This report does not constitute a rating action.

Luis Abinader, from the Partido Revolucionario Moderno (PRM), was reelected president of the Dominican Republic on May 19, 2024, for a second consecutive term (2024-2028). Abinader got around 57% of the votes, winning decisively in the first round.

The governing party also achieved a strong result in the legislative elections, increasing its representation in the Senate (and its allies) to 29 out of 32 seats, from 19 previously. Results in the lower house are yet to be determined but will likely result in a simple majority as well. This, coupled with success in municipal elections held in February 2024 where the party won in 119 out of the 158 districts, will bolster the president’s mandate and raise the possibility of passing long-pending economic reforms. Having said that, President Abinader already had high approval ratings during his first term in office and his party also enjoyed a majority in Congress, but he backtracked from difficult and unpopular reforms during periods of economic stress, raising questions about the government’s capacity to pass them.

Abinader’s reelection in the first round represents more of an exception than the norm in the region, where post-pandemic economic shocks have increased social discontent and led to turnover in governments and political parties in most recent elections. Furthermore, voter turnout (estimated at 56% of total voters) was low in the Dominican history of elections but high compared with regional standards. This contrasts with many countries where disillusion with politicians has led to falling support for traditional political parties. The political parties in the Dominican Republic that receive most of the popular vote remain close to the center of the political spectrum, with relatively little polarization. Abinader’s PRM has become the dominant party, following 16 years of rule by the now opposition Partido de Liberación Dominicano (PLD) between 2004-2020.

Our 'BB' long-term sovereign credit ratings on the Dominican Republic, with a stable outlook, reflect its impressive economic resilience and dynamism over past years combined with a less favorable fiscal and debt profile, compounded by delays in passing structural reforms. Although the country remains vulnerable to external shocks, it has shown strong capacity to quickly recover from them in recent years. Having said that, limited polarization between political parties has allowed for broad consensus on macroeconomic policies and continuity in a probusiness market-friendly approach.

Here, S&P Global Ratings answers frequently asked questions from investors about how the presidential reelection could affect the sovereign credit rating.

Frequently Asked Questions

What are the main challenges facing the reelected president and new leadership in Congress? 

We will focus our analysis on Abinader’s ability in his second term to pass key structural reforms. Budget rigidities highlight the need for fiscal and tax reform, while inefficiencies in the electricity sector continue to drag public finances. Despite contractive monetary policy that brought inflation to the middle of the central bank’s target range of 4% +/- 1%, the higher costs of living could make it difficult for the government to advance with potentially unpopular reforms that could lead to social discontent and dent Abinader’s high approval ratings.

The government was able to approve reforms in the electricity sector (through the so-called Electricity Pact) during Abinader’s first term, although the sector continues to face important challenges. These reforms have dismantled the inefficient public-sector distribution conglomerate and gradually increased electricity tariffs. The cost of electricity underwent quarterly adjustments after having been frozen for around 10 years, although social pressures led the government to suspend further increases. Despite these tariff adjustments, the government was unable to reduce electricity losses in the grid, which remain high at around 36%, mostly explained by low collection, technical losses in the grid due to aging infrastructure, and the expansion of the grid to rural areas.

The government will also face the challenge of improving security while managing the impact of the political and social crisis in Haiti, which has deepened over the past years. The government has repeatedly highlighted that it cannot solve the Haitian humanitarian crisis by itself, and that Haiti needs international assistance. In the meantime, the situation will continue to weigh on the country’s public finances through higher health and security spending.

The government also faces the challenge of strengthening public institutions and bolstering efforts to fight corruption. During his first term in office, Abinader appointed an independent prosecutor in what was seen as an important step to reduce the mishandling of public resources and even possibly regain some allegedly stolen assets. Abinader has signaled the possibility of revising the constitution in his second term to grant more independence to the judiciary.

Can the Dominican Republic achieve investment grade during this presidential term? 

Our long-term sovereign credit rating on the Dominican Republic (BB/Stable/B) is still two notches below the ‘BBB-’ investment grade threshold.

