Dominican Republic: Risk Assessment
Country Risk Rating
Business Climate Rating
- Leading Caribbean tourist destination
- Remittances from its diaspora
- Free-trade agreement with the United States (CAFTA-DR) and Economic Partnership agreement with the EU
- Institutional stability
- Dependence on the U.S. economy
- Reliance on gold prices
- Faulty electricity supply
- High levels of poverty and inequality / low fiscal revenues (14% of GDP)
- Drug trafficking-related crime
- Widespread corruption
Growth will remain robust in 2022
After the solid economic rebound in 2021, the Dominican Republic will continue to experience robust growth in 2022. Tourism (which accounted for roughly 16% of GDP before the COVID-19 crisis) is expected to have fully recovered by early 2022, as the country has been one of the leaders in vaccination in the Caribbean. Furthermore, the job market should also react positively as foreign visitors return. The latter, combined with an average 24% readjustment for minimum wages approved in July 2021 and substantial remittances from expatriates in the U.S., will bode well for household consumption (70% of GDP). Moreover, exports (gold, tobacco, bananas, textiles, medical instruments, and electronics), which account for 13% of GDP, are likely to remain at a high level, driven by still favorable growth momentum in the U.S., which is the primary destination for foreign sales (54% of total exports in 2019). This tailwind and the free trade links between the two countries will also benefit investments in export-oriented sectors. Similarly, the rebound seen in tourism should attract new investments to expand and renew the country´s lodging capacity. Finally, the Pacto Eléctrico reform, approved in 2021, will also attract private capital to the sector in the coming years.
Fiscal deficit set to shrink, the still moderate external deficit
Despite a strong rebound in tax revenues in 2021, the fiscal deficit only partially eased. This is because the government kept some fiscal stimuli to smooth COVID-19’s social impacts, including the extension of social programs and subsidies to reduce inflationary pressures related to electricity and fuel prices. Financing needs were covered by pre-financing operations in 2020 and local and external bond placements. For 2022, the fiscal deficit is expected to converge closer to pre-pandemic levels as activity recovers and the need for stimuli eases.
Regarding the external accounts, the country kept a moderate current account deficit in 2021. On the one hand, considering January to September 2021 figures, the trade balance deficit widened as the rise in imports (particularly the oil bill) surpassed the increase observed in free zone exports. The primary income deficit also deteriorated due to the foreign companies’ profits recovery. On the other, remittances from Dominicans living abroad (11% of 2020 GDP) posted a substantial increase. Furthermore, the services account surplus also improved, driven by travel revenues. Meanwhile, foreign direct investment in the country surged by 35%, reaching USD 2.5 billion during the period, and was able to cover the current account deficit. Moreover, the external public debt amounted to 36.6% of GDP in September 2021 (vs. 38.0% of GDP in September 2020).
Fighting corruption and the relationship with neighboring Haiti remain central issues
Center-left President Luis Abinader took office in August 2020 and counts with a majority in Congress (18 out of 32 Senate seats and 92 out of 190 seats in the lower house). He has been able to keep a high popularity thanks to one of the fastest COVID-19 vaccination campaigns in the Caribbean and the solid economic rebound that the country has experienced. Moreover, in February 2021, he finally signed the electric sector reform - Pacto Eléctrico -. Lack of consensus between the parties had hindered the advancement of the reform, announced in 2014 under the mandate of then-president Danilo Medina. This should attract private investment into the sector, which often faces outages due to systemic problems. Regarding the fight against corruption, one of Abinader´s main campaign promises, the intention to promote a revision of the Constitution to establish the independence of the Public Prosecutor’s Office and the Central Electoral Board (JCE), was announced in August 2021. This would have to be subjected first by one-third of the legislature and then by a two-thirds majority. Abinader´s name was embroiled in the Pandora Papers case released in October 2021, which could somewhat impact his political support. He and his brothers were linked to two offshore Panama companies, albeit the administration argues that the holdings are in a trust and were made public before the president was sworn in. Finally, regarding the tense cross-border relations with Haiti, the murder of the latter country’s president, Jovenel Moise, in July 2021 worsened the situation. Abinader called on the international community, notably the U.S., to generate a political dialogue in the neighboring country. Still, in the last quarter of 2021, the Dominican Republic started working on a controversial wall and fence along the border, announced in February 2021.