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)
- Free-Trade Zones (51% of exports)
- Political stability
- Dependence on US economy
- Dependence on gold prices
- Sporadic electricity shortages
- Deficiencies in education and health care systems
- High levels of poverty and inequality
- Drug traffic related crime
- Wide-spread corruption
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, as part of the budget consolidation being implemented by the Dominican government. However, growth will likely remain strong, boosted by higher tourist numbers and sustained private consumption, thanks to strong inflows of remittances from expatriate workers given the relatively favorable economic situation in the United States. 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, which is expected to attract significant foreign investments. Mainly focused on infrastructure, these investments are likely to provide a boost for the construction sector. The country’s poor performance in terms of energy supply, however, remains an impediment to growth, and 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. The bottom target range as defined by the Central Bank (4% +/- 0.5%) thus looks set to be reached, following a number years spent below this target.
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 public revenues, thanks to income tax collection improvements, and other taxes on goods and services. At the same time, 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. 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. The level of export earnings from gold is expected to hold steady. Energy imports are, on the other hand, likely to become more expensive, as a result of the moderate upturn in oil prices, and because demand for non-fuel imports is likely to grow given the country’s dependence on imported finished goods. Consequently, this negative performance of the trade balance is likely to lead to deterioration in the current account balance in 2018. 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.
Weak Institutions, and no Effective Opposition
President Danilo Médina, re-elected in 2016, retains a significant level of popular support. His Dominican Liberation Party (PLD) has an absolute majority in both parliamentary houses, as well as a considerable degree of influence over the judiciary. This context ensures political stability, but remains subject to the danger of negating the separation of powers in the absence of a strong and organized opposition (the PLD absorbed its traditional rival, the Dominican Revolutionary Party, leaving only the Modern Revolutionary Party as the opposition in a very minority role). The various corruption scandals associated with the Brazilian company Oderbrecht are, however, threatening this equilibrium, and 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.
Institutional weaknesses and a lack of transparency weigh on the business climate, which is already undermined as a result of infrastructure failings (with the exception of telecommunications), and the problems in terms of electricity supplies, despite some progress being made in these areas.