NS4540 Winter Term 2018 Dominican Republic Recent Developments Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

DR Overview I After the two principal parties agreed to cooperate and support common candidates, President Danilo Medina of the center-right Dominican Liberation Party (PLD) won a second four-year term in 2016 His party retained majority control of Congress. The PLD’s dominance of government for well over a decade supports political stability However it risks undermining checks and balances and weakening the country’s multiparty democracy. Long history as an exporter of sugar, coffee, and tobacco, However economy has been the Caribbean’s most vibrant in recent years, driven by mining activity and strong growth in such service-based sectors as tourism and finance.

DR Overview II On the positive side: Gradual economic diversification has strengthened resilience to external shocks Reforms have led to some progress in regulatory efficiency. Relatively high openness to global trade has aided the transition to a modern and competitive economic system. Strong economic growth has also supported the business climate. On the negative side While modest tax rates have encouraged competitiveness, non- transparency and institutional weaknesses have undermined it. The rule of law is not strongly sustained by the judicial system. Corruption and political patronage are the main complicating factors in doing business.

Business Complaints

DR Overview III The Dominican Republic’s economic growth has been one of the strongest in the LAC region over the past 25 years. Economy has averaged growth of 7.1 percent between 2014-16. This contrasted sharply with that of the average 1.4 percent contraction for the LAC region in 2016. A significant reduction in poverty has taken place, although the country remains vulnerable to natural disasters such as hurricanes and earthquakes. World Bank Dominican Republic Page

DR Macroeconomic Performance

DR Overview IV The share of Dominicans living in poverty (about 152 Dominican pesos a day) fell sharply from 42.2 percent in 2012 to 30.5 percent in 2016. Yet, social spending in the DR remains low compared to the rest of the region. On average, total health spending in the DR increased from roughly 2.2% of GDP in 2000 to 2.9% in 2014, compared to the regional average of 3.7%. However, the Government remains committed to allocate every year 4% of GDP to the education sector. World Bank Dominican Republic Page

DR Prosperity Gap

DR Overview V According to the World Bank Group’s Doing Business 2017, the Dominican Republic made progress Getting an electricity connection faster and Paying taxes less costly. However, despite improvements in doing business, further reforms are needed to improve the country’s competitiveness. Better water and electricity services are also needed to support growth in tourism, agriculture and manufacturing. While debt levels continue to rise, debt trajectory remains sustainable and progress has been made in recent years, including in diversifying financing sources. World Bank Dominican Republic Page

DR Economic Freedom The Dominican Republic’s economic freedom score is 61.6, making its economy the 89th freest in the 2018 Index. Its overall score has decreased by 1.3 points, pulled down by lower scores for government integrity, trade freedom, and property rights. The Dominican Republic is ranked 18th among 32 countries in the Americas region, and its overall score is above the regional and world averages.

DR Forecast I Slowdown in growth to continue into 2018 The growth slowdown recorded in 2017 is set to continue in 2018, due to the reduction in public spending and investment, This is part of the budget consolidation being implemented by the Dominican government. However, growth will likely remain strong, boosted by tourism and sustained private consumption, Prime factor responsible is the strong inflows of remittances from expatriate workers given the relatively favorable economic situation in the United States. Coface January 2018

DR Forecast II Manufacturing output (notably clothing) is expected to increase, with the United States being the leading export market for the Dominican Republic. In addition, the cut to the key lending rate by the Central Bank in July 2017 is likely to encourage an expansion in credit and therefore stimulate investment. In addition, the weakness of the Dominican peso, relative to other regional tourist destinations, will further enhance the competitiveness of its tourist sector Tourist competition from Cuba may not be a strong as originally feared Tourism is expected to attract significant foreign investments. Mainly focused on infrastructure, these investments are likely to provide a boost for the construction sector.

DR Forecast III The country’s poor performance in terms of energy supply, however, remains an impediment to growth the political environment – dominated by cases of corruption – is unlikely to facilitate the implementation of the structural reforms needed to improve the situation. As a result of the 20% increase in the minimum wage adopted in the first half of 2017, as well as rising fuel and food prices, inflation is likely to continue upwards in 2018.

DR Forecast IV Budget consolidation efforts but current account deficit deepens The initial results of the budget consolidation efforts implemented by the government were seen in 2017 with an increase in revenues due to better income tax collection and other taxes on goods and services. Also, the government brought the increase in its spending under control by ending subsidies within the transport and energy sectors. The public deficit is thus expected to shrink slightly in 2018, but with the approach of elections in 2020, doubts still remain regarding the latest reforms for continuing this consolidation.

DR Forecast V In terms of external accounts, manufactured exports should continue growing with the success of the free-trade zones and ongoing moderate growth in the US economy. However, energy imports are likely to become more expensive, as a result of the moderate upturn in oil prices. Consequently, this negative performance of the trade balance is likely to lead to deterioration in the current account balance in 2018.

DR Forecast VI This deficit will be partly financed by the inflow of direct foreign investments (3.2% of GDP in 2016) in the tourist sector and of remittances from expatriate workers (7.0% of GDP). These foreign currency flows, together with the country’s limited exposure to the financial markets, should allow for a moderate depreciation of the Dominican peso.

DR Forecast VII However, the various corruption scandals associated with the Brazilian company Oderbrecht are triggering a rising tide of popular discontent. With the aim of containing this social restlessness, the president replaced the National Police Chief in August 2017 to revitalize the fight against crime. In terms of international relations, following a period of serious tensions with Haiti arising from the large-scale expulsions of Haitians and trade reprisals (Haitian boycott of Dominican imports) The two governments resumed talks in mid-2017.