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New Dominican president Luis Abinader, a businessman with hotel interests, is promising to improve the business climate and fight corruption. (Photo: LuisAbinader Twitter account)
Mary Fernández, Headrick Rizik Alvarez & Fernández and Alejandro Peña-Prieto, Squire Patton Boggs. (Latinvex collage)
Wednesday, August 19, 2020
Special Reports

Dominican Republic Changes Course


New president expected to boost foreign investment, cut waste and corruption.

BY JOACHIM BAMRUD

The Dominican Republic, the largest economy in the DR-CAFTA trade block and one of the top three tourism destinations in Latin America, is set to change course after Luis Abinader assumed the presidency on Sunday.

Abinader -- a 53-year old, US-educated economist and businessman – is promising to punish corruption, cut government waste and make the country more attractive to investors.

“While the outgoing government for all its faults, was considered business-friendly, the perception of rampant corruption was an important element in stymying foreign direct investment,” says Mary Fernández, a founding partner at Dominican law firm Headrick Rizik Alvarez & Fernández. “The new government is promising to be even more business-friendly, eliminating and consolidating redundant government bureaucracies, as well as tackling corruption.  To the extent that the government is successful – even moderately so – in these endeavors, the economy of the Dominican Republic could be in for a substantial uptick in investment, both foreign and local.”

Alejandro Peña-Prieto, the Santo Domingo-based head of the Latin America Practice at Squire Patton Boggs and a former president of the American Chamber of Commerce in the Dominican Republic, points to Abinader’s background and appointments as reason for optimism.

“Luis Abinader comes from the private sector so he understands the issues and needs of the business community as well as its potential for generating employment and sustainable development,” he says. “The early announcements of key members of his administration bolster the view that one of his goals is to make the country friendly for private investment.  Also, in light of the situation created by the pandemic which has had a severe impact on the government's finances, I anticipate that the government will have to look for new ways to expand its revenue base.  One of these ways could be through the attraction of foreign investment.”

Abinader succeeds Danilo Medina, who had been president since 2012. While GDP growth continued at relative good levels, his presidency was marred by several corruption scandals and authoritarian moves (including sending army and police to surround and enter Congress as it debated his plan to change the constitution so he could  run for a third term). The political uncertainty caused by Medina’s re-election plans, weakened the peso and local and foreign investment sentiment.

Medina "bought re-election, militarized Congress, institutionalized nepotism and converted corruption and impunity to key pillars of his administration," complained Francisco Mendez, a former superintendent for electricity and former head of state refinery Refidomsa, on Twitter.

Medina had also shocked foreign investors shortly after assuming office when he broke the contract with Canada-based Barrick Gold – the largest foreign investor in the Dominican Republic – and forced the miner to pay more taxes to the new government. The move deterred many foreign investors who had been drawn to the Caribbean country by Medina’s more business-friendly predecessor Leonel Fernandez.

Meanwhile public debt and expenditure more than doubled during Medina’s eight years in power, largely to finance an over-bloated and inefficient public sector. When Medina left, many Dominicans celebrated with fireworks and cacerolazos (a Latin American form of protest whereby people bang pots and pans outdoors or from windows and balconies).

NEW STYLE

Abinader brings a new style to the presidency. His official car is a Tesla S electrical vehicle and when the car company’s founder Elon Musk was alerted, he announced on Twitter that Tesla “was most honored. “ Abinader responded on Twitter by pointing out that the “Dominican Republic is full of full of investment opportunities [especially] for innovating companies such as Tesla."

“The arrival of the President-elect in an electric vehicle to his inauguration signals a new beginning for the energy sector, where renewable energy will be promoted,” says Fernández.

Meanwhile, Abinader is using Twitter in ways not seen before by a Dominican president. His inauguration speech was live tweeted bit for bit and he made all announcements about his new cabinet via Twitter since winning the July 5 elections.

