SANTO DOMINGO, Dominican Republic--(BUSINESS WIRE)--The Central Bank of Dominican Republic announced it would expand its non-delivery forward operations offering hedging opportunities to international investors with exposure to local Dominican pesos bonds, while preventing capital outflows that could put further pressure into the FX market. As part of the key measures taken to alleviate the economic impact of COVID-19 pandemic, the Central Bank of Dominican Republic has deployed a strategy of FX interventions through its Electronic FX Trading Platform, participating with more than US$3.5 billion dollars in both the spot and forward markets, to ensure foreign exchange liquidity in local currency market, since COVID-related lockdowns have affected the flow of US dollars into the economy.
The Central Bank’s decision aims at restoring orderly market conditions, while continuing to support the development of foreign exchange market, improving the depth of the Dominican peso derivatives market that would allow for hedging opportunities in times of unexpected volatility.
Foreign Exchange intervention in the form of NDFs, allows the Central Bank to use more efficiently its international reserves, as future payments are netted and do not require selling the full amount of dollars to the counterparties. The Bank declared this tool is an additional ammunition to intervene in the market, as it enhances the amount of dollars the Central Bank can use to support the Dominican peso. Currently, the Central Bank maintains a strong international reserves position of US$7,142.5 million, equivalent to 9% of its economy GDP.
Due to the increased demand for US dollars for precautionary purposes derived from the spread of COVID-19 pandemic and the lockdown of the economy that affected tourism and maquila sectors as well as FDI flows, the Dominican peso has experienced an increase in its depreciation rate, towards 9% YTD. This level of depreciation is low relative to other Latin American countries. As declared by the Governor of the Central Bank, Lic. Hector Valdez Albizu: “The Central Bank had to intervene in the FX market to prevent that expectations would divorce from medium and long term economic fundamentals. This unusual volatility in the FX market coupled with additional uncertainty related to electoral processes, led us to implement a hedging instrument for both local and international market participants.”
The Central Bank stated that financial institutions in Dominican Republic are currently able to bid for these NDFs, and it is expanding its operational capabilities to on-board international counterparties who qualify as dealers for its international reserves operations to be eligible as well. These entities can then pass the exposure to a larger group of market participants with positions in local peso.
Specific details of further offerings will be included in the announcement of future transactions. Hedging instruments will have a maturity of 90 days and the Central Bank will rollover the full amount of maturing instruments, until judges it as desirable based on the evolution of market dynamics.