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Tuesday, February 14, 2012
Perspectives

Dominican Republic: Positive 2012 Outlook 

The Pueblo Viejo project in the Dominican Republic, a $3 billion joint venture between Barrick Gold and Goldcorp. (Photo: Barrick Gold)
The two major presidential candidates have committed themselves to an IMF agreement. Here the Presidential Palace in Santo Domingo. (Photo: President's Office).

The growth outlook for the Dominican Republic is positive this year, experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

Strong exports helped the
Dominican Republic's economy to grow 4.5 percent last year. The country's exports rose 29 percent, while imports increased 13.6 percent. To what extent have government policies, such as preferential tax treatments, aided the economy? Which sectors of the economy are especially ripe for growth? What more should the government do to boost businesses, and what obstacles stand in the way?  

Bernardo Vega, president of Fundación Cultural Dominicana and former ambassador of the Dominican Republic to the United States: The outlook for the Dominican economy is positive, despite the recent decision of the government not to continue with the IMF agreement until after the May presidential elections and despite the electoral process itself, under which governments increase spending, the deficit and postpone painful decisions. However, the two major political candidates have committed themselves publicly to an IMF agreement after the elections. The 2010 target for the fiscal deficit was not met, mainly due to the electricity subsidy. After the elections, it is very likely that fiscal reforms will increase taxes from the present level of 12.7 percent of GDP. Exports increased in 2011 and the Barrick Gold mine will start exporting at the end of this year, although the taxes that it will pay will be small until investors recuperate their investment, which will take three or four years. The ferronickel plant, which was closed, is back in operation and should reach capacity this year. Despite the international situation, the government has maintained macroeconomic stability with a devaluation of only 3 percent to 4 percent and inflation at less than 8 percent. However income distribution keeps worsening and drug-related violence keeps increasing. Flows from tourism, maquiladoras and remittances have increased, despite the external limitations. The volatility of oil prices, together with the dependence on the Petrocaribe financial scheme, still constitutes the main danger to the economy. Growth is forecast as slightly higher than last year's 4.5 percent. 

Mary Fernández Rodríguez, founding partner at Headrick Rizik Alvarez & Fernández in Santo Domingo: Government policies, specifically in the area of agriculture, have contributed to the continued growth of the Dominican export sector. In particular, there has been a significant increase in the export of processed agricultural products such as beer, rum, tobacco, cocoa and coffee. As the Dominican Republic seeks to move up the value chain, success stories such as these should continue to be the focus of government policies. Many in the Dominican Republic believe that a greater investment in education needs to be made in order for business to continue to prosper over the longer term. Increased investment in education has not been a priority of the government (which frames its concern about such investment in the context of the budgetary consequences thereof), though the business community has continued to press the case that such investment is vital to increase the country's ability to export value-added products and services. In addition to investing in education, the government should focus on streamlining the processes to start new companies (although it is important to recognize that a new business organizations law has represented a significant advance in this respect). The passage of a corporate restructuring and insolvency bill pending before the Congress would also be a positive development. Finally, continued efforts to improve regulatory transparency, along with the investment in infrastructure, are recommended to permit the export market to be more efficient and insure increased business opportunities in the Dominican Republic.

Christopher Mitchell, professor emeritus of politics at New York University: Tax policy probably has not fostered Dominican economic growth; both business associations and good-government groups often criticize the government's tax hikes of recent years. The state gave modest financial support to export-processing zones during the post-2008 downturn, and the sector appears to be recovering (without notable job increases). High commodity prices help explain revived mining for ferronickel and gold; sugar, coffee and cacao also attract limited new investment. A relaxed exchange-rate policy probably assisted 2011's 5 percent growth in tourism; hoteliers had complained for years of an overvalued peso. Tourism and other services, plus mining, seem the segments most likely to grow strongly in the next few years. Three mid-range policy challenges await. The nation needs to remedy its persistent electric-power shortage; adequate and reliable electricity is vital for industry, communications and security. The problem is political as well as technical. Both influential businesses and some urban neighborhoods are 'free riders' on the electricity grid, and yearly electricity subsidies cost the state approximately $1 billion. Greater commitment to ecological protection is urgently needed, for example, to address the inherited (and potential future) pollution from gold refining, and to safeguard Dominican mountains, beaches and national parks for the nation's future-including well-planned eco-tourist development. Most importantly, major new support is required to educate Dominican workers and professionals. Per-capita education spending (2.4 percent of GDP) is one of the world's lowest, though a 1997 law requires spending at 4 percent. Civil society, less hindered than the state by patronage and corruption, is the most likely source of pressure for the latter two policies. 

Olga Kalinina, sovereign ratings director at Standard & Poor's: The Dominican Republic's real GDP growth is estimated to have moderated to 4.5 percent in 2011. Although this is below Standard & Poor's Ratings Services' initial forecast of 5.5 percent and down from a high of 7.8 percent in 2010, it's within the 4 percent to 5 percent range that we consider to be the country's medium-term growth potential. This relatively high growth trend reflects the country's resilient economy, its diversified export base, robust domestic demand and the expectation of relatively stable macroeconomic fundamentals. Although the government's withdrawal of its countercyclical fiscal and monetary stimulus curbed consumption and investment in 2011, exports performed well. This was because ferronickel exports resumed following the reopening of the Falconbridge mine. In addition, nontraditional exports benefited from weaker competition from Asia and stronger U.S. demand. Increasing diversification by both market (exports to Central America expanded significantly) and subsector (exports of footwear, textiles, jewelry and medical products have increased) has made the export sector more resilient. The tourism sector has also benefited from diversification. Nonresident foreign arrivals grew more than 5 percent last year, reflecting gains from South America. We believe further diversification of investment, trade and financial links with South America and other regions would benefit the Dominican Republic. We project the country's real GDP growth at 5 percent this year, supported by the Falconbridge, Barrick Gold and Cerro de Maimon operations. However, global uncertainties could dampen that growth somewhat. Despite high growth and attractiveness to FDI, structural and institutional weaknesses continue to hinder the Dominican Republic's economy. For example, the country's electricity sector has many unresolved structural, technical and institutional deficiencies. Unfavorable perceptions of corruption (a low 129th among 183 countries in corruption perception index) and poor global competitiveness index (110th out of 142 nations) reflect major qualitative weaknesses that we believe the Dominican Republic needs to address to ensure sustainable investment and growth.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter

 

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