III Successful External Debt Restructuring
Author:
Mr. Jaime Cardoso
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Mr. Philip M Young
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Language:
English
Print Publication Date:
29 Jan 2002
Keywords:
OP; debt; stock reduction; restructuring agreement; debt-service profile; debt payment; annual debt service due; Commercial banks; Debt service; Debt restructuring
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Abstract

In the 1960s and early 1970s the Dominican Republic enjoyed sustained economic growth together with relatively low inflation. In the late 1970s, however, the country began to experience severe external and internal imbalances. High fuel import prices and international interest rates, the precipitous fall in nonoil commodity prices, and a world recession led to a record external current account deficit of 10 percent of GDP in 1980. The authorities resorted to external arrears accumulation as a means of financing this deficit. At the end of 1980, arrears on commercial transactions amounted to about US$150 million; by 1982 the amount in arrears had jumped to US$436 million and included not only commercial arrears, but also debt-service payments and profit remittances.

In the 1960s and early 1970s the Dominican Republic enjoyed sustained economic growth together with relatively low inflation. In the late 1970s, however, the country began to experience severe external and internal imbalances. High fuel import prices and international interest rates, the precipitous fall in nonoil commodity prices, and a world recession led to a record external current account deficit of 10 percent of GDP in 1980. The authorities resorted to external arrears accumulation as a means of financing this deficit. At the end of 1980, arrears on commercial transactions amounted to about US$150 million; by 1982 the amount in arrears had jumped to US$436 million and included not only commercial arrears, but also debt-service payments and profit remittances.

The 1980s–First Round of External Debt Restructuring

In 1983, following the formalization of a Stand-By Arrangement supported by the IMF, the Dominican authorities initiated a round of discussions with commercial banks to restructure principal in arrears and unpaid letters of credit. Unfortunately, the restructuring in December of that same year only provided temporary relief to the country’s balance of payments problems, and by the end of 1984, the Dominican authorities had to initiate a new round of negotiations with commercial banks.33 In February 1986, a new rescheduling agreement was signed with international commercial banks for US$775 million, including previously rescheduled debt, arrears up to the end of 1985, and public debt maturing before the end of 1989. In May 1985, the Dominican authorities agreed with Paris Club creditors to reschedule US$290 million. However, due to a lack of international reserves, the high level of outstanding debt, and the unwillingness of the national congress to approve some of the clauses, the Dominican Republic was unable to comply with the agreement. Efforts to reach a new agreement in 1987 failed in the absence of an IMF-supported program, a prerequisite to concluding an agreement with the Paris Club.

The government that took office in 1986 embarked on an economic reactivation program and, lacking external financing, it resorted to loose fiscal and monetary policies. The success of the program was short-lived—by 1989 average inflation had increased to 41 percent (from 5 percent in 1986), the peso was devalued on several occasions, and the external current account deficits were once again being financed by a running down of international reserves and the accumulation of external arrears.

The 1990s–Second Round of External Debt Restructuring

After being reelected in May 1990, President Balaguer introduced a series of measures aimed at reducing the fiscal deficit. This effort eventually led to the conclusion of a Stand-By Arrangement with the IMF in 1991. At that time, Latin America was receiving massive net capital inflows and international creditors were generally supportive of countries’ efforts to reform their economies. This allowed the Dominican Republic to benefit in the first half of the 1990s from substantial debt relief from bilateral creditors and commercial banks. This contributed to an easing of the country’s external public sector debt-service burden and facilitated macroeconomic adjustment. By the end of 1999, the public sector’s total debt was brought down to a manageable 21 percent of GDP, from 72 percent of GDP at the end of 1990 (Table 10). Similarly, annual debt service due was reduced from 13 percent of GDP in 1990 to 2 percent of GDP in 1999 (Table 11). Outstanding arrears were eliminated by the end of 1998, compared with almost US$1.5 billion (23 percent of GDP) at the end of 1990 (Table 12). The debt relief agreements also provided a means for the Dominican authorities to reestablish normal relations with most external creditors, a primary goal of the authorities’ economic program.

Table 10.

Outstanding External Public Sector Debt (End-of-Period)

article image
Sources: BCRD; and IMF staff estimates.

Derived using a weighted average exchange rate of the official and market exchange rates based on current account receipts.

Table 11.

Medium- and Long-Term Public External Debt Service

article image
Sources: BCRD;and IMF staff estimates.

In 1998/99, including informally agreed delay of debt service to Paris Club creditors.

Table 12.

Outstanding External Public Sector Arrears

(End-of-Period)1

article image
Sources: BCRD; and IMF staff estimates.

