Previous Quarterly Editions
Expropriation Risk: 37 36 34 34 Political Violence Risk: 32 32 30 33 Terrorism Risk: 28 26 26 28 Exchange Transfer and Trade Sanction Risk: 46 44 42 42 Sovereign Default Risk: 43 43 42 42
TREND ▲ OUTLOOK ►
The Dominican Republic is on pace to meet expected GDP growth of 5.5% for 2018 thanks to the strong showing of the construction sector and success of the country’s special export zones. The solid performance of the export processing zones is particularly welcome as they handle products of greater value, including medicines and medical equipment, and benefit from the ongoing economic expansion in the US. Other macroeconomic indicators remain healthy. Annualised inflation in the first quarter of 2018 was 4%, well within the annual target band of 3-5%. After an increase of 25 basis points in July, interest rates are now at 5.5% and should remain unchanged for the rest of the year.
The current account deficit is low, thanks to the expansion of remittances which are highly correlated to conditions in the US market, to revenue from the export processing zones, and to income from tourism. The IMF forecasts that the current account deficit will reach 1% by the end of the year, increasing to 1.4% in 2019, but this is manageable. Given this economic stability, the country’s main challenges are political. Corruption remains high and the legal system slow. A long investigation into the Odebrecht scandal has led to some prosecutions, including a former minister of public works. However, the attorney general chose not to investigate overpayments for infrastructure projects or illegal campaign contributions and did not charge the highest-ranking officials from the PLD, including a former economy minister, who had previously been implicated. Social dissatisfaction with the levels of corruption remain high, with the anti-corruption Green Tide movement organising a new protest in Santo Domingo in August. Additional protests are likely.
At the same time, tensions within the ruling PLD remain high. President Danilo Medina’s supporters are still pushing for a change to the country’s constitution that would enable him to run for a third consecutive term, although his popularity has fallen since last year. Former President Leonel Fernández, a still influential PLD politician forced to stand down by the term limits in place when his term ended, plans to run and opposes any further attempt to reform the Constitution. He is increasingly becoming a strong critic of the current administration. Although the PLD should ultimately resolve its internal problems, a period of sustained conflict within the ruling party poses some risk to the economy. There are also some external economic risks that include the slow but steady rise in the price for oil, which is one of the country’s main imports, as well as rising global interest rates and any unexpected reduction in US demand for Dominican products. The government’s fiscal room for manoeuvre to respond to deteriorating global conditions is relatively small due to growing debt and a still narrow fiscal base.
TREND ► OUTLOOK ►
The role of foreign companies in the Dominican economy remains uncontroversial. Foreign direct investment increased by 11% in the first quarter of 2018, thanks to new projects in tourism, commerce and mining. Management of the export processing zones is particularly effective, making investment easy and risks minimal. Prior tensions with foreign investors have primarily involved the mining and electricity sectors, but these have subsided since government policy towards them became clearer and more predictable. Corruption is undoubtedly the main challenge for investors, as it is for Dominicans themselves. The country scores poorly on the latest Corruption Perception Index from Transparency International and is ranked a lowly 135 out of 180 countries.
Despite the positive economic conditions, social discontent is high as a result of a lack of trust in the country’s political class. Polls suggest that three-quarters of Dominicans do not feel their economic situation is improving, almost 60% believe that the country is going in the wrong direction and a quarter consider that public security is the country´s greatest problem and is not being tackled. The Marcha Verde (Green Tide) movement has succeeded in mobilizing most of the population against corruption and remains an active political force. After a relatively quiet few months, it expects to be staging massive social protests again during the latter part of 2018. Opposition political parties remain critical of the government but are weak both in Congress and in the streets.
TREND ▲ OUTLOOK ▲
The main security challenge comes from the border area with Haiti, which is also a source of conflict between the two countries. In July, social instability in Haiti increased following a government attempt to push through a significant increase in energy prices. Concerns over the implications of the crisis on migration and instability at the border led the Dominican government to expand its military presence in the area, but there has been little trouble so far. The Dominican Republic is not a focus for terrorism and does not have any major known terrorist risk.
The exchange rate remains relatively stable and the outlook remains positive as long as the US economy continues its current expansion. Although the Trump administration is pursuing major changes to NAFTA, it has so far remained supportive of the Central American Free Trade Agreement (DR-CAFTA), which has been positive for Dominican exports. Nevertheless, given the volatility of the Trump administration’s trade policies, the government in Santo Domingo is closely watching the outcome of the NAFTA renegotiation talks.
TREND ► OUTLOOK ▲
Although the public external debt remains manageable, it has increased steadily in recent years to reach 20 billion dollars by mid-2018. It grew by 8.6% in the first quarter of 2018 compared to the same period in 2017. At the end of March, it had reached 20.7 billion dollars, equivalent to 26.5% of GDP, and it may increase slightly during the rest of the year. Of this, two-thirds is owned by the international private sector, mostly through bonds, and the other third is owned by multilateral and bilateral institutions. Tax revenues have increased in recent years but only due to more positive economic conditions. The IMF and other lenders have called for political moves to broaden the tax base and create new income opportunities for the government.
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