Sovereign bond issue of capital importance

Last fall, the Dominican Republic was closing in on a historic deal to launch a $500 million sovereign bond issue on the international market with top bankers JP Morgan and Morgan Stanley working hard to promote the operation. By early September, and with $1.2 billion in the order book for the issue, the outlook for the upcoming pricing looked bright.
The only problem was the timing. The terrorist attacks of September 11, the same day the deal for the bond issue was supposed to be signed off, added a high factor of uncertainty among investors, and demand for the bond shrank when it finally came to market a few days later.

“Still, the issue had an amazing reception considering the degree of uncertainty and we attracted orders for around $750 million,” recalls Andres Dauhajre, the former executive director of the unit in charge of the Dominican government’s medium-term external financing program (UPMFE).
The success of the bond issue in the international market has guaranteed fiscal viability for the government and resources to allow it to maintain macroeconomic stability and finance repayable infrastructure projects.
The funds from the sovereign bonds are to be used in high-priority public works projects, such as the construction of a modern freeway in the east and a hydroelectric dam to name but two.

“Besides helping to provide the Dominican private sector with a benchmark to access funds on the international capital markets, the bond issue had a financial objective with two ramifications,” notes Mr. Dauhajre. “One was to increase central bank reserves in order to improve credit ratings and the other was to provide fiscal breathing room for the government so that it could maintain its rhythm of public investment in important public works that were unable to be executed on the magnitude we had expected in 2001.”

The bond issue marked the beginning of a new era in the Dominican Republic, which had traditionally given little importance to the international financial market, and imposes a healthy dose of fiscal discipline on the economy.
“We now have an administration that is strongly convinced that, considering the trend towards globalization, it is crucial to have a foot not only in the goods market, which we already have, or in the services markets, which we have with tourism and the free zones, but also in the international capital markets, where we were lacking a presence. That is why we made this transaction, and I think the country now sees that it was worth it,” Mr. Dauhajre concludes.