Passage of DR-Cafta bodes well for region's long-term sovereign creditworthiness, says S&P

By Reshmi Basu

New York, July 28 - The passage of the Dominican Republic-Central American Free Trade Agreement by the U.S. Congress may result in positive implications on the sovereign credit ratings of participating Latin American nations, according to Standard & Poor's.

Early Thursday, the House voted 217-215 in favor of DR-Cafta.

The free-trade pact with Central America will get rid of tariffs on U.S. exports to Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.

"The trade agreement is not a magic solution to the region's problems but it could create a more stable policy environment that encourages more private investment," said S&P credit analyst Roberto Sifon Arevalo in a news release.

The agreement will liberalize trade with the United States and promote deeper economic integration in the region, he said.

In an earlier commentary published on June 9, Arevalo said the sovereign ratings in the region were constrained by low GDP growth, weak fiscal revenue, high levels of poverty, and income inequality.

Low levels of investment were a contributing factor to weak productivity growth and poor external competitiveness.

He stated that the region would benefit over the coming years if governments were able "to implement structural reform that boosts investment and productivity enabling them to take advantage of the enhanced access to the U.S. market."

Cafta is not a cure for the ailments which inflict the region. However with no treaty in place, some sovereigns would have been under ratings pressure because of the missed opportunity for mid-term growth, he remarked.

Over time, the agreement could help boost higher living standards, more tax revenue, and higher sovereign creditworthiness, said the analyst, who added that the impact could be similar to that of the North American Free Trade Agreement (Nafta) on Mexico, in Thursday's release.

The economic benefits of Nafta have helped create Mexico's increasing macroeconomic stability, which has contributed to its investment-grade credit rating, he said.

"Realizing the long-term benefits of the trade agreement depends upon the ability of governments to implement policies that boost investment and productivity, thereby enabling local producers of current and most importantly new products to take advantage of secure access to the U.S. market," added Arevalo.

"The agreement is likely to have a far bigger impact on the signatory Central American countries, whose combined GDP equaled only 0.8% of U.S. GDP in 2004, than on the U.S.," he noted.

The DR-Cafta agreement increases and makes permanent trade arrangements implemented under the Caribbean Basin Initiative, which was signed by President Ronald Reagan in 1983.

The ratings agency sees this as positive for a region facing increasing competition from the People's Republic of China, particularly in the textile industry.

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