likely begin discussions to draft an accord with the IMF in January that will include modifications to the electricity sector, Montas said.

A new agreement with the IMF will also “generate credibility” with foreign capital markets and provide better interest rates for the bond sale, he said.

“An agreement with the IMF gives predictability to a country’s economic policy,” Montas said. “I think that when the country looks to finance an important part of its budget for next year in capital markets, a new agreement with the IMF will help facilitate the process.”

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