Today, the winds of political change are taking place but for a familiar face, former Dominican Republic ‘DR’ President Fernandez will again take power shortly at a time of great economic chaos, the Dominican Republic’s worst economic crisis in decades.
In 1996-97, then President Leonel Fernandez implemented sweeping free-market economic reforms including a modest devaluation of the peso. The Dominican Republic economy fourished with high growth rates for the remainder of the 1990’s until it gradually slowed from the global economic contraction in 2001. By 2003-04, a renewal in peso weakness returned coupled with a higher than expected inflation rate impacted by higher world oil prices. Energy shortages and periodic blackouts, a decline in living standards sparked protests, riots, violence & death in the capital city of Santo Domingo. The DR has been hurting socially and economically where upwards of 65 percent of the 8.83 million citizens live in poverty. Will President Fernandez bring back the good times to the Dominican Republic again, a stronger and sounder currency? Below is a summary of BankINTRO.com’s research findings as it relates to the Dominican Republic peso.
POLITICS: representative democracy. Country independence was obtained in year 1844 with a consitution implemented in year 1966 when then President Jonquin Balaguer took command of the Dominican Republic and ruled for 30 years. In 1996, international reaction to a perceived flawed elections then forced out President Balaguer from power in favour of centrist President Fernandez. On May 18, 2000, populist opposition leader Rafael Mejia of the centre-left Democratic Revolutionary Party was elected the new President of the Dominican Republic on his election platform to better help spread the wealth to the poor by directing funds into work projects, road repairs, sanitation and more monies into education. President Mejia has claimed that the ‘rich have gotten richer while the poor have gotten poorer.’ Unfortunately during President Mejia’s tenure, taxes were increased which discouraged private sector investment. President Mejia’s government also allocated tax revenues and monies from foreign borrowing abroad to dramatically increase the size of the public sector workforce and payroll by 50 percent. His government ran into many other difficulties including higher inflation caused by a jump in world energy prices, skyrocketing food prices, domestic electrical energy shortages resulting from nationalization of utilities, a slowdown in the global economy and overall weakness in the DR domestic consumer economy. But what sunk his ship was a large domestic banking sector crisis that impacted the Dominican Republic in 2003. In order for President Mejia to finance a larger public payroll and monetary bailout of the banking sector resulted in the doubling of the nation’s foreign debt levels. While at this time, living standards began to tumble as the peso crashed in value and with the people fed up voted in favour of change in a landslide victory for former President Fernandez.
On May 17, 2004, former President Fernandez of the Dominican Liberation Party was elected in a landslide with a mandate to fix the economic malaise and crisis the nation finds itself in. President Fernandez will be sworn into office August 16, 2004.
ECONOMY: the DR economy during the 1990’s was one of the best performing in the Western hemisphere. An economic program introduced in late 1994 led to the stablization of the peso exchange rate and lower inflation levels. In 1996, further reforms were implemented in an attempt to develop a market economy so that the DR can better compete globally. From 1996-2000, the economy grew at an outstanding 40 percent. Although the economy boomed especially in areas of tourism & telecommunications, poverty is still widespread. During 2000-01, continual energy disruptions and blackouts occurred. The global economic slowdown in 2001 and the collapse of the international tourism market from the fallout of terror attacks on the United States impacted DR directly with slower GDP growth. The DR economy has remained sluggish as a tax hike in 2001 discouraged investment coupled with a currency devaluation in an attempt to stimulate GDP growth. The government of then President Mejia in 2001 implemented his government’s economic plan with greater state spending, government control and redistribution of wealth via taxation. In 2003, modest negative growth due to continued reduced tourism levels, a major bank fraud and slower U.S. economic growth continued to impact the DR economy as 87 percent of export revenue is derived from the United States. By 2004, economic performance in response to these socialist polices further helped to nose dive the economy which was already impacted by a big jump in the oil price since 2002. The Dominican Republic has no confirmed oil resources and must import all of its needs
The new government of President Fernandez will have to reschedule foreign debt payments with the Paris Club as the Dominican Republic’s debt has doubled over the last 2 years while also putting forward an economic plan for economic renewal shortly after taking office. The Dominican Republic has had a long history as an exporter of sugar, coffee and tobacco. Fossil fuels provide the majority of electrical energy generation although the country continues to face frequent power outages. At present, the service sector is the largest component of the DR economy including areas of tourism and free trade zones. The DR is one of the Caribbean’s most popular tourist destinations with many tourists arriving from Europe. An international tourism project at Monte Cristi is valued at $1.8 billion USD over 10 years to include a new airport, a 1,000 room hotel complex, marina and deep sea port. Remittances from abroad are substantial source of foreign exchange for DR accounting to $1 to $2 billion USD/year. Capital outflows include purchases for equipment and technology coupled with factor income abroad itself that is measured upwards of $1 billion USD/year.
Economic Statistics
GDP as measured by purchasing power parity stands at $52.2 billion USD (2003) with corresponding GDP/Capita at $6,000 USD. Market GDP stands at $21.3 billion USD (2002). GDP growth for 2004 is again to be recessionary by contracting by an estimated 1 percent of GDP although year 2005 is expected to rebound positively by 4.5 percent. Other figures include year 2003 GDP growth negative at 1.8 percent, year 2001 slowed to positive 3 percent, years 1998-2000 GDP growth was at an impressive 7 percent annually, 1997 at 8.3 percent. Inflation for year 2004 is projected at 28 percent (currently running at 32 percent) and year 2005 to drop to 11 percent although inflation was measured at 45 percent in February 2004. Other inflation figures include year 2003 at 21 percent, 2001 at 5.3 percent, 2000 at 9 percent. The current account is in persistent deficits averaging $2 to $3 billion USD/year. Exports measured at $5.52 billion USD (2003) and imports at $7.911 billion USD reflecting a trade deficit of $2.4 billion USD. Foreign debt is measured at $7.6 billion USD (2004), private external debt stands at $1.8 billion USD (2003). Official unemployment is at 16.5 percent. Economic structure consists of agriculture at 11 percent, industry at 34 percent, services at 55 percent.Year 2000 foreign direct investment ‘FDI’ at $1.5 billion USD.