Includes past-due payments that are still within the grace period and debt service in dispute. Figures for 1998 and 1999 do not include arrears tolerated by Paris Club members as pan of the relief following Hurricane Georges. As of June 30, 2000, all such arrears were cleared. As of December 1997, all outstanding arrears were regularized or cleared.

On reserve liabilities other than IMF credits; some of the liabilities are due to official bilateral creditors.

In late 1991, the authorities were granted a rescheduling by Paris Club members and soon thereafter debt reduction packages were also concluded with Venezuela and Mexico, the two largest non-Paris Club bilateral creditors. A restructuring of debt with commercial banks, which included debt stock reductions, was agreed in early 1994 and implemented in August of that year. Each of these agreements also involved commitments to regularize relations with creditors, including a mix of cash payments and capitalization of arrears. In 1995, arrears were also cleared with Paraguay and Venezuela and, in 1997, with the U.S. Commodity Credit Corporation (CCC).

While the burden of outstanding external obligations was being reduced, the Dominican Republic’s access to new loans remained limited. Following the restructuring of commercial bank debt in 1994, there were net capital outflows (except for a marginal reversal in 1995). Overall, the stock of external public debt fell from US$4.5 billion at the end of 1990 to US$3.7 billion at the end of 1999. While the stock of external debt owed to multilateral organizations increased by US$156 million, debt to bilateral creditors fell by US$547 million, and to commercial banks by US$352 million. In terms of debt composition, the share of outstanding external debt owed to official bilateral and multilateral creditors rose to 82 percent at the end of 1999 from 75 percent at the end of 1990. On the other hand, the share of commercial bank debt fell to 17 percent at the end of 1999, from 22 percent at the end of 1990 (see Figure 2). The change in composition of debt and the lack of fresh funds from commercial creditors reflect the weak credit rating of the government, which effectively impeded financial market access at acceptable terms.

Figure 2.
Figure 2.

Changes in Composition of External Public Sector Debt

(In percent of total)

Sources: BCRD; and IMF staff estimates.

After reaching a low in 1998, the stock of debt (in U.S. dollar terms) has edged up (while continuing to decrease in relation to GDP), as multilateral and bilateral lending picked up again. Over the years, as the external debt burden was declining, some deficiencies in the control and monitoring of public external borrowing built up. However, excessive recourse to external debt was avoided due to congressional unwillingness to approve more external loans, partly motivated by the experience with external overindebtedness in the 1980s. Nevertheless, in the run-up to the 2000 presidential elections, this political control of external debt contraction did not prevent the use of relatively expensive bilateral credits tied to specific investment projects. This shortened the average maturity and, together with a rise in repayments on some categories of rescheduled debt, led to a more uneven debt-service profile for 2000–01.

The remainder of this section describes the major debt relief packages. It then reviews the overall impact of the debt relief on annual debt-service obligations, including payments in arrears, future debt-service payments, and the composition of external debt, concluding with an outlook for external debt policy.

The 1991 Paris Club Debt Rescheduling

On November 22, 1991, the Dominican Republic agreed with its Paris Club creditors34 on rescheduling obligations amounting to US$927 million (Table 13), of which US$144 million was interest on arrears outstanding at the beginning of the consolidation period. The authorities cleared US$113 million of arrears on debt ineligible for rescheduling, which was paid in early 1992. The agreement provided for repayment over 14 years, with an 8-year grace period. For concessional obligations, the repayment period was extended to 20 years with a 10-year grace period; for past-due interest, the repayment period was 10 years with a 5-year grace period. As a lower-middle-income country, the Dominican Republic was not eligible for cancellation of any debt obligations. These terms were somewhat softer than those of the Dominican Republic’s May 1985 agreement with the Paris Club, which allowed for a repayment period of only 9 ½ years and 5 years’ grace.

Table 13.

Total Rescheduled Debt

article image
Source: BCRD.

Eligibility for rescheduling was partly established at the time of the 1985 Paris Club agreement. Only amortization, interest, and interest on arrears incurred prior to the cutoff date of June 30, 1984, were eligible for the 1991 rescheduling. Previously rescheduled debt service was also eligible for that rescheduling. An 18-month consolidation period (October 1, 1991 to March 31, 1993) was established, during which time current debt service falling due on pre-cutoff date debt was also rescheduled. Many of the arrears outstanding at the beginning of the consolidation period were also rescheduled including about US$300 million of arrears on previously rescheduled debt. The agreement also called for the successful completion of a program with the IMF over the consolidation period, implying the clearance of US$27 million in arrears to the IMF.

