The Dominican Republic Flag
The small coat of arms at the centre of the white cross features a shield supported by a laurel branch (left) and a palm branch (right); above the shield a blue ribbon displays the motto, DIOS, PATRIA, LIBERTAD (God, Fatherland, Liberty), and below the shield, REPUBLICA DOMINICANA appears on a red ribbon; in the shield a bible is opened to a verse that reads “Y la verdad nos hara libre” (And the truth shall set you free); blue stands for liberty, white for salvation, and red for the blood of heroes.
Dominican Republic: At a glance
Structure of the economy
Over the last decade, the Dominican Republic has been one of the fastest growing economies in Latin America and is now the seventh largest in the region. Traditionally, the Dominican Republic has long been viewed as a commodity exporter (sugar, coffee and tobacco), however, over recent years, the service sector has become the largest contributor to GDP (57%) followed by industry (30%) and agriculture (6%). Within these sectors, the economy is reliant on tourism (12% of GDP), remittances (8% of GDP) and mining revenues (8%); these areas have largely underpinned the remarkable period of economic progress over the last five years, where average annual GDP growth expanded at ~6%. Likewise, the economy has a high reliance on exports (18% of GDP), with its main export products precious metals (22% of total) and machinery (12% of total), with the United States positioned as its largest trading partner (53% of total). Prior to the pandemic, the Dominican Republic was on track to reach its ambitious target of achieving high income status by 2030; the crisis and resulting contraction has caused the first recession in 25-years putting public finances under pressure.
Despite the rapid economic achievements in the Dominican Republic over recent decades, the country faces challenges in the wake of the pandemic. The economy suffered badly last year, slipping into a sharp recession, where GDP contracted -6.7% in 2020. That said, the economy is expected to rebound quickly, aided by a swift vaccination rollout, direct tailwinds from the acceleration in the United States and the accommodative monetary policy stance to insulate the nascent recovery. The constructive outlook for the recovery in the Dominican Republic is reflected by robust IMF forecasts, where GDP is expected at 5.5% in 2021 and 5% in 2022.
In response to the pandemic, the Central Bank of the Dominican Republic (BCRD) cut its policy rate to a record low of 300bps in August last year. The BCRD left policy rates unchanged at this level in at the recent meeting in July, following “exhaustive” analysis of the impact of COVID-19 on the recovery. The central bank is in no rush to tighten policy, opting to insulate the economic recovery. The central bank continues to look through price pressure which they describe as “transitory”; CPI at 7.8% in July is above the 3%-5% target band. The BCRD also upgraded its growth forecasts at the meeting, where GDP is expected to reach “9% -10% for this year 2021…these positive perspectives for the Dominican economy are supported by the dynamism of the world economy, the advance in the vaccination plan and the gradual improvement of tourism, as well as in the coordinated effort of monetary and fiscal policies to consolidate the reactivation of domestic demand”.
Fiscal policy support in response to the pandemic has been swift; in March 2020, the original economic support measures implemented by the previous administration amounted to $576m (0.75% of GDP). The newly elected President Luis Abinader introduced further support via a supplemental budget in September 2020, amounting to $3.2bn (4.5% of GDP). The contraction in the economy and the emergency pandemic response measures pushed the debt to GDP ratio to almost 70% last year. As a result, the government was forced to turn to multinational support to cover the funding shortfall, via credit lines from the IMF ($650m) and World Bank ($250m). In light of this year’s economic recovery and ongoing government rebalancing, the IMF forecasts the budget deficit to improve from -7.4% in 2020 to -3.4% in 2021, which will bring the overall debt to GDP ratio towards 65% over the next year.
The Dominican Republic has a stable democracy; the President is both the head of state and the head of government. The President executes laws passed by congress and appoints the cabinet; executive power is exercised by the government and legislative power is vested in the bicameral National Congress. The latest presidential and congressional elections took place in July 2020 with the winning candidate, Luis Abinader (PRM) taking charge August 2020. The president has a solid majority in congress (18 out of 32 seats). The new government has a firm pro-business stance and a firm anti-corruption agenda, which plagued the previous administration; campaign promises include a universal minimum wage and the pledge to address fiscal imbalances. Likewise, the president is committed to strengthening ties with the United States which is the country’s main commercial partner, where approximately two million Dominicans reside and from where 40% of tourism originates.
Bottom line: Gold medal
We are optimistic when it comes to the outlook for the Dominican Republic. From a bottom up standpoint, the recovery is in great shape and expected to gather further momentum over the next two years, reflected by the constructive IMF outlook over that horizon. At the same time, the domestic rebound continues to enjoy support from the BCRD; the central bank continues to look through transitory inflation pressure and maintain its accommodative stance to support the recovery. Furthermore, the fiscal position, which suffered in the wake of the pandemic, continues to improve and remains underpinned by multinational support via the IMF and World Bank.
From a structural perspective, as noted in our Roadmap for Q3 and Beyond, we believe that the current backdrop is complicated for emerging markets. That said, in our view, there are selective opportunities to extract alpha from EM. Firstly, under our US-Led Growth Theme, we believe that as further fiscal stimulus enters the system, at home and abroad, the foundations for the cyclical rebound are solid. This backdrop is likely to support allocations to some emerging markets; we favor the emerging markets which have a strong beta to the recovery in the United States. Likewise, as noted under our investment theme – Sticky Inflation, Structural Headwinds – we stick to our longstanding view that recent price pressures are transitory. As such, we believe that the Fed will introduce a controlled normalisation of monetary policy under the AIT framework, which will encourage extracted in selective carry positions. Therefore, from a structural perspective, we believe that the Dominican Republic is well placed to benefit from both the ongoing cyclical rebound in the U.S and the strong likelihood of selective carry demand in EM.
The World Bank.
Olympics data: Olympiandatabase.com
All other data is ESLJ, 2021.
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