MACRO REPORT: Dominican Republic working to sustain broadly positive scenario

Monday, October 24, 2016

The Dominican Republic continues to experience excellent macroeconomic conditions with high growth and low inflation, amid very mixed economic conditions across the Caribbean.

In an October 20 address celebrating 69 years of the central bank, governor Héctor Valdez Albizu highlighted economic successes this year that include impressive 6.9% GDP growth in the first nine months, annualized inflation in September of only 1.35% (0.35% in January-September), growth in remittances, mining exports and farm goods production, as well as foreign direct investment and a record performance in the tourism sector.

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He also noted an improved current account deficit aided by the inflow of US$18bn in hard currency, a figure expected to reach US$24bn by year-end, and international reserves equivalent to 3.6 months of imports.

In late June, Moody's shifted its outlook on the nation's sovereign debt (affirmed at 'B1') to positive from neutral on the optimistic growth outlook and improving public debt scenario.

Hurricane Matthew left devastation across a large swath of Haiti, the nation's neighbor and major trading partner. The Dominican Republic suffered some damage in the storm, which destroyed over 200 homes and isolated rural communities. Nevertheless, the country quickly mustered its forces to become a key part of the Haitian relief efforts – work praised last week by the United Nations.

The nation has long historical and cultural ties to Haiti, though often contentious and difficult, as seen by the 2013 diplomatic conflict that led to a loss of legal rights for four generations of Dominican-born residents of foreign origin. The issue flared again last week, as migration minister Florinda Rojas called on the government to give legal status to undocumented Haitians living in the Dominican Republic.

According to the ministry, of the 524,632 foreigners living in the nation (5.4% of the total population), 87.3% are Haitians.

However, despite the Dominican Republic's ability to help its neighbor and its truly exceptional macro indicators, the country continues to struggle with inequality and poverty – 32% of the population was below the poverty line in 2015, according to the World Bank. Government figures show 5.8% were in extreme poverty that year (down from 10.3% in 2013).


Valdez Albizu estimated GDP growth would reach 6.5% in 2016 (totaling US$67.1bn, according to the World Bank). The central bank also reported the GDP proxy for growth reached 6.9% in September.

The central banker noted the dynamism in several key sectors in the first nine months of 2016, with mining growing 22.3%, construction 12.2%, farm goods 10.6%, financial intermediation 10.4% and health 8.2%. The hospitality sector grew 5.9% in the period, while transport expanded 5.3%. Local manufacturing saw growth of 5.3%.

In its June report, Moody's recalled that GDP rose 6.9% in 2015, "the highest growth rate in Latin America and in the Caribbean, and Moody's expects strong economic growth this year and next, albeit at a somewhat lower rate," the ratings agency said.

"Data from the first four months support our view of at least 6% growth for 2016, driven by construction and mining. Next year growth should be closer to the 5% long-term trend, still higher than rating peers."

The report added that the Dominican Republic has grown faster than its Caribbean neighbors, by 5.6% a year on average from 2006 to 2015 against the islands' average 1.0%, bringing per capita income up to US$14,984.

"The economy is strongly linked to that of the US, which accounts for around 50% of exports, 41% of tourist arrivals and 71% of remittances to the island. The tourism industry in the Dominican Republic currently contributes around 16% of GDP, 15% of total employment and 25% of its foreign exchange earnings," says Moody's in a report.

That said, the country must find a way to sustain growth in the years ahead that is not currently apparent. The World Bank, for example, projects growth will fall to 4% in 2018.


Valdez Albizu is credited with guiding the nation towards low inflation in recent years – annual inflation averaged 2.4% from September 2012 to September 2016.

The governor added in the central bank report that the region has faced considerable economic uncertainty and volatility recently. However, prices have been stable.

"A variety of low international commodities prices, such as for oil and other basic consumables, and the increase in gold [prices] in recent months, have improved our terms of trade, reflecting a positive supply shock for the country, consolidated over the last three months," he said.

The central bank expects inflation to remain below 2% through year-end.


The Dominican peso has been weakening very slowly but steadily in recent years against the US dollar, closing Friday at 46.44 pesos to the greenback.

