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Dominican Republic Summary Moody’s B1 / S&P BB- / Fitch BB-1 Economy: Agriculture 5%, Industry 33%, Services 62% The Dominican Republic is a $71 billion economy that has grown at an average rate of 5.6% from 2006 to 2016, the second highest in Latin America after Panama. The economy is well diversified, and manufacturing goods from export processing zones (EPZs), tourism, and remittances are the country’s major sources of foreign currency. The United States is a major trade partner, and the country also has a strong political and commercial relationship with Venezuela. President Danilo Medina was reelected for another 4-year term in 2016 and continues to implement his fiscal reform agenda, including important economic adjustments. The Dominican Republic’s main weakness is the electricity sector, although the government is focusing on reaching an electricity pact with stakeholders. The relatively low level of reserves is another concern as it limits the country’s ability to defend its currency, although this is counterbalanced by the country’s healthy banking system. Economic Indicators Population (Millions) GDP per Capita (USD) Nominal GDP (USD Billions) 2012 2013 2014 2015 2016F 9.7 9.8 9.9 10.0 10.1 2017F 10.2 6,252 6,264 6,482 6,733 7,083 7,394 60.5 61.3 64.1 67.2 71.5 75.4 Real GDP (%) 3.9 4.1 7.4 6.5 6.2 5.2 Year-End CPI (%) 3.9 3.9 1.6 2.3 1.6 3.5 Fiscal Balance (% of GDP) -6.6 -3.6 -3.0 -0.2 -3.0 -3.1 Interest (% of Revenues) 17.4 15.9 16.7 17.5 17.0 16.9 FC Debt/Public Debt (%) 73.5 75.5 76.5 77.5 76.5 76.5 Government Debt (% of GDP) 30.5 34.6 34.4 34.9 35.8 36.7 223.9 237.7 228.4 196.3 245.2 253.9 Current Account (% of GDP) -6.6 -4.1 -3.2 -2.1 -1.7 -2.0 FDI (% of GDP) 5.2 3.2 3.4 2.8 2.7 2.6 External Debt (% of GDP) 27.4 30.6 31.4 30.1 29.9 31.0 Foreign Reserves/External Debt (%) 21.5 25.0 24.1 26.0 25.5 24.1 Foreign Reserves (Mo. of imports) 2.1 2.9 2.9 3.2 3.1 3.1 Foreign Reserves (% of GDP) 5.9 7.7 7.6 7.8 7.6 7.5 Government Debt (% of Revenue) As of November 2016 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: IMF, Haver Analytics, Ministry of Finance, Central Bank, Lazard 423 Lazard Emerging Markets Debt Rating History Below is a history of the country’s foreign and local currency ratings by the major agencies dating back to 2000. We have also included a chart of the country’s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BB+ BBB+ BB BBB BBB+ BBB- B BB+ BCCC+ BB CCC BB- 2000 2008 Moody’s 2016 S&P Fitch CCC- 2000 2008 Moody’s S&P 2016 Fitch As of December 2016 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Fitch, Moody’s, Standard and Poor’s, Bloomberg Bond Spreads 2000 1600 1200 800 400 0 2008 2010 2012 Dominican Republic 2014 2016 EMBIGD As of December 2016 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 424 Dominican Republic Strengths Well-Diversified Economy From an external perspective, the pillars of economic growth are tourism, the maquila sector, family remittances, and, more recently, gold exports. Domestically, construction is an important driver of growth. As such, the Dominican Republic is relatively well diversified and does not depend on any particular sector or industry. The industrial sector, including EPZs, is the single-largest category, accounting for 25% of GDP, while in the service sector, which accounts for slightly more than 60% of GDP, none of the subsectors has more than 10% participation.2 EPZs continue to be a major source of exports, accounting for 58% of total 2015 exports. The country also benefits from gold exports from the Barrick Pueblo Viejo mine, which began production in 2013 and generates gold exports amounting to more than US$1 billion annually.3 The Dominican Republic is by far the top tourist destination in the Caribbean and Central American region and boasts major facilities, including six major airports, most of which have direct flights from the United States. Finally, family remittances totaling US$4.9 billion, equivalent to more than 8.0% of GDP in 2015, are an important source of growth.4 More than one-tenth of the Dominican Republic population, equivalent to 1.4 million people, live abroad, mainly in the United States. They tend to send the bulk of the family remittances.5 Both tourism and remittances performed quite well in 2016; tourist arrivals from January through October 2016 were 4.9 million, compared to 4.5 million in the same period in 2015.6 Key Partners The Dominican Republic has succeeded in maintaining a good relationship with both the United States and Venezuela. This strong relationship is not only reflected in trade, but also in the form of other treaties, such as the free trade agreement with the United States that was approved in 2005.7 The Dominican Republic has traditionally also had strong economic ties with Venezuela, which provided subsidized oil through the PetroCaribe initiative; from 2005 to 2014 the Dominican Republic was the largest beneficiary of the program, receiving 90 million barrels of oil out of 307 million total barrels supplied to 13 PetroCaribe member countries.8 The strong relationship also extends to politics; for instance, former President Leonel Fernandez was one of the few electoral observers welcomed by the Venezuelan government for the December 2015 legislative elections.9 In addition, many wealthy Venezuelans are moving to the Dominican Republic and making significant investments, estimated at US$2 billion in 2014, in the retail, banking, and tourism sectors.10 One of the most highprofile projects will be a new Four Seasons hotel by the influential Cisneros Group, whose chairman has adopted the Dominican nationality.11 Haiti has also been an important trade partner recently, as it is the second-largest export destination after the United States, with 2015 exports valued at US$1.8 billion;12 although a significant portion of this consists of intermediate textile products destined for Haiti’s EPZs. In contrast to relations with the United States and Venezuela, relations with Haiti tend to be more tense, even as the two countries develop economic ties. Dynamic Economy The Dominican Republic is one of the fastest growing economies in the Central American and Caribbean region. From 2006 to 2016, the economy grew at an average rate of 5.6% per year, only below Panama’s 7.4%.13 In the first nine months of 2016, the economy grew by 6.9% and is expected to grow 6.2% in 2016, above the estimated potential rate of 5%.14 Economic performance has been influenced by the performance of the United States, its 425 Lazard Emerging Markets Debt main trade partner and largest source of tourism. Therefore, gradual economic improvement in the United States is likely to have a positive impact on the three external pillars of the economy: tourism, maquila exports, and family remittances. Continued Structural Reforms and Better Macroeconomic Stability The country has undergone a series of structural reforms that are positive for the economy over the longer term. On the fiscal side, President Medina introduced changes to the tax code and government spending that could eventually lead to a more sustainable economy. Partially as a result of tax reforms (better collection, formalization of informal economy, etc.) and other measures, the budget deficit has declined to a more sustainable level of 3% GDP. Another positive is that since 2012, the Central Bank has introduced an inflation-targeting regime that has set a target of 4% ±1% in 2016. Inflation has declined and remains well contained, with October 2016 year-over-year inflation of only 0.9%, below the lower inflation target. President Medina was also reelected for another term in May 2016, and the main challenges for him are to ensure he delivers on an electricity pact that will address structural issues in the electricity sector, as well as a fiscal pact aimed at ensuring sustainable performance. Solid Banking System The Dominican Republic’s banking system is relatively solid, and it is in a much better position than during its financial crisis in 2003–2004. The banking system’s management is more cautious, while regulation and supervision are much better than in the past. The banking system’s balance sheet is relatively strong. Deposits have steadily grown for the past couple of years, and credit has also grown at a moderate pace. Reforms have strengthened the banking and financial sectors with better regulatory oversight. The banking system is healthy, and the consolidation of two of the largest banks (BHD and Leon) in December 2013 further strengthened the sector, although it also resulted in a concentration of market power; as of September 2016, the three largest banks accounted for 78% of banking assets.15 Equally positive, interest rates have been stable, and the level of non-performing loans is not a cause for concern; as of October 2016 NPLs only amounted to 1.8% of assets.16 Weaknesses Electricity Sector Problems For all the positive reforms that the country has undertaken, a major bottleneck for further economic growth remains the electricity sector. For more than two decades, the government has made many reforms and changes but has failed to resolve the major issues. The generation sector, managed by the private sector, is profitable and relatively well managed despite late payments from the distribution companies. The primary challenges stem from distribution and transmission, which are largely under the control of the public sector. Among the main problems with the distribution and transmission sectors are electricity sale prices below market levels; low billing collection rates; theft due to unsecured access to equipment; inefficient operation; and very old or missing meters, cables, transformers, and overhead lines. The government continues to make progress, such as reducing losses from around 40% to around 33%, but electricity losses remain among the highest in the world.17 The World Bank continues to provide support for the modernization of the distribution grid in order to reduce electricity