Abinader’s new team has also won widespread praise. While Medina named loyalists – often unqualified – to key posts, Abinader has named new ministers that in general bring expertise to their new portfolios. (See Dominican Republic: The New Government Team)

Meanwhile, the new president is expected to continue the successful macro-economic policies of the previous two governments.

“The Abinader Administration should seek to preserve the macro-economic stability that the country has enjoyed for decades,” Peña-Prieto says.  “In this sense, President Abinader's decision to maintain in his position the current Governor of the Central Bank, Hector Valdez Albizu, and to appoint a highly-competent new Minister of the Treasury, Jochi Vicente, has been well received.”

Abinader also plans to improve relations with the United States, which became strained under Medina over his lack of corruption prosecutions, ridicule of US criticism and his move to establish diplomatic relations with China. 

“The new government should seek to capitalize on the current de-coupling of the U.S. and China economies, the Dominican Republic's geographic proximity to the United States, and the existence of its free trade agreement with that country (DR-CAFTA), to attract to the Dominican Republic manufacturing enterprises currently operating in China,” Peña-Prieto says.  “The appointment of Roberto Alvarez, a seasoned diplomat and entrepreneur who has been outspoken about the opportunities presented by this geo-political reality, is a positive sign.”

In a speech before the American Chamber of Commerce of the Dominican Republic in March last year, Alvarez pointed out the close business, trade, tourism and family relations with the United States as opposed to the limited opportunities presented by China. 

TOURISM

Abinader also plans to focus on the key tourism sector, the second-highest revenue earner after exports. Last year, tourism revenues reached $7.5 billion, a slight decline from 2018 due to the fallout and negative media coverage of a series of tourist deaths. That decrease ended nine straight years of increases.

The Dominican Republic is the second-top tourism earner in Latin America after Mexico (and ahead of Brazil and Argentina) and among the top three tourism destinations in Latin America (along with Mexico and Argentina), according to a Latinvex analysis of new data from the World Tourism Organization.

The sector was hard hit by the COVID-19 pandemic, which closed hotels and airports from March to July and is now gradually recovering.

Abinader is familiar with the hotel sector as his family business Abicor has invested in the hotel sector. Meanwhile, he has been president of the Association of Hotels in the Puerto Plata area and is a member of the Board of Directors of the National Association of Hotels and Restaurants (Asonahores).

In addition to the challenge of recovering from the COVID-19 fallout, Abinader also faces another challenging issue affecting the sector, namely a last-minute decree by his predecessor that authorized the building of a new international airport in the Bavaro area. The concession was given to Grupo Abrisa, which also is behind the Cap Cana resort. The problem is that the new airport will be close to the existing Punta Cana international airport (the largest by far in the Dominican Republic).  The group behind the Punta Cana airport questioned the technical viability of the new airport and formally denounced corruption. Officials of the Abinader government have vowed to review the decree.

Meanwhile, Abinader plans to restructure the public sector to make it more efficient and save costs to help finance the fallout from COVID-19. He has already eliminated several entities – including the public works agency OISOE and the state sugar council CEA – both tainted by various corruption scandals -- and merged others. According to a 2017 report from Oxfam, there are 77 state entities that provide duplicate services at an unnecessary cost of 13 billion pesos (US$222 million) annually.

It’s not even clear how many people are on the state payroll, with public employees being anywhere from 260,000 to 500,000, according to Diario Libre. And only 15.9 percent of public employees are career staff, according to Listin Diario.

For years, governments have typically used public jobs to reward political supporters, friends and relatives. One of the worst cases has been Dominican embassies and consulates abroad, with many appointees not even having left the Dominican Republic but receiving an elevated salary, nevertheless.

CORRUPTION

In his inauguration speech, Abinader promised to end impunity, both for former and new officials, vowing to fire and sanction any officials who are corrupt. That stands in contrast with the Medina government, which fired some officials implicated in corruption scandals, yet did not sanction them through the courts or jails.

“The previous government leaves with significant suspicions of corruption,” Fernández says. “Corruption directly leads to delays in approvals and the establishment of costly conditions for business that are not provided for in law.”

