Official monetary, financial and exchange measures in the face of the impact of COVID-19

The Governor of the Central Bank, Héctor Valdez Albizu, announced around noon a series of measures aimed at guaranteeing the proper functioning of the Dominican economy in a complex international environment, characterized by a high level of uncertainty, as a result of the expansion of the coronavirus that affects about 160 countries in the world.

In his message he indicated that in this context, and as mentioned by President Danilo Medina Sánchez, in his address to the country last night, the Monetary Board and the Central Bank have adopted a set of measures aimed at reducing interest rates. in the financial market, to provide liquidity to banking entities, both in national and foreign currency, and to temporarily make the prudential regulations of the financial sector more flexible.

“We are convinced that these measures will have a positive and immediate impact on economic activity, favoring Dominican households, micro, small and medium-sized businesses and the private sector in general. Likewise, they will create the conditions so that debtors who face problems due to the crisis conditions prevailing as a result of the expansion of COVID-19, can meet their payment commitments," said the Governor of the Central Bank to go on to list the measures. :

Interest rate measures

First of all, I want to announce that the Open Market Operations Committee (COMA) of the Central Bank of the Dominican Republic, in an extraordinary monetary policy meeting held last Monday, March 16, decided:

1. Reduce the Monetary Policy Rate (MPR) by 100 basis points, from 4.50% to 3.50% annually, with the objective of encouraging a generalized lowering of interest rates in the financial system through the monetary policy transmission mechanism.
2. Likewise, and with the purpose of providing liquidity at a low cost to financial entities, a decrease of 150 basis points in the interest rate of the permanent liquidity expansion facility (overnight Repos) was approved, going from 6.00 % to 4.50% annually.
3. Additionally, it was decided to reduce the interest rate on short-term interest-bearing deposits in the Central Bank (Overnight), from 3.00% to 2.50% annually. This measure contributes to reducing the interbank interest rate and, therefore, reduces the funding cost of financial entities.

Measures to provide liquidity to the financial system

In addition to the interest rate cuts, a series of liquidity provision measures were adopted, both in national and foreign currency, with the aim of making a large amount of resources available to financial entities so that The credit demand of the productive sectors and Dominican households can be effectively met. Specifically, in national currency we are making liquidity for more than RD$52 billion available to financial entities through the following measures:

1. First, in a meeting held yesterday, Tuesday, March 17, the Monetary Board made the requirements for coverage of the legal reserve in national currency of financial entities more flexible, recognizing the securities of the Central Bank and the Ministry of Finance as valid coverage for an amount of up to RD$22,321.0 million, which represents 2.0 percentage points of the legal reserve coefficient. Of that amount, RD$10 billion will be allocated to loans to households and micro, small and medium-sized businesses and the commerce sector, while the rest of the funds, some RD$12,321.0 million, will be channeled to the productive sectors, mainly to tourism and the export sector, at interest rates in all cases no higher than 8.0% annually.

It is important to highlight that new loans granted by financial entities with these resources will be classified as risk category A, with zero provisions, and will not be considered in the calculation of the solvency index.

2. Second, the Central Bank enabled the liquidity provision window to financial entities through the Repo mechanism for up to 90 days for an amount of up to RD$30 billion, using securities from the Central Bank and the Ministry of Finance as collateral. This facility would be available to financial entities with interest rates of 4.75% for Repos of up to 30 days and 5.0% for Repos between 31 and 90 days. These facilities could be renewed as long as the conditions of uncertainty that gave rise to the measure persist.

Regarding the provision of liquidity in foreign currency, we have approved two measures that guarantee an adequate flow of dollars to cover the needs of the exchange market, at a time when large foreign currency-generating sectors such as tourism and the export sector are seeing affected. In this sense, we are providing liquidity to the market for more than US$ 500 million, through the following mechanisms:

1. Inject liquidity in foreign currency for an amount of up to US$300.0 million, through 90-day repo operations, using securities from the Ministry of Finance as collateral.
2. Temporarily relax the requirements for the coverage of legal reserves in foreign currency of multiple banks, recognizing Ministry of Finance securities in dollars as valid coverage of US$ 222 million, which represents 2.5 percentage points of the legal reserve coefficient. This measure will help facilitate the channeling of foreign currency to generating sectors such as tourism and exports that have been impacted by the drop in trade and tourism flows globally.

Special regulatory treatment measures for the financial system

At its meeting yesterday, the Monetary Board also approved a series of measures that imply special regulatory treatment to the financial system while global uncertainty persists, associated with the economic effects caused by the coronavirus pandemic. Said special treatment would allow the payment schedule of bank debtors to be readjusted if necessary, without additional regulatory costs arising from this action. These measures seek to avoid a possible deterioration of the credit portfolio due to the impact of COVID-19 on the performance of some productive activities.

Specifically, the measures adopted as part of the special regulatory treatment are:

1. Authorize financial entities to freeze the ratings and provisions of debtors at the level they are at at the time of approval of the Resolution.
2. Authorize credit restructurings that involve modifications in payment conditions, interest rates, terms and installments, among others, to maintain the same risk rating of the debtor at the time of being restructured. In other words, this means that the debtor's credit rating would not be reduced due to problems caused by late payments resulting from the current situation.
3. Authorize those loans disbursed against lines of credit for a period of sixty (60) days to be considered not due. This measure includes a waiver of payment of the loan principal in that period, benefiting the debtor's cash flow.
4. Extend by ninety (90) days the period granted to the debtor to update the guarantees corresponding to the appraisals. This measure will provide greater flexibility to the debtor who will have more time to comply with the requirement to update their guarantee.

It is important to highlight that this adverse situation finds the Dominican economy with strong macroeconomic fundamentals, reflected in growth around potential, low and stable inflation, dynamic credit to the private sector and high levels of international reserves, giving the country a greater capacity of reaction to face the challenges derived from the economic effects of COVID-19.

In this context, preventive measures by the Central Bank, the Monetary Board and the Dominican Government will contribute to economic stability, giving security and certainty to private agents in such a way that a favorable environment is maintained to sustain the proper functioning of the economy and preserve the Dominican productive system.

The Central Bank of the Dominican Republic and the Monetary Board reaffirmed their commitment to conducting monetary policy towards maintaining macroeconomic stability and the proper functioning of the financial and payment systems. In that sense, the institution, as well as the entire Dominican Government, will continue to monitor the impact of the coronavirus and the other factors of uncertainty and its effects on the Dominican economy, being prepared to continue reacting in a timely manner to factors that may generate a deterioration in the employment and well-being of Dominicans.

At the press conference where the measures were announced, the governor of the Central Bank, Héctor Valdez Albizu, was accompanied by other members of the Monetary Board, including the superintendent of Banks, Luis Armando Asunción, and the Minister of Finance, Donald Guerrero.