Non-Paris Club Debt Rescheduling: 1991–97

The Paris Club urged the Dominican Republic to seek equivalent debt relief from non-Paris Club creditors to assure equitable burden-sharing. Mexico and Venezuela, the two largest non-Paris Club creditors to have provided project loans, balance of payments support, credits for petroleum imports, and export credits, granted generous restructuring terms. The Dominican Republic was given the opportunity to buy back much of the outstanding obligations at about one-third of their face value. Toward the end of 1991, US$160 million of debt outstanding to Mexico was repurchased for about US$50 million. After repeated prior reschedulings, about two-thirds of the US$265 million owed to Venezuela as of the end of 1991 was repurchased at a similar discount in March 1992. These two transactions reduced the Dominican Republic’s debt by US$425 million at a cost of US$140 million. Arrears to Brazil and Peru were cleared in 1993 and arrears to Paraguay and Venezuela during 1995. Outstanding obligations to Taiwan Province of China, totaling about US$9 million, were rescheduled for repayment over the period 1996–98; penalty interest on these arrears was forgiven.

Though not technically a rescheduling, about US$20 million of overdue payments to the OPEC Fund the development lending arm of the Organization of Petroleum Exporting Countries (OPEC), were also cleared in 1995 and 1996 through new credits for the exclusive use of repaying these arrears. Finally, in 1997, the Dominican Republic reached an agreement with the CCC. Under the new agreement, debt-service payments resumed and past-due interest and principal in the amount of US$ 137 million were made current. In contrast to reschedulings with other creditors, there was no grace period and repayment was to occur over five years, with stepped up payments to start in June 2001, at a fixed interest rate of 6½ percent.

The 1994 Restructuring of Commercial Bank Credits

After prolonged negotiations with the commercial banks’ Advisory Committee, a “Brady-type” debt restructuring agreement was signed on February 14, 1994. The agreement, which covered 99 percent of the debt owed to commercial banks, allowed for a reduction of nearly 60 percent in outstanding claims from US$1,251 million to US$520 million (Table 14). The deal was implemented on August 30, 1994 with the purchase by the central bank of 30-year zero-coupon U.S. treasury bonds to serve as collateral for part of the restructured debt.

Table 14.

Summary of the 1994 Restructuring of Commercial Bank Debt

(In millions of U.S. dollars)

article image
Source: BCRD.

Initial interest defined as total past due included in restructuring less interest.

Thirty-year zero-coupon US. treasury bonds with face value of US$329 million.

The agreement provided three options for banks to restructure outstanding principal. Eligible debt, which amounted to USS764 million, could either be repurchased at a 75 percent discount, exchanged for new collateralized 30-year bonds with an interest rate of LIBOR plus l3/16 percent offered at a 35 percent discount, or exchanged for new bonds at par with reduced interest rate coupons. The banks’ initial choices, however, did not yield a sufficient discount, so they were requested to tender at least 35 percent of outstanding principal for the discounted buyback option.35 Given the lack of interest in the reduced interest rate bonds, this option was withdrawn in the final settlement.

Nearly all of past-due interest (PDI) at the time of the final settlement was included in the debt restructuring agreement. Of this, US$141 million (30 percent) was forgiven, while US$41 million (12 ½ percent of the balance) was paid in cash. Similar to the restructuring of principal, one-third of the remaining obligations (US$96 million) were made available for repurchase at a 75 percent discount, with the rest (US$191 million) being capitalized into a new security. The terms of these PDI bonds included a repayment period of 15 years—25 semiannual installments, following a 2 ½-year grace period, at a yield of LIBOR plus 13/16 percent. The first seven of these installments were reduced to 1 percent of the original face value, with the remaining 93 percent of the outstanding debt being paid in 18 equal installments, starting in 2001.

The final settlement of the commercial bank debt restructuring involved a total cash outlay of US$169 million by the central bank, which also became the institution liable for servicing the new securities. In addition to the US$41 million of interest paid in cash, US$89 million was used to buy back discounted interest and principal. In addition, a cost of US$39 million was incurred for the purchase of collateral for US$329 million in newly issued discount bonds. Overall, the total discount granted to the Dominican Republic was US$585 million, or 47 percent of the initial obligations to commercial banks. Furthermore, the arrangement made current all obligations to commercial banks, compared with US$1 billion in arrears to commercial banks at the end of 1993.

Evolution of Payments Arrears in 1990–2000

As the economy of the Dominican Republic weakened in 1990, payment arrears nearly doubled from about US$735 million at the end of 1989 to US$1.45 billion at the end of 1990 (Table 12). About half of these new arrears were due to Paris Club members. Following rescheduling and the settlement of non-reschedulable arrears to the Paris Club, total arrears fell to about US$779 million at the end of 1991. Debt reduction arrangements with Mexico and Venezuela in 1992 further reduced arrears, but then they jumped to over US$1.25 billion in 1993 in the run-up to the restructuring agreement with the commercial banks.