We could raise the rating to ‘BB+’ if the country demonstrates capacity to pass and implement reforms that improve its fiscal and debt profile, leading to lower government deficits. Our base case does not incorporate meaningful fiscal reforms, so a sustained increase in government revenues (from the very low level currently) could improve creditworthiness.

Having said that, a further upgrade to ‘BBB-’ from ‘BB+’ would most likely depend upon significant institutional strengthening and continued increase in per capita income. Countries we rate investment grade tend to have very stable and predictable policies. As a result, to achieve this rating level, we would need to see a substantial improvement in the country’s fiscal and debt profiles that allows the country to build important buffers ahead of external and domestic shocks.

Conversely, we could lower the rating if the country’s impressive economic growth were to lose momentum.

What are the Dominican Republic’s economic prospects for the coming years? 

The Dominican Republic’s dynamic and resilient economy continues to be its main credit strength. A predictable political environment has spurred the growth of a buoyant private sector, which has taken advantage of the strong economic linkages with the U.S. This has facilitated a shift from a small and open economy dependent mostly on agriculture to a more diverse economy with substantial industry, tourism, and service exports.

This impressive economic growth has allowed the Dominican Republic to consistently increase its per capita income, in a region in which economic growth has been lackluster. Since the beginning of this century, the Dominican economy has tripled in real terms, whereas Latin America grew only 170% over the same period--closer to the average of advanced economies worldwide.

We expect tourism will continue to be an important driver of economic growth over the coming years. The country received a record 10 million tourists last year, and there has been much investment in hotels and infrastructure that bodes well for the economy. Connectivity through the international airport in Punta Cana, its main tourist destination, has been key to sustaining this trend, and the private sector has been promoting other destinations and the cruise industry.

Besides tourism, the Dominican Republic has attracted sizeable foreign direct investments in manufacturing through free-trade zones exporting goods, mainly to the U.S. Near-shoring trends could be a potential upside for the economy, although progress so far has been slow and more concentrated in countries such as Mexico and Costa Rica.

Furthermore, given historical migration to the U.S., the country also counts on remittances to sustain its consumption and economic growth. We expect remittances to normalize after three years of extraordinarily high growth but remain around 8% of GDP. Given the Dominican Republic’s strong linkages with the U.S., potential changes in economic policies after the U.S. election in November would likely have an important impact on its long-term policies. For example, changes in U.S. migration policies could affect remittances, or international tariffs could also boost near-shoring trends in the region.

What are the Dominican Republic’s main fiscal and debt constraints compared with peers? 

The main credit weaknesses are its fiscal and debt profiles. Tax revenues are among the lowest in the region, at around 15.5% of GDP. On the other hand, spending needs have increased to attend the social programs and to invest in infrastructure. As a result, the country has posted moderate fiscal deficits of around 4% over the past decade and covered its financing gap through international and some local debt issuances.

On top of that, the Dominican Republic faces important budget rigidities. For example, government interest payments account for around 3% of GDP and the government needs to spend 4% of GDP on education by law. Subsidies to the electricity sector continue to be a drag on fiscal accounts. With the approval of the Electricity Pact, the government gradually increased tariffs, but subsidies remain high and currently account for 1% of GDP.

Over the past years, governments have faced this budgetary inflexibility by reducing capital expenditures, which averaged 2.9% of GDP over the past decade, down from 4.3% over the previous 10 years. This highlights the importance of creating fiscal space to further invest in infrastructure, which could otherwise become a constraint on economic growth.

The relatively weak fiscal performance has led to rising net general government debt, which rose to around 55% of GDP now from around 30% of GDP over the past two decades.

The sovereign’s debt profile reveals its external vulnerability, with around 70% of its debt denominated in foreign currency. The government has done liability management operations to roll over much of its amortization payments over the coming years in both external and domestic debt. Furthermore, the possibility of issuing international bonds in domestic currency could allow the government to marginally lower its exposure to foreign currency, although at a higher financing cost.