loss, and it approved a US$120 million loan in December 2015.18 In addition to the obvious effect on GDP when the country experiences blackouts, 40% of all thermoelectric plants, which supply 87% of all energy, rely on imported oil, although this has proven 426 Dominican Republic beneficial in the current context of lower oil prices. Finally, the government is moving ahead with a US$2 billion project for the construction of two coal-powered thermo-electrical plants in Punta Catalina that will generate 720 megawatts; this was scheduled to be operational in 201719 but work has been delayed due to financing constraints.20 The new timeframe is to have the plant operational by the third quarter of 2018,21 and the government will be issuing a US$600 million sovereign bond to finance the project.22 Low Level of Reserves While reserves are currently at their all-time high, the level of net reserves remains relatively low at US$5.4 billion (circa 7.5% GDP), although this is a substantial increase compared to its level of reserves in the early 2000s, when reserves were less than US$600 million. The major concern with low reserve levels is that it limits the central bank’s ability to defend the Dominican peso or to support the banking system in the event of a shock. If there were a shock, it could trigger macroeconomic imbalances that could impact private investors. For instance, low foreign exchange reserves greatly contributed to the major economic and exchange-rate crisis in 2003–2004.23 At that time, the country’s foreign exchange reserves were extremely low, leaving no room for the central bank to adjust. Oil Dependency The Dominican Republic is an oil importer; it imports about 90%24 of the energy that it consumes, and oil imports typically account for 6%–7% of GDP.25 Thus, the country is highly vulnerable to adverse movements in oil prices. In the past 10 years, oil import expenditures have quadrupled, from US$1.2 billion in 2001 to US$4.3 billion in 2013 before the oil shock, even though the actual volume of imports has only marginally increased.26 On the positive side, the current environment of lower oil prices has benefited the country; oil imports in 2015 were only US$2.5 billion,27 a 28% decrease from 2013. Quality of Education The education quality in the Dominican Republic is among the lowest in the world, a situation the government is trying to improve. An important step toward socioeconomic development was taken in 2012 when the government committed to allocate 4% of GDP to the educational budget,28 but the results of this initiative are still unclear. According to a UNESCO survey, the Dominican Republic ranks 146 out of 148 countries in terms of quality of education, well below the Latin American average,29 and ranks last in Latin America in terms of literacy, math, and science.30 History of Debt Restructuring and Defaults A major drawback of the country is its historical tendency to default (defined in the broader sense of not making payments on due dates as opposed to stopping payments entirely) and/or restructuring its debt.31 With official creditors, the country was behind on its payments from 1975–2008. With bank loans denominated in foreign currency, the country defaulted from 1982–1994. And with foreign currency bonds, the country defaulted in 2005, and has also defaulted with local currency bonds for the period 1975–2001. While the amount of some of the restructured debt is rather insignificant or it involves taking advantage of a 30-day grace period, it underscores a lack of willingness to make timely payments. 32 427 Lazard Emerging Markets Debt Country Background Size 48,670 KM2 (132th) Capital Santo Domingo Population 10.6 Million Religion Catholic 95% Median Age 27.8 Years Literacy Rate 91.8% Independence February 27, 1844 Presidents Danilo Medina (PLD) Presidential Elections 2020 Economy Agriculture 5.1%, Industry 32.8%, Service 62.2% Labor Force Agriculture 14.4%, Industry 20.8%, Service 64.7% Merchandise Exports Gold, Silver, Cocoa, Sugar, Coffee, Tobacco, Meats, Consumer Goods Export Partners US 42.5%, Haiti 16.5%, Canada 8.1%, India 4.8% Currency Dominican Peso (DOP) As of November 2016 Source: CIA 428 Dominican Republic Country Timeline Return to democracy 1966 Joaquin Balaguer, a Trujillo protege and former leader of the Reformist Party (later to become the centre-right Christian Social Reform Party (PRSC)), is elected president. 1978 Silvestre Antonio Guzman (PRD) is elected president and proceeds to release some 200 political prisoners, ease media censorship and purge the armed forces of Balaguer supporters. 1979 Two hurricanes leave more than 200,0000 people homeless and cause damage worth 1 billion dollars as the economy continues to deteriorate due to high fuel prices and low sugar prices. 1982 Another PRD candidate, Jorge Blanco, elected president. Austerity, unrest 1985 IMF prescribed austerity measures, including price rises for basic foods and petrol, lead to widespread riots. 1986 Balaguer (PRSC) re-elected president. 