My Word is My Bond

The Dominican Republic’s (DR) stock market saw embryonic activity upon the promulgation of Law 3553 of 1953 that enabled the creation of the National Stock Exchange and the National Commission of Securities. This was expedited in the 80s, under Presidential Decree No. 554-89, which launched today’s Stock Market of the Dominican Republic (BVRD); a non-profit self-regulated institution that rang its first bell in 1991. Since then, while the bourse has become an indispensable instrument in global integration and economic advancement, having evolved into a regional star, its expansion has been limited by local convention. Traditional attitudes, wherein family businesses shun the strict financial scrutiny that comes with public listing, have curbed the number of companies opting for an IPO to raise capital. In consequence, the bulk of activity is confined to the capital and fixed income markets. Moreover, around 75% of securities transactions comprise cross transactions where both buyer and seller are clients of the same brokerage house. The market’s rise was nothing short of stellar and immediate, whereby volumes at BVRD peaked in 2001 at DOP22.69 billion, up a staggering 461.2% YoY. In the year 2002, the BVRD realized operations valued at DOP24,841.9 million, up 9.52%.

Operations are determined by Stock Markets Law 19-00 of May 8, 2000, which established the framework and regulation of public offers, and the issues and issuers of securities to encourage growth of transparent capital markets capable of expediting national growth and regional standing. The above law also created the Superintendence of Securities (Superintendencia de Valores, SIV). This body, along with the bourse itself, and the National Council of Securities, ensures the market is thrice regulated, with strict checks and balances adhered to, rendering the bourse appealing to the investor. Additional Securities Market legislation, the draft of which was submitted to the National Congress in March, is keenly awaited.

The instrument offering ranges from open-end mutual funds, close-end funds (including real estate investment trusts REITs), commercial paper, structured notes, sovereign, and corporate bonds, plus other fixed income securities. The field as of November 30 was populated by 207 participants, 26 issuers, 23 external auditors, and 22 brokerage firms. In late November 2016 the BVRD scaled a new height, as trading for the month including the primary market and secondary markets accumulated to DOP22,911 million, up 244.5% YoY. For the same annual period, the secondary equity market, had traded a volume of DOP.677 billion, amounting to 179.8% of the previous year’s print.

The SIV has in two years approved over USD1 billion in the bond issues of utilities companies alone. And with all issuing entities being established corporations and public institutions of high credit rating, fixed income securities remain an excellent route to a diversified portfolio. SIV data indicates that public offerings approved in 2016 at the stock market amounted to DOP76.57 billion, posting YoY growth of 54%. And as of November 30, 2016 the stock market had seen a volume of DOP1.65 billion. Growth of interest is borne out by the 17,211 new accounts registered in the Centralized Deposit of Securities between January and November, and 16,681 incumbents. In December 2016 the SIV commented that the DR’s bond market is an appetizing address due to high rates generally on offer, on average of 10.5% in pesos and 5.5-6% in dollars, although reflective, too, of prevailing market conditions. As an example, in late June 2016 the DR launched a USD500 million tap of its 2026 bond with bearing an interest rate of 6.875% at 5.6% once the order books has swelled to around USD3 billion. As a result, this took the final yield to the tight end of the instrument’s 5.6-5.65% guidance.

On June 29, 2016, Moody’s Investors Service amended its outlook on the DR’s long-term issuer and debt ratings to ‘positive’ from stable, affirming the B1 rating. The decision was based on key factors and, as is often the case, came with a number of caveats.

Firstly, the DR’s debt burden was foreseen declining over the coming two years, reflective of a slimmer fiscal deficit. Second, was the nation’s strong growth outlook, exceeding that of its peer nations, and boding well for income levels and hence spending. The debt burden, in decline each year since 2013, was foreseen closing 2017 at 35.4% of GDP, in stark contrast to the 58% average of B1-rated sovereigns. Then comes GDP, which had climbed 6.9% in 2015, leading the field in both Latin America and the Caribbean, with around 6% forecast for 2016, fueled predominantly by the construction and mining sectors. Of note, the Dominican economy appreciated annually by an average of 5.6% in the 2006 to 2015 period, compared to the Caribbean median of 1%. The caveats highlighted the need for a more robust institutional framework, and economic diversification. Moody’s noted that tourism alone was responsible for 25% of the nation’s foreign exchange earnings. It becomes clear from this that the financial sector and capital markets in particular must work to step up the game.

Another negative underlined by Moody’s was the DR’s “low scores on the Worldwide Governance Indicators and a mixed track record of macroeconomic stability.” While the latter pertains to fiscal policy, the former issue is one that SIV is acutely aware of, and indeed one on which it spoke out as 2016 drew to a close. Because, according to the SIV, while the capital markets have continued to grow, they requires greater scope given the negligible scale of the primary market. For one, it called for pension fund diversification through investment in key infrastructure projects of sound and profitable return potential to galvanize the capital markets. And while greater market participation is to a degree dependent upon public education, which the SIV also undertakes, it called for the passage of keenly awaited pending legislation.

The proposed law, endorsed by all parties active at BVRD, grants the SIV financial independence, and foresees greater international capital markets information exchange and closer links with other regulators. To date, BVRD has penned no agreements with other bourses. The SIV also awaits legislation to foster greater synergy between the private and public sectors to expand the capital markets, and where ideally, the Treasury and the Central Bank are not the main sources of emission. It notes that current legislation dates back to 2000, and hence to an environment prior to the bourse’s existence. Of direct relevance to Moody’s call, however, is the fact that the anticipated regulations would set in place a legal framework in step with the objectives and principles of the International Organization of Securities Intermediaries Commissions (IOSCO). And the significance of this is that it would grant the Dominican Republic the right to enroll in dedicated anti money laundering and terrorism commissions at the G20, boosting national prestige. The DR ranks among 14 nations yet to have signed the IOSCO memorandum of understanding.