Publish in Perspectives - Monday, July 25, 2016
Tourism is helping the Dominican Republic's economic growth. Here the Westin Puntacana Resort & Club. (Photo: Dominican President's Office)
The Dominican Republic’s growth streak is driven by tourism and gold exports.
BY LATIN AMERICA ADVISOR
Moody’s Investors Service on June 29 changed its outlook on the Dominican Republic’s debt ratings from stable to positive at its B1 category, saying the Caribbean country’s debt burden will continue to fall over the next two years and calling the growth outlook “robust” compared to rated peers. The country’s debt levels have fallen every year since 2013. What is driving the Dominican Republic’s relatively strong economic growth, and is the trend is likely to continue? With 20 percent of its population living in extreme poverty, what does the Dominican Republic need to do to address inequality more effectively? What can its neighbors in the Caribbean and Central America learn from the country’s successes and shortcomings?
Mary Fernández, founding partner at Headrick Rizik Alvarez & Fernández: As an observer and a practicing attorney, I believe domestic demand has been the driving force for economic growth in the country, partly through construction in both the public and private sectors, as well as through growth in sectors like commerce, finance and tourism. In turn, domestic demand has been supported by declining oil prices, which have increased purchasing power in businesses and households, and by relatively high expenditure, supported by debt through placement of internal and external bonds. In the short run, this trend could perhaps continue for one or two more years. However, the fact that exports have not increased significantly may result in a lack of sustainability in the medium and long run. To address growing inequality more effectively, public services need to be strengthened—mainly education and health care. Public policy should focus more on job creation. Despite economic growth, the impact on unemployment has been very modest. In terms of successes, our country can claim it has not succumbed to drastically reducing the budget deficit, which has allowed for demand to remain active and has probably made sustained growth possible. This, however, also has strong negative effects, namely that the budget deficit has been well above 2 percent of GDP for too long. Additionally, the deficit has then translated into a significant increase in national debt, where service of interest alone has increased from 6 to 20 percent of the country’s ordinary income. Another negative aspect is that public policy is not tackling institutional weaknesses, which is a key factor in explaining the lack of sustainable growth, and accounts for the lack of quality investments or stimulation in job creation.
William Malamud, executive vice president of the American Chamber of Commerce of the Dominican Republic: The Dominican Republic’s economic growth has been driven by tourism, construction and the diversification of exports—especially gold. In spite of this growth, income inequality remains high. Over half of the economy is informal, paying little or no taxes, including social security and health care. A concerted effort to simplify the tax code and lower marginal rates would actually increase revenue to the state and lower barriers to formalizing the gray economy. This would have a powerful impact on inequality. Increased revenue would also allow the government to invest more in human capital, the most significant long-term challenge to competitiveness and alleviating poverty. While it is true that the debt-to-GDP ratio has fallen slightly since 2013, total public debt has grown from $3.2 billion in 2000 to $25 billion in 2016. Interest on the debt has grown from 6 percent of the budget to more than 21 percent. That is not a sustainable trend, no matter what ratings agencies may say. The government controls the importation and pricing of fuels, and has taken advantage of falling oil prices, through sticky pricing, to increase revenues. The government also benefited from Venezuela’s fiscal situation, paying off a $4.1 billion debt to Petrocaribe for $1.93 billion—less than 50 cents on the dollar. In spite of these windfalls and better controls on spending in the first three years of the Medina administration, the Dominican Republic will likely be returning to the markets to borrow in order to cover the fiscal deficit that ballooned in the run-up to the recent elections in May. If the Dominican Republic can transform its institutional culture from one of wealth distribution to one of wealth generation, then it will indeed become an example for the rest of the region to emulate.
Bernardo Vega, president of the Dominican Academy of History and former ambassador of the Dominican Republic to the United States: While it is statistically true that the Dominican Republic’s foreign debt level has fallen recently, it has been mainly due to the non-repetitive repurchase, at a very high discount, of the country’s debt to Petrocaribe, feasible only because of Venezuela’s sore need for foreign exchange. The Dominican budget has operated with deficits for the last 15 years and will do so in 2016. Dominican sovereign bonds are being quickly purchased, as is the case of developing country bonds with a similar B1 grade, because interest rates are negative for German and Swiss government bonds and very low for U.S. Treasuries. The new government of recently re-elected President Danilo Medina has announced a new fiscal plan. Civil society and the private sector insist that it include reduction in the bloated government payroll—the government has stopped providing data on the number of government employees because it is too embarrassing—and other austerity measures, but the government would prefer to increase the tax burden. The fiscal deficit is highly affected by the low level of collection on sales of electricity by the government-owned electric distribution companies. Additionally, the government has not reduced the quasi-fiscal deficit that was created when the central bank in 2004 advanced funds to the government in order to redeem the deposits of a bank that busted fraudulently. The economy keeps growing due to tourism, money remittances, gold exports and low petroleum prices.
Flora Montealegre Painter, the Inter-American Development Bank’s Country Representative in the Dominican Republic: First-quarter 2016 economic growth in the Dominican Republic was 6.1 percent compared to the same period in 2015, slightly below the 7 percent average of 2014–15. The strong performance has been supported by favorable external conditions, such as low oil prices and the United States’ economic recovery, as well as domestic factors, such as solid consumer demand and investment. Although long-term growth is expected to gradually slow to around 4.7 percent, low oil prices and stable U.S. growth are expected over the next four years, and this should benefit the Dominican economy, which is a net oil importer and has strong links with the United States in trade, investment, remittances and tourism. However, recent volatility in world financial markets indicates that risks remain, so it is important for the authorities to continue safeguarding a sound macroeconomic framework. Concerned over the low impact of growth on the country’s high levels of poverty and inequality, the government has identified three means of addressing the underlying causes: 1.) Make fiscal policy more equitable, efficient and sustainable; 2.) Improve the transparency and efficiency of institutions that provide public goods and services to vulnerable citizens; and 3.) Invest in human capital to improve employment opportunities for the poor. In addition, worker training and education should equip workers with skills demanded by higher value-added companies investing in the Dominican Republic. Proper incentives should be introduced to reduce labor market informality. At the same time, it is essential to strengthen social safety nets and to promote financial inclusion in order to reduce inequality. The Dominican Republic, like Panama, has been able to keep growth high in spite of international volatility. The key lessons learned are that sound macroeconomic policies are essential. It takes time and commitment for countries with large fiscal imbalances to restore investor confidence, and a solid banking system is key. The private sector must be nimble in order to diversify products and markets and to adapt to changing external conditions, which in the case of the Dominican Republic has included competition from China and the effect of the financial crisis on tourism.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor