Publish in Perspectives - Wednesday, January 14, 2015
The entry into full production of Barrick Gold's Pueblo Viejo operations was the single largest contributor to growth in 2014. (Photo: Barrick Gold)
Thanks to Barrick's gold exports, the Dominican Republic had Latin America’s fastest GDP growth last year.
BY LATIN AMERICA ADVISOR
Strong growth in construction, tourism, mining and manufacturing helped propel the Dominican Republic's economy to grow by 7.1 percent last year, the fastest of any country in Latin America and well above the regional average of about 1 percent, the central bank said in early January. Why did those sectors grow so well last year, and will that growth be maintained in 2015 and beyond? What is the country's economic outlook in the year ahead, and what factors might put a damper on economic expansion?
Bernardo Vega, president of the Fundación Cultural Dominicana and former ambassador of the Dominican Republic to the United States: Being a service economy, the Dominican Republic was not affected by the decrease in commodity prices last year. While in the past, most tourists came from Europe, today more than 50 percent arrive from North America, and the improvement in the U.S. economy helps to explain the nearly 10 percent growth in tourism, as well as the substantial increase in remittances arriving from the U.S. Eastern Seaboard. Increased labor costs in China stimulated the growth of assembly plants. Barrick's 20 percent surge in gold production and the lowering of oil prices in the second half of last year also contributed to growth. But the 'trickling down' of economic growth was not very strong. Although income distribution did not worsen, it also did not improve much, despite the government's emphasis on education, its fight against illiteracy and the unfortunately politically-oriented distribution of conditional social services. Undocumented immigration flows also enhanced the difficulties of improving income distribution. Inflation and devaluation were very low. Employment increased, but not very much. Growth in 2015 will be less dramatic, despite tourism, remittances and assembly plants increases. The possible elimination, or reduction, of financing from Petrocaribe and Brazil's BNDES, the already high proportion of public debt to GDP and foreign reserves and the uncertainty surrounding oil prices are difficulties and question marks to face. It is also a pre-electoral year, and Dominican politicians tend to overspend in an economy that has had fiscal deficits for six years in a row.
William M. Malamud, executive vice president of the American Chamber of Commerce of the Dominican Republic: The entry into full production of Barrick Gold's Pueblo Viejo operations was the single largest contributor to growth in 2014, more than offsetting the suspension of Falcondo's ferro-nickel production in the mining sector. Tourism has been experiencing steady growth, offering an ever more diverse range of packages and with increasing air connectivity worldwide. Construction benefited from government spending in new schools, lower-income housing and certain infrastructure projects. Being entirely dependent on energy imports, the Dominican economy stands to benefit from lower oil prices in 2015 and from access to U.S. natural gas exports once export infrastructure in the United States is built out in 2016 and beyond. Lower energy prices should help keep inflation low and improve the current account position. Manufacturing of products for the U.S. market has benefited from an increasing trend toward near-shoring and re-shoring of manufacturing facilities from Asia to the region. Companies are shortening their supply chains to the United States in order to lower transportation and inventory costs, and reduce geopolitical risk. With significant investments being made in sea and air links, we expect the Dominican Republic to be well-positioned as a regional logistics hub and to continue attracting significant FDI in manufacturing for the U.S. market. The electricity sector continues to require massive subsidies, undermining long-term macroeconomic stability. The Medina administration expects to commence a public-private dialogue in early 2015 with the goal of arriving at a consensus sustainable national strategy for the sector. External risk factors include: the suspension of Petrocaribe by Venezuela, which would increase financing costs for oil imports; economic downturn in Europe; and economic downturn in United States.
Miguel Collado Di Franco, senior economist at the Centro Regional de Estrategias Económicas Sostenibles (CREES) in the Dominican Republic: After an economic slowdown, it is possible for an economy to experience above-average growth. International factors contributed to GDP growth in 2014 after the Dominican economy underperformed in 2013 following the most significant tax increase in recent history. Tourism and a growing U.S. economy favored growth amid a climate of rising taxes and high internal costs. External dynamics compensated for a local business environment that is not leading to outside growth. Continuing a trend from 2013, national exports (excluding gold and silver) decreased more than 9 percent in 2014 from 2013. It is not possible for a small economy to sustain growth without a major change in its fundamentals, otherwise outside factors will continue to play a major role in short-term performance. International oil prices and a more dynamic U.S. economy, coupled with continued growth in the hospitality industry, could create favorable conditions for economic growth during 2015. However, in order to achieve sustainable growth rates, the Dominican Republic needs structural reforms that lower tax rates, reduce costs and create a better business environment. In addition to a simplified tax code with lower rates, structural changes are needed in the energy, transport, and labor markets; as well as in health, education, law enforcement and the judicial system. The Dominican Republic needs to move away from its dependence on changing international conditions; only structural reforms can generate long-term growth, poverty reduction and social cohesion.
Jaime Reusche, vice president and senior analyst in the sovereign risk group at Moody's Investors Service: The Dominican economy has traditionally been a high-growth economy. From 2004 to 2013, growth averaged 5.4 percent yearly. However, in 2014 the national accounts were rebased, and the new methodology increased the weight of construction and services (particularly those that cater to tourism), providing an extra boost to economic performance relative to what the previous methodology would have suggested. We believe that the updated reference year better reflects the current structure of the Dominican economy and that improved statistical techniques add precision to economic estimates. In this regard, tourism performance has strengthened, significantly owing to the U.S. recovery, underpinning stronger activity in hotels, bars and restaurants, which have almost doubled their weight to 8 percent of GDP under the new base year. Importantly, Barrick's Pueblo Viejo gold mine ramped up operations in 2014, increasing mineral output and supporting export performance. The mine's increasing output represents a positive supply shock for the economy and fiscal revenues, with a benign effect on the external current account, which in the past had been an Achilles' heel for the Dominican Republic. The Dominican macroeconomic outlook remains favorable. We estimate that output growth will moderate and converge with its potential (approximately 5 percent) in 2015, reaching 4.8 percent. The proximity of the general election is the main point of uncertainty on the fiscal front given previous governments' high proclivity to engage in disruptive stop-and-go fiscal policies that increase economic volatility and have led to higher debt ratios. Avoiding fiscal slippage through 2016 would mark an important break with a traditional credit weakness and the rise of a new institutionality that would support stronger economic performance.