POSITIVE: foreign investment laws into mining & petroleum exploration have provided for increased monies into these capital intensive industries, government working to improve infrastructure - energy, acceptable literacy rates. CONCERN: power outages have been a problem which may restrain economic growth & productivity, illegal drug transshipment centre, money laundering, moderate to high AIDS rate at 2.5 percent, infant mortality rates, hurricanes, environmental and over exploitation of natural resources.
BANKING SYSTEM: authorities tightened monetary policy in early 2004 resulting in a sharp drop in inflation for March/April 2004. The overall banking system is vulnerable and volatile as noticed with the banking disturbances that occurred in 2003. In July 2003, the DR’s second largest commercial bank Banco Intercontinental also known as BanInter became insolvent. The banking collapse was fueled by a pyramid investment operation, embezzlement - fraud, bad loans, etc. The end result is the government bailed out the financial institution at a cost of $2.2 billion USD with assistance from the IMF in a bridge loan. The impact was enormous immediately resulting in further sharp drop in the peso while inflation soared. Recently, Canadian based Scotiabank with its large DR banking presence and as the oldest private bank in the Dominican Republic bought a large portion of the dissolved BanInter. Just prior to BanInter insolvency, the central bank in June 2003 came to the assistance of the DR’s third largest bank Banco Nacional de Credito after a run on deposits. Commercial lending rates are in the 25 percent range. Foreign exchange reserves have increased dramatically from 1994 at a modest $250 million USD to $1.23 billion USD by 2002. A growing new area of wealth exists in offshore finance and bank deposits from abroad but the integrity of the DR banking system will have to prove itself in order to regain this trust. Global banks such as Scotiabank within the DR are world class sound banking institutions.
REGIONAL ANALYSIS: Haiti, Peurto Rico
Haiti lies immediately to the west of the Dominican Republic sharing the same island. Consequently with Haiti in chaos from political instability with an economy in shambles, Haitian refugees have been illegally crossing the border and entering into the Dominican Republic seeking a better life. Conversely, many poor Dominicans themselves are risking illegal boat trips to the wealthier U.S. territory of Peurto Rico in the hopes of a better economic lifestyle.
KNOWLEDGE: Mining and Commodities Boom
The Dominican Republic is home to one of the world’s largest gold & zinc deposits called Pueblo Viejo which is located 100 km north of Santo Domingo. The government ran the mine from 1979 to 1999 when mine production stalled when operations arrived to the sulphide portion of the mineral deposit. The government does not have the knowledge or technical expertise on how to mine the remainder of the large open pit deposit in an environmental or economically feasible manner. The government accordingly put out a call for tenders to the world mining giants. In August 2001, Canadian based global gold conglomerate Placer Dome won the bid to be granted a 4 year time frame to conduct a feasibility study in order to make a production decision sometime in 2006. This is a very attractive proposal for both the Dominican Republic government and for Placer Dome as it can obtain a world class deposit for relatively little monies while the DR government can profit share plus obtain tax revenues from the hundreds of new well paid mining jobs expected.
Pueblo Viejo mineral deposit is estimated to have measured resources of 17 million ounces of gold, 103 million ounces of silver and 7 million tons of zinc. Pueblo Viejo mine has played an important role in the economic history and development of the Dominican Republic economy as so has other minerals since 1975 including bauxite, iron, nickel, limestone, copper and rare earth minerals. Previous to 1975, very little formal mining took place within the Dominican Republic. The DR is rich in natural resources which it is on the cusp of realizing great national wealth as BankINTRO.com predicts a massive commodities boom is currently in motion that will last several years to feed new large growing consumer economies in India and China. Higher gold and metal prices going forward will help to make the cost analysis & mineral production for Pueblo Viejo more attainable.
CURRENCY: ISO symbol ‘DOP’, Dominican Republic peso. At time of review on August 11, 2004, the peso had an exchange valuation of 42.5 DOP to the US-dollar (‘USD’). The peso has crashed in value over the last 2 years from 17 to 47 DOP to the USD level. The currency regime in place follows a managed float. Credit cards are not widely accepted, the US-dollar is mostly accepted at tourist locations as the peso is the only legal tender currency of the Dominican Republic.
CURRENCY HISTORY: historical exchange valuation quotes for the peso include: June 24, 2004 at 47.5 DOP to the USD, year 2003 at 30.8, 2002 at 18.61, year 2001 at 16.95, year 2000 at 16.42, 1999 at 16.03, 1997 at 14.26, 1996 at 13.8, 1995 at 13.6, 1994 at 13.16 and 1993 at 12.7.
CURRENCY FORECAST: stable with modest appreciation to the USD perhaps to the 35 DOP to the USD within the next 12 to 18 months. Although national debt has doubled, it is still manageable at acceptable levels when compared to other Caribbean and Latin American countries. It appears the debt default risk in early 2004 has been averted for now although an interest payment was missed in July 2004 with an extension granted until end of August 2004. It is speculated that the new government of President Fernandez will secure this payment to avoid any further economic disruption. BI.C believes that the new centrist government of President Fernandez will cut the fat with much lower levels of public spending while renewing a favorable tax and regulation environment for foreign investors while regaining the confidence of international lenders including the IMF to again put the Dominican Republic on a sound footing ahead.
UPDATED: August 11, 2004
