Every Little Bit Counts

Having been defined as the “strategic axis of the industrial and commercial sectors” by President Medina, micro firms and SMEs are being targeted by new financial resources that are seen as a major tool for boosting their fortunes. With a special focus on the industrial and commercial segments, a fund of Ps4 billion and a Solidarity Bank have been established to ease access to loans. Tax amendments at the industrial level are also planned, with hopes that a stronger base of micro firms and SMEs will provide a boon to large corporates, many of which work closely with smaller firms, according to José Del Castillo Saviñón, Minister of Industry and Commerce. At the state level, the Ministry of Industry and Commerce is soon likely to establish a separate Energy and Mining Ministry in order to highlight the importance of each sector for national development.

Domestically, the country has historically been strong in the areas of tobacco, alcohol, and sugar production, while a large automobile and machinery distribution industry has developed around growing household incomes and the expanding construction, mining, and agriculture sectors. New car sales in the country are showing signs of stable recovery following a shock in 2008, increasing to 21,000 units in 2012, well on their way to the 30,000 units sold in 2007.

The traditional production of rum, cigars, and sugar is also on the up, buoyed by strong demand in international markets. While sugar production still has some way to go to before it can reach the 1 million tons of annual production it once enjoyed, expectations are high that the strong international price of sugar will attract investment in the coming years. The cigar and rum sectors, however, are enjoying high levels of employment and are considered ambassadors of Dominican quality.

CIGARS, RUM, & SUGAR

While the Dominican Republic used to produce upward of 1 million tons of sugar annually, its current production level of 530,000 tons is likely to rise thanks to the high international price of sugar—$0.20 per pound—and expectations that a growing presence in European markets will spur investment and boost employment. Employment currently stands around 50,000, a number that will need to double to ensure stable production levels in the future.

In 2012, $500 million was earned through cigar exports, a commodity that has little presence in the domestic market. As well as representing 5% of the country’s total exports, cigars also represent 8.5% of fiscal revenue on merchandise taxation. Challenges remain, however, to increase domestic consumption through the production of machine-rolled cigars, while industry leaders are also expressing concern over Western market movements to introduce plain packaging laws, a move that could reduce the potency of the Dominican Republic’s high-quality brand.

Rum, exports of which are worth around $135 million annually, enjoys more popularity domestically, and the market is estimated to be worth between $600 million and $1 billion. Europe and the US are the largest importers of Dominican rum, with increasing exports to China and Russia likely to provide growth in the years ahead.

AUTOMOBILES & MACHINERY

In 2007, new car sales reached 30,000 units, a figure that the country is hoping to reach again following the global financial crisis of 2008, which saw sales drop to under 14,000. Due to a strong second-hand segment, recovery has been slow in the new car market, with 21,000 new cars sold in 2012, up from under 20,000 in 2011. The sector could take another hit, however, as new tax reforms will increase VAT from 16% to 18%, while the first license plate tax will rise to 20% from 17%, depending on emission levels. Widely accepted as a government effort to challenge the trade deficit by reducing energy imports, the result may see a slowdown in new car purchases. The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) will provide some relief for importers, with the agreement giving vehicles imported from the US a competitive advantage. “As a country culturally oriented to the US, the market embraced US-made vehicles like Ford at competitive prices,” said Fernando Villanueva S., Executive Vice-President of Grupo Viamar, a company credited with making Ford the country’s most popular brand.

The mining industry is providing an incentive for growth in the distribution of machinery, a fact that companies such as IMCA are taking advantage of. “In the last three years, mining has meant about 30% of our business,” said Pedro Esteva, President of IMCA, a company which also works extensively with the agriculture and construction sectors.

FREE INDUSTRIAL ZONES

The development of FIZs has been at the forefront of the government’s efforts to formalize the economy, and has encouraged both investment and exports. There are currently 55 specialized industrial parks in the Dominican Republic, which fall under the purview of the National Free Zones Council (CNZFE). They have a mix of public and private administrations, and offer reduced or zero import/export tariffs and duties, reduced or zero taxes on profits paid to the government, relaxed regulations and restrictions, and convenient access to transportation and shipping facilities, the latter of which are seen as the backbone of the economy in general. Currently, around 70% of all exports destined for the US and Europe come from industries and businesses located within the FIZs. Around 30% of companies operating in the country’s FIZs produce textiles and shoes, around 20% are service companies, while another 5% manufacture pharmaceuticals and medical equipment.

Based on statistics from 2010, free trade zones (FTZs) in general represent approximately 2.7% of the country’s GDP, 5% of employment, and 7% of its FDI. Approved amendments to the Free Zones Act will see a 2.5% tax levied on companies selling part of their production to the domestic market, in a move described as necessary to eradicate potentially unfair production. “We believe that the export processing zones (EPZ) scheme should be given continuity, because it currently generates 130,000 direct jobs and nearly $4 billion in exports,” concluded the Minister of Industry and Commerce.

Moving forward the key to growth likely lies with the domestic segment and increasing household incomes. Heightened formality in the economy thanks to better access to finance for micro firms and SMEs is likely to help raise wages, providing a much-needed boost to domestic demand for products from cigars to new automobiles. The march of the free zones will also continue, with the country’s strengthening trade links the best way for the country to generate wealth.