The Dominican Republic could benefit from development of the domestic capital market and from relying more on low-cost concessional funding from multilateral lending institutions. An important increase in pension fund assets has given scope for deepening local capital markets over the past decades.

What are the expectations of fiscal reform, and how it could affect the rating? 

There is now an opportunity for the government to advance fiscal and tax reforms during Abinader’s second term. The president has highlighted the need to revisit the fiscal structure to free up resources to invest in social needs and infrastructure. However, several administrations in the past also had high approval ratings and a majority in Congress but found it difficult to pass and fully implement such reforms. Given that these potential reforms could be diluted when presented to Congress and that it would take time for the results to materialize, we are not incorporating any meaningful fiscal reform in our base-case scenario.

To meaningfully increase tax revenues, the government would likely need to work on tax rates and on increasing the tax base. Interestingly, the Dominican Republic’s tax rates are already relatively high, with ITBIS (a VAT-like tax) charging 18% on most activities, higher than in most countries in the region. However, tax exemptions and relatively high economic informality translates into low collection rates.

Furthermore, the government could focus on tax expenditures (taxes not collected due to exemptions), which it estimates at around 4.6% of GDP as of 2024. However, this could also prove politically difficult, as around 2.4% of GDP in exemptions is related to ITBIS. Changes in the ITBIS could directly affect the most vulnerable segments of the population. Another significant tax expenditure is related to free-trade zones, which are key long-term commitments to attract private-sector investments and could also be difficult to revisit.

However, the government has repeatedly signaled that the country needs both tax reform and broader fiscal reform, which includes government expenditures. To do so, the government has already presented to Congress a fiscal responsibility law, which would cap its primary spending (total spending less interest payments) at an annual growth rate of 3% in real terms and medium-term government debt (which differs from our definition of general government debt) at 40% of GDP. The effectiveness of such fiscal rules differs from country to country and is usually discernable only after they have been applied for many years.

From the expenditure side, the government would likely need to focus on subsidies to the electricity sector, which account for around 1% of GDP. Furthermore, the government has granted subsidies to hydrocarbons over the past years with the shock of the pandemic and increase in cost of living.

Can monetary policy become a credit rating strength over the next five years? 

The Dominican Republic has shown important improvements in the effectiveness of its monetary policy and supervision of the financial sector. However, in our view, monetary policy remains constrained by the long-standing discussion about the recapitalization of the central bank, following the bailout and rollover of its debt since the last domestic financial crisis, 20 years ago. We expect the central bank to continue posting quasi-fiscal losses over the next few years, and any decision to recapitalize it would likely be a gradual medium-term plan. We also expect continuity in monetary and financial sector policies over the long term regardless of changes in political leadership and in leadership of the central bank, whose governor has been in his position for 20 years. Deeper domestic capital markets, a stronger monetary policy framework, and rising policy credibility could eventually boost monetary flexibility and strengthen sovereign creditworthiness.

Related Research

• Dominican Republic, Jan. 4, 2024
• Sovereign Ratings History, Dec. 7, 2023
• Dominican Republic's Bond Equivalent To $1.25 Billion Rated 'BB', Sept. 13, 2023
• Default, Transition, and Recovery: 2022 Annual Global Sovereign Default And Rating Transition Study, April 28, 2023
• Sovereign Debt 2023: Commercial Borrowing In The Americas Stabilizing At Higher Levels Than Pre-Pandemic Years, March 9, 2023
• Dominican Republic's Bonds Equivalent To US$1.8 Billion Rated 'BB', Feb. 1, 2023

Primary Contact:	Patricio E Vimberg, Mexico City 52-55-1037-5288; patricio.vimberg@spglobal.com
Secondary Contacts:	Joydeep Mukherji, New York 1-212-438-7351; joydeep.mukherji@spglobal.com
	Omar A De la Torre Ponce De Leon, Mexico City 52-55-5081-2870; omar.delatorre@spglobal.com