The currency weakened 1.9% through September and 2.4% in the last 12 months, considerably lower than the annual rates seen in Argentina, Mexico, Peru, Nicaragua, Honduras and others ranging between 3.5% and 37.6%.

"This has been achieved without affecting competition with exports, considering that the difference in inflation with respect to our principal trading partner, the [US], has been practically nil," said Valdez Albizu.

The country maintains dollars as a reserve currency and allows certain business to be conducted in dollars (particularly tourism). As of October 17 the central bank held gross international reserves of US$5.44bn, up US$569mn from the same time in 2015.

"Our economy is generating enough dollars to satisfy demand for the productive sectors of the country," the governor added, noting that US$14bn has entered the country so far in 2016.


According to 2015 World Bank and statistics agency (ONE) figures, of the 10.53mn people living in the Dominican Republic, 5.01mn were employed or seeking work.

Of these 5mn, 14.0% were unemployed – a mismatch with the apparent health of the economy.

The World Bank has urged the Dominican Republic and President Danilo Medina to improve the investment climate to spur higher wages as well as employment, which has stagnated since the 2003-04 crisis in the country.

The recommendations specifically urged the government to further support the tourism trade and businesses aligned with that sector, as well as to further develop free trade zones.

Dominican economist Miguel Ceara-Hatton, in an opinion piece for news outlet Al Momento, said Medina wasn't doing enough to improve employment.

"The unemployment rate has dropped only 0.7% from 2012 to 2015," said Ceara-Hatton of the first three years of the Medina administration, noting the president's promise to create 400,000 jobs has only resulted in "everything being left the same."

"It doesn't matter if the economy grows more than 5%, the unemployment rate isn't dropping, and in not dropping, this [GDP growth] has little impact on reducing poverty," wrote the economist.


According to central bank data to June 2016, the Dominican Republic had a US$7.34bn trade deficit in 2015 with US$9.52bn in exports and US$16.86bn in imports.

The most recent data shows a deficit of US$3.63bn in the first half of 2016, up 5.1% from the same period of 2015, with US$4.68bn in exports and US$8.21bn in imports. Of these imports, 19.75% entered via the nation's free trade zones and 12.92% were oil imports. Both metrics are lower than in the same period of 2015, when 24.6% were free trade zone imports and 17.19% oil imports.


The central banker said that exports in the first nine months of 2016 were boosted by a 10.0% increase in tourism sector revenue (US$5.08bn), a 4.7% y-o-y rise in remittances (US$3.91bn) and US$1.80bn in foreign direct investment – largely in trade and tourism – resulting in a US$282mn current account deficit so far this year. That deficit is US$159mn smaller than in the same period of 2015.

Beyond tourism, interest from telecom firms like América Móvil has drawn foreign investment, complementing strong infrastructure investment from the government and partners in energyroads and water projects.

Moody's, in its outlook report, said it expected the country's debt burden will continue to fall over the next two years, supported by a reduced fiscal deficit.

"The first driver for the outlook change relates to the Dominican Republic's improving debt profile. The country's debt burden has fallen every year since 2013, when it peaked at 38.9% of GDP, and we expect the country's debt will end at 35.4% next year, compared to an average of 58% of GDP for 'B1'-rated sovereigns," the agency said.

"A reduced fiscal deficit has been key in reducing the debt metrics. The Medina administration, which assumed power in 2012 and was reelected this past May, has been able to maintain a trajectory of gradual fiscal consolidation, reducing the deficit to 2.9% of GDP last year, from a peak of 6.4% during the 2012 election year. The lower deficits will continue this year and next with the fiscal deficit dropping to 2.5% next year."


Thanks to an electoral reform allowing sitting presidents to run for a second term, Danilo Medina of the leading Dominican Liberation Party (PLD) was reelected for another four-year term on May 15 by a wide margin.

Medina's popularity has largely come from his efforts to boost social programs in accordance with his party's philosophies, most recently signing into law the 2017 budget, which added US$13bn and US$15bn in spending on education and health, respectively.

In a CID-Gallup Latinoamérica poll conducted soon after his reelection, Medina garnered a 73% approval rating – the highest of any Latin American leader at that time.

In a similar poll, conducted by Mitofsky in July 2016, Medina again topped popularity among 20 Latin American leaders, with 83% approval.

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