Economic Analysis
Dominican Republic

Dominican Republic

Population 10.4 million
GDP per capita 8,596 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 7.0 5.0 -6.0 4.0
Inflation (yearly average, %) 3.6 1.8 3.3 4.0
Budget balance (% GDP) -4.3 -4.2 -8.5 -4.0
Current account balance (% GDP) -1.4 -1.4 -6.0 -4.5
Public debt (% GDP)* 50.7 53.8 68.8 68.2

(e): Estimate (f): Forecast *Non-financial public sector

STRENGTHS

  • Leading Caribbean tourist destination
  • Remittances from its diaspora
  • Free-trade agreement with the United States (CAFTA-DR) and Economic Partnership agreement with the EU
  • Free zones (56% of goods exports in 2019)
  • Institutional stability

WEAKNESSES

  • Dependence on the U.S. economy
  • Dependence on gold prices
  • Faulty electricity supply
  • High levels of poverty and inequality / low fiscal revenues (14% of GDP)
  • Drug trafficking-related crime
  • Widespread corruption

Risk assessment

A partial rebound for the Dominican Republic in 2021

The economy experienced a recession in 2020 for the first time in decades, as the country was hit by the COVID-19 pandemic. The first COVID-19 case was confirmed in early-March 2020 and a national emergency was implemented since then, leading to the enforcement a national curfew, as well as the closure of borders and non-essential businesses. Moreover, the state of emergency and the curfew have been extended several times. In 2021, GDP is expected to partially rebound, but activity by the end of 2021 will still be 2.2% lower than in 2019. While tourism (which accounts for roughly 16% of GDP) did reopen on 1 July 2020, it is not likely to rebound strongly in 2021. This is underpinned by the fact that some potential travellers will remain cautious until a COVID-19 vaccine is widely applied. This will negatively influence the pace of resumption of gross fixed investments and household consumption (due to a slow recovery on the job market and higher inflation). Regarding the trade balance, exports (gold, tobacco, textiles and electronic) are likely to improve in 2021. This will be driven by the expected recovery of the U.S. economy, the major destination for Dominican Republic’s exports (54% of total foreign sales in 2019). Downside risks are mostly related to the COVID-19 pandemic’s evolution.

 

Large COVID-19 induced fiscal and external imbalances partially shrunk

The COVID-19 put the fiscal balance under considerable strain. During his last months in office, the former president Danilo Medina announced a series of countercyclical fiscal stimulus measures. The latter were then extended until the end of 2020 by the newly elected President Abinader, who promulgated a Supplemental Budget Law of around 4.5% of GDP in September 2020. As a result, gross public debt strongly deteriorated last year. In order to cover part of the higher financing needs, policymakers ensured loans from multilateral institutions, such as the IMF (USD 650 million) and the World Bank (USD 250 million). In 2021, the fiscal deficit should only partially ease, since a full-fledged economic recovery is unlikely. Moreover, the COVID-19 also triggered a shock on the external accounts in 2020. On the one hand, taking into account January to September 2020 figures, the trade balance deficit narrowed thanks to a relatively higher drop in imports (particularly the oil bill) compared to exports. Alongside, remittances from Dominicans living abroad surprisingly increased to USD 5.8 billion (+ 11% in comparison with the same period of 2019). Nevertheless, the services account surplus strongly deteriorated (travel revenues plummeted by 65% year-on-year reaching USD 2  billion, down from USD 5.8 billion in the same period of 2019). Meanwhile, foreign direct investment in the country shrunk by 13%, reaching USD 2 billion during the period. In addition, the external public debt amounted to 38% of GDP (26.3% of GDP in September 2019). This increase is mainly due to the amounts disbursed due to sovereign bond issues to combat the economic effects of COVID-19. Finally, foreign reserves stood at USD 10.6 billion in the same period (covering over 6 months of imports.

 

Despite the change in power, pro-business environment should be preserved

President Luis Abinader of the centre-left opposition Partido Revolucionario Moderno took office on 16 August 2020. His victory put an end to the 16-year power period of the centrist Dominican Liberation Party. Mr. Abinader has a majority in Congress (18 out of 32 Senate seats and 92 out of 190 seats in the lower house). He promised a universal minimum subsistence wage of 10,000 pesos (USD 173) and has indicated his intention to fix the fiscal imbalances, including through measures such as the broadening of the tax base (as recommended by IMF). Nevertheless, the social and economic challenges imposed by COVID-19 will probably delay his plans. Moreover, during the campaign, he stressed out the need to combat corruption, as well as strengthen the government’s contracting and procurement processes. In 2017 and 2018, Marcha Verde demonstrations were organised to denounce corruption and call for the conviction of political leaders accused of taking bribes from Odebrecht, a Brazilian company. Finally, regarding the tense cross-border relations with Haiti, president Abinader said in October 2020 that while he is willing to collaborate in solidarity with the constant crisis in Haiti, he defends that any response must come from the entire international community.

 

Last updated: March 2021

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