Dominican Republic guide 2016: Macroeconomy

By:
Rob Dwyer
Published on:

The Dominican Exception.

The IMF marks out the Dominican Republic as boasting one of the region’s most dynamic economies. However, further structural reforms will be needed, if the country is to maintain its rapid growth, say the country’s leaders.

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These are testing times for Latin America. Growth across the region has stalled as China’s demand for commodities has slowed along with its economic growth. The rise in the dollar has added to the end of the commodities super-cycle, leaving many regional economies searching for new drivers of growth. There is one notable exception, however. The Dominican Republic’s economy is booming thanks to domestic reforms and policies that have been lifted by favourable international conditions.

The oil-dependent economy is seeing the price of its imports fall. The economy’s ties to the US are also benefiting growth and the value of remittances is increasing, despite the relative stability of the exchange rate. Together this has boosted domestic consumption and lowered inflation. GDP growth hit 7.3% in 2014 and 7% in 2015 – easily above the region’s second-fastest growing economy of Bolivia (4.4%) and in stark contrast to the lower rates of growth of the Pacific Alliance countries of Colombia (3.0%), Peru (2.5%), Mexico (2.4%) and Chile (2.1%). Elsewhere in the region, Brazil suffered a sharp contraction (-3.0%). The Dominican economy, with a population of 10 million, now accounts for 22% of the total GDP of Central America and the Caribbean, making it the biggest economy in the region.

The country’s exports have grown from $8.9 billion in 2012 to $9.9 billion 2014 (the projected figures for 2015 are expected to be above $10 billion). Foreign direct investment continues to exceed $2 billion annually since 2010, and the current account deficit has been reduced substantially, from 7.5% of GDP in 2011 to a projected 2.0% in 2015. Net reserves, though still low at about three months of import payments, are increasing and the growth is well diffused throughout the economy. 

The construction industry has been particularly strong in recent years (18.2% growth in 2015), thanks to infrastructure and school-building projects, but the wide base of the economy is solid. 

The IMF team that visited the country in November 2015 said: "The Dominican Republic remains among the most dynamic economies in the region, having benefitted from a strengthened policy framework and external tailwinds. Growth averaged at 7% during 2014 and in the first three quarters of 2015, the fiscal position has improved, the external position strengthened, and inflation remains low. The current cyclical upturn provides a good opportunity to address the remaining vulnerabilities, build buffers against risks and strengthen the foundations for a sustainable and more inclusive growth in the future." 

Simon Lizardo, minister of finance, says the Dominican Republic’s rapid growth is creating space for further institutional reform. The administration’s priority in its first term has been fiscal discipline, he says and he adds that there is evidence of progress because in 2016, unlike previous election years, there is no fiscal slippage expected.

"In the next four years we will have to implement structural reform in many areas – in monetary policy, electricity and energy reform and with financial supervision," says Lizardo. "We have to keep moving ahead to our medium-term goal of attaining an investment grade rating."

Lizardo expects the economy to grow at 5% in 2016, which he says is the country’s long-term trend rate of growth, but with the average price of oil used in the 2016 at $48 a barrel, many analysts expect an even higher rate of growth.

The Dominican Republic has already achieved upgrades from all the major rating agencies in recent years and is now rated B1/BB-/B+. Reform of the electricity sector will be crucial for further upgrades. The government is working to cut the cost of electricity production through the development of renewable energy sources and two large coal-powered plants that will reduce the reliance on oil imports. There is also a project to improve transmission efficiency to lower the fiscal burden of the electricity sector to the state. Lizardo says that the administration will also seek to enshrine the current fiscal discipline through a fiscal responsibility law.

Larisa Arteaga, director at Fitch Ratings in Santo Domingo, says that the agency upgraded the sovereign to B+ in December 2014 and then a year later put the rating on review for another upgrade, which could come later this year. The economy is benefiting from a positive external environment, she says, but the improved ratings also reflect the government’s progress in increasing fiscal flexibility and strengthening the country’s fundamentals.

"The economy is expected to grow at around 5% and the government is working to lessen its vulnerabilities," says Arteaga. "For example, the two coal-power energy plants will lessen the country’s dependency on oil imports in the medium term and that’s very positive for the Dominican Republic. Another strength is the country’s increasing financial flexibility – it has more access to get financing from the international markets, as well as developing the local markets and getting some important multilateral funding."