In a move widely applauded among Dominicans asking for an end to impunity, Abinader named Miriam German, a well-respected former Supreme Court judge, and Yeni Berenice, a well-respected former prosecutor, as attorney general and deputy attorney general.

“The President has taken a significant step towards the battling of corruption with the designation of … German, a career judge with 40 years being a Magistrate, who had been ousted from her position a year ago after grotesque and ill-founded allegations of corruption made against her by the former Attorney General,” Fernández says. 

Abinader also announced that he was giving German and Berenice full autonomy, a contrast to the previous attorney general, who critics charge was covering up government corruption.

“President Abinader can succeed in ending impunity for corruption by upholding the independence of the judicial system and prosecutors, as the perception is that both had been crippled by the former government,” Fernández says.

German and Berenice will have their hands full investigating alleged acts of corruption by the previous Medina government, including most notably re-opening the Odebrecht probe.
Both German herself and other critics had said the previous probe was insufficient.

POWER SECTOR

Another major challenge will be the power sector. The Dominican Republic is one of only three countries in Latin America suffering from regular blackouts (the others being the failed states of Venezuela and Haiti). A key reason is the inefficient state companies that have a monopoly on distribution generated by private companies and typically buy less energy than they know is needed. At the same time they lose money due to over-bloated payrolls and theft by consumers.

“The new government has a serious challenge in the energy sector,” Fernández says.

Abinader has vowed to make the state companies more efficient and eliminating a holding company for the three state companies that cover different regions in the country. 

Another hot issue is the $2.4 billion Punta Catalina coal plant constructed by Medina. The plant was formally inaugurated by Medina on July 29 after several delays at a cost overrun of 17 percent, but continues to be marred by technical problems and pollutionSerafin Canario, whom Abinader appointed as the new director of Punta Catalina, has been a long-time critic of the project, claiming it is technically deficient, which results in $3.9 million in monthly losses. 

The Medina government had awarded Odebrecht the Punta Catalina contract of more than $2 billion in 2017, ignoring cost-effective bids from Chinese construction companies SEPCO3 (US$1.1 billion) and Gezhouba Group (US$900 million). The U.S. Justice Department revealed in 2016 that, from 2001 to 2014, Odebrecht paid at least $92 million in bribes in the Dominican Republic, which helped Odebrecht win contracts amounting to more than $4.7 billion. (see Dominican Republic: Punta Catalina & Corruption).

A report by the International Consortium of Investigative Journalists (ICIJ) revealed more than $39 million in secret Odebrecht payments made in connection with Punta Catalina. "Two official investigations into the project that reported finding no wrongdoing didn’t mention these payments," the ICIJ says.

The previous government planned to sell a 50 percent stake in Punta Catalina and hired Guggenheim Securities, according to a report in Diario Libre. However, Abinader said during the campaign that he opposed the sale.

FDI POTENTIAL

Although COVID-19 will still hamper foreign investment in the Dominican Republic, Abinader is expected to take advantage of the potential the country offers.

"The COVID-19 pandemic...has shown the value of risk reduction through the diversification of supply chains for critical parts and products," argues William Malamud, the Executive Vice President of the American Chamber of Commerce of the Dominican Republic, in an op-ed in Latinvex. "Taken together, these economic, technological, and geopolitical trends combine to make a compelling case for more regional integration of value chains.  Within that context the Dominican Republic is well-positioned to attract more foreign direct investment [thanks to] world-class logistics, connectivity, and free trade zones."

Fernández believes the Dominican Republic has strong potential if Abinader comes through on his promises.

 

“There is significant pent-up demand for local investment, and opportunities for making these investments will depend on the overall confidence in the Dominican economy, with the rule of law as the primary indicator of such,” she says. “In summary, it’s fair to say that the new government is making all the right moves to incentivize local and foreign investment, and if they follow through on their promises, we could see significant new development in the country.” 


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RELATED LINKS

Dominican Republic: The New Government Team

Dominican Republic: Strong Nearshore Potential

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