The 1994 restructuring with commercial banks allowed the Dominican Republic to reduce arrears by over US$1 billion to about US$250 million at the end of 1995, half of which were owed to the CCC and US$100 million to suppliers mainly from Japan, Italy, and Taiwan Province of China. The authorities’ efforts to clear these arrears materialized in the 1997 agreements with the CCC and various private suppliers. This reduced the outstanding amount to US$63 million at the end of 1997; by the end of 1998, there were no more arrears.

Past, Present, and Future Debt-Service Payments

The Dominican Republic succeeded in considerably lowering its external debt burden over the 1990s thanks to good macroeconomic policies and strong growth performance. Some disbursements were limited by a lack of counterpart funds. New borrowing was effectively contained by a policy of avoiding reliance on foreign financing and by limited access to international capital markets. Medium- and long-term debt service due has fallen from US$801 million a year at the beginning of the decade to US$405 million in 1999, reflecting a steady decline in principal and interest payments; the debt-service ratio dropped from 12.8 percent in 1990 to 2.3 percent in 1999.

In 1998, after Hurricane Georges hit the Dominican Republic, an informal agreement was reached with the Paris Club, which agreed to tolerate arrears for a rolling six-month period beginning in the last quarter of 1998 and ending in December 1999. By mid-2000 all delayed debt service had been paid, explaining part of the higher debt-service payments in the first half of 2000. Total debt service paid in 2000 is estimated to have risen to US$510 million.

Debt-service payments are expected to increase significantly in 2001 to around US$770 million as a result of (1) the end of the grace period in 2000 of part of the 1991 Paris Club rescheduling, (2) stepped-up payments to commercial banks, which began in 2000, and similar repayments on the restructured arrears with the CCC, (3) debt service on short medium-term bilateral loans at nonconcessional terms contracted in 1999–2000, and (4) the elimination of technical past-due payments that were still within in the grace period at the end of 2000. These obligations are expected to increase debt-service payments by about 1 percentage point of GDP to 3.5 percent of GDP in 2001.

External Debt Policy

The approval process for external debt plays an important role in containing its level and composition. The first stage consists of identifying potential projects that can be externally financed. In the second stage, projects are linked to a specific source of external funding, and financial and technical analysis is carried out to determine economic viability. In the third stage, the loan is formalized, documentation is signed, and funds are committed. Finally, the loan must be approved by the central bank and congress (if there is a public guarantee), and promulgated by the executive branch. This last stage, which is generally politicized, has often delayed, or altogether prevented the finalization of loan documents.

As a result of the extensive use of external debt rescheduling and relief, the Dominican Republic ended the 1990s with one of the lowest external debt burdens in the region and a favorable debt-service profile. Debt to official creditors increased from about 70 percent of total debt at the end of 1993 to 82 percent at the end of 1999, with new loans since 1998 coming mainly from bilateral and multilateral lenders, in particular the IDB and the World Bank. The Dominican Republic used to contract most of its external debt on a medium- and long-term basis. Short-term debt consists mainly of (1) revolving trade lines of credit; and (2) reserve liabilities of the Central Bank and the state-owned commercial bank, Bunco de Reservas. Nevertheless, as a result of deficiencies in the control and monitoring of public external borrowing, the maturity profile of external debt has lately been deteriorating, with an increasing proportion falling due in the short to medium term at market conditions.

Conclusion

The Dominican Republic availed itself successfully of the benefits of a series of comprehensive debt restructurings and relief in the 1990s. The country managed to grow out of the stifling external debt situation of the 1980s, as a result of high economic growth, which was based on strong export performance and was financed largely from other, nondebt creating sources. Reliance on external financing was also limited by congressional approval procedures for new loans and by restricted access to international markets resulting from below-investment-grade international credit ratings. Despite progress in reducing the external debt burden to one of the lowest levels in the region, some deficiencies in debt management persisted.

The authorities are working to overhaul public debt management policies and practices, using modern financial techniques to contain the debt-service burden and lower financing costs, in line with the Dominican authorities’ aim of smoothing the debt-service profile. This, together with the implementation of sound macroeconomic policies, should help to achieve an upgrade in international credit rankings from the specialized rating agencies.

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Cover The Dominican Republic
The Dominican Republic
Stabilization, Structural Reform, and Economic Growth
ISBN:
9781589060463
ISSN:
0251-6365
Publication Date:
29 Jan 2002
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589060463.084
Pages:
78
  • Figure 2.
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    Figure 2.

    Changes in Composition of External Public Sector Debt

    (In percent of total)

Figure 2.

Changes in Composition of External Public Sector Debt

(In percent of total)

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