Economy

Find the Balance

Economy

According to IMF data, growth slowed from 7.8% in 2010 to 4.5% in 2011, while nominal GDP came in at $55.6 billion, dropping off around half a percentage point in […]

According to IMF data, growth slowed from 7.8% in 2010 to 4.5% in 2011, while nominal GDP came in at $55.6 billion, dropping off around half a percentage point in year-on-year terms. The current account deficit, although dropping to 7% of GDP in 2012 from 8.5% in 2010, is a cause for medium-term concern as the private sector struggles to regain confidence as a result of global commodity price shocks and the slow recovery of Europe and the US. The high price of oil per barrel is also sparking a trend toward coal and gas in the electricity generation segment, while the need to tackle losses on the distribution network is also leading to calls for increased government and private investment in the country’s energy matrix.

An increase of around 40% in primary government expenditure plus lower-than-expected revenue performance led to a fiscal deficit of around 8.5% in 2012, which resulted in public debt reaching almost 45% of GDP by the end of the year, up from 35% in 2007-2008. The Central Bank of the Dominican Republic (BCRD) embarked on an inflation-targeting campaign at the end of 2011. IMF estimates put the consumer price inflation indicator at around 4% in 2012, down from 7.8% in 2011, with an expected rise to 5% in 2013, well within the BCRD’s target range of 5.5% (+/-1%). Unemployment fell to 13% in 2012 from 14.6% in 2011, according to preliminary IMF data. The informal sector represents 56% of total employment, with formalization seen as key to boosting economic equality and getting more people into work. SMEs account for 90% of the country’s companies, providing over 1 million jobs, according to Jean Alain Rodrí­guez, Minister and Executive Director of the Investment Center of the Dominican Republic (CEI-RD). The country’s consistent GDP growth has also served to attract foreign investors in recent years, with FDI totaling $3.5 billion in 2012, a record for the country.

TRADE & FDI

Despite running a current account deficit of 7% in 2012, Dominican exports have continued to grow in recent years. In 2011, the country exported goods worth $8.5 billion, a record for the Caribbean nation. The changing nature of the economy is also reflected in the shifting dynamics of the export basket. While 10 years ago sugar accounted for 70% of foreign earnings, sugar, coffee, cocoa, and tobacco combined now account for just 7%. The country’s minerals sector, dominated somewhat by ferronickel and soon gold, accounts for 5%, while 88% are non-traditional goods, including fruits and vegetables, gourmet and organic products, agro-industrial goods, and manufactured products. The agricultural sector accounts for 40% of the country’s exports. According to government statistics, the Dominican Republic exported 3,150 products to 173 countries in 2011, boosted significantly by country’s the free trade agreements (FTAs), including the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR). The US represents the country’s most significant export market, the slow recovery of which has contributed to the Dominican Republic’s current trading position. In 2011, the country exported $4.2 billion worth of goods to the US, up by 14.1% on 2010 figures. Top non-agricultural exports to the country were optical and medical instruments ($595 million), precious stones ($540 million), electrical machinery ($417 million), tobacco ($360 million), and knitted apparel ($335 million), according to the Office of the US Trade Representative. The Dominican Republic also imported $7.3 billion worth of goods from the US in 2011, up by 11.2% on 2010, with the major categories including oil, electrical machinery, vehicles, and agricultural products.

In 2011, the Dominican Republic accounted for 53.3% of total foreign investment in the Caribbean, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). FDI reached a record $3.5 billion in 2012, up from $2 billion in 2010. According to CEI-RD’s Rodrí­guez, over the last six years FDI totaled $682.5 million in the transportation sector, $642.8 million in the finance sector, and $487 million in the free zones, which have an industrial focus. The US has a significant stock of FDI in the country, focused mainly on the manufacturing industry. It reached $1.7 billion in 2011, up by 32.7% in 2010. Lower government income, however, can be somewhat attributable to a reduction in remittances due to the economic slowdown in the US. Dominican FDI stock in the US was $37 million in 2011, down by 14.3% from 2010.

GROWTH SECTORS

The Dominican Republic has not shied away from investing heavily in its traditional engines of growth, committing $3.1 billion—or 4.1% of 2012 GDP—of its 2013 budget to agricultural projects. Over the last decade, the sector has grown by an annual average of 5.5%, and contributes to 7.7% of GDP, while employing 21% of the population. The current year will be underlined by upgrades to the country’s irrigation system, while it is predicted that organic products may at last be able to break through in the domestic market. President Medina has established a $1 billion fund through Banco Agrí­cola to boost financing and help mitigate the impact of drought and plant disease.

A similar fund has been established to support the manufacturing industry to the tune of Ps4 billion, in a move complemented by tax amendments at the industrial level. Alongside the country’s growing list of 55 specialized industrial parks, which accounted for 2.5% of GDP, 5% of employment, and 7% of FDI in 2010, the new measures are aimed at not only improving exports but also lowering informality in the economy, an issue that has put pressure on revenue collection for the government.

The Medina administration is also set to preside over significant changes to the mining, tourism, and energy landscape over 2013 and beyond. Barrick Gold’s investment in the Pueblo Viejo mine will both allow the country to participate in the lucrative global gold trade and also open the eyes of further foreign investors to potential mining opportunities. Thanks to developments in the sector, mining is set to contribute 2% to GDP in 2013. The tourism industry, also a long-term mainstay of the economy, is in Medina’s sights. The President has declared his intention to see 10 million people visit the Caribbean nation annually by 2022, up from the current figure of 4.5 million. Upgrades to the country’s airport infrastructure, including Las Américas International Airport in Santo Domingo and Punta Cana International on the country’s popular northern coastline, will pave the way for increased visitor numbers. The energy sector, due to fluctuating oil prices, is looking to diversify its generation matrix in 2013. Coal and gas, supplemented by a growing renewables industry, are the likely candidates to replace fuel oil for electricity generation. Significant investment is also required to upgrade the distribution network, which has been plagued by losses of up to 40% over the last few years. According to industry figures, however, investment of up to $900 million could be required over the next few years if the losses are to be meaningfully reduced.

Government spending will also continue in terms of construction projects into 2013, with Ps50 billion dedicated to the building of bridges, seafront infrastructure, and highways in 2013. With the Panama Canal expansion now a reality, the Dominican Republic will need to keep up the pace of investment if its ports are to be ready to service the increased size of ships that the widened canal will bring.

The Dominican Republic’s continued growth will be somewhat subject to external risk in the coming years, with the recovery of key trade partners the US and the EU vital to reigning in the trade deficit. A slow recovery in those areas could also continue to negatively affect tourism and remittances. Growth is unlikely to recover to pre-crisis levels in the near future as the government contemplates belt tightening, although eased monetary policy and a well-capitalized finance sector will go a long way to seeing a private sector-led recovery in terms of confidence. The availability of external financing will also be key if budgets drop, while the authorities will keep a close eye on the cost of oil until the country’s energy matrix can be overhauled.

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