1988 Jorge Blanco tried in absentia and found guilty of corruption during his presidential tenure. 1990 Balaguer re-elected, defeating Bosch by a small majority. 1994 Balaguer re-elected, but agrees to serve only a two-year term after being accused of fraud. 1996 Leonel Fernandez Reyna of the Dominican Liberation Party (PLD) elected president. 1998 Hurricane George causes widespread devastation. 2000 PRD returned to power with Hipolito Mejia as president. 2001 May—Appeals court quashes a conviction against former president, Salvador Jorge Blanco, on charges of corruption. 2001 November—US jet bound for Santo Domingo crashes in New York killing all 255 people on board. Three days of national mourning declared. 2002 July—Former president Joaquin Balaguer dies aged 95; thousands pay their last respects to a man who dominated politics for more than 50 years. 2003 November—Deadly clashes between police and protesters during demonstrations against high prices, power cuts. Two months later, demonstrations about economic policies leave at least five dead. Fernandez elected 2004 May—Former president Leonel Fernandez defeats incumbent Hipolito Mejia. Severe floods in the south-west, and in parts of neighbouring Haiti, leave more than 2,000 dead or disappeared. 2005 September—Congress approves a proposed free trade agreement with the US and Central American nations. The DR enters the accord in March 2007. 2008 May—President Leonel Fernandez is re-elected. 2010 May—Congressional elections. Governing Dominican Liberation Party (PLD) retains firm grip on power. 2010 October—Dominican Republic tightens border restrictions to prevent cholera spreading from Haiti. 2012 May—Governing Dominican Liberation Party candidate Danilo Medina wins close presidential election over former president Hipolito Mejia. 2012 October—Hurricane Sandy causes extensive damage. 2013 September—Dominican Republic's highest court rules that the children of undocumented migrants are not eligible for Dominican nationality. Human rights groups warn that it could leave tens of thousands of people of Haitian descent stateless. 2014 May—The Dominican parliament approves a bill to grant citizenship to Dominican-born children of immigrants. 2016 May—President Danilo Medina is re-elected with a large majority. Source: BBC 429 Lazard Emerging Markets Debt Notes 1 2 3 4 5 6 As of December 2016. As of December 2015, Source: Central Bank of the Dominican Republic. As of December 2015, Source: Central Bank of the Dominican Republic. As of December 2015, Source: Central Bank of the Dominican Republic. ”Prospectus: Dominican Republic 7.45% Bonds due 2044,” Goldman Sachs, May 2014. Informe del Flujo Turistico Enero-Octubre 2016 http://www.bancentral.gov.do/publicaciones_economicas/ informe_turistico/informe_turistico2016-10.pdf, accessed on November 21, 2016. 7 ”Prospectus: Dominican Republic 7.45% Bonds due 2044,” Goldman Sachs, May 2014. 8 “Evolution of the PetroCaribe Energy Cooperation Agreement,” SELA, June 2015 http://www.sela.org/ media/1950653/evolution-of-petrocaribe.pdf. 9 “Expresidente dominicano liderará misión de Unasur en Venezuela,” TelesureTV.net, November 16, 2015, accessed on December 16, 2015, http://www.telesurtv.net/news/Expresidente-dominicano-liderara-mision-deUnasur-en-Venezuela-20151116-0048.html. 10 “Empresas venezolanas invierten 2.000 millones de dólares en Dominicana,” Noitmérica.com, December 17, 2015, accessed on December 21, 2015, http://www.notimerica.com/economia/noticia-empresas-venezolanasinvirtieron-2000-millones-dolares-rdominicana-2015-20151217131613.html. 11 “Magnate venezolano Gustavo Cisneros adquiere la nacionalidad dominicana,” AmericaEcnomia.com, March 17, 2014, accessed on December 16, 2015, http://americaeconomia.com/negocios-industrias/magnate-venezolano-gustavo-cisneros-adquiere-la-nacionalidad-dominicana. 12 As of December 2015, Source: Central Bank of the Dominican Republic. 13 “World Economic Outlook Database,” International Monetary Fund, October 2016, accessed on November 21, 2016, http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx. 14 Informe de Politica Monetaria, Central Bank Dominican Republic, November 2015. 15 As of September 2016 http://www.sib.gob.do/transparencia/publicaciones-oficiales/informes-estadisticas/ estadisticas-e-imformes, acessed on November 21, 2016. 16 As of October 2016, http://www.sib.gob.do/transparencia/publicaciones-oficiales/informes-estadisticas/ estadisticas-e-imformes, accessed on November 21, 2016. 17 “Prospectus: Dominican Republic 7.45% Bonds due 2044,” Goldman Sachs, May 2014. 18 “Dominican Republic- Distribution Grid Modernization and Loss Reduction Project,” World Bank, December 15, 2015, accessed December 16, 2015, http://www.worldbank.org/en/news/loans-credits/2015/12/15/dominicanrepublic-distribution-grid-modernization-loss-reduction-project. 19 “CDEEE avanza construcción central termoeléctrica 2 plantas a carbón en Punta Catalina,” Diario Digital Domincano.com, accessed on November 18, 2014, http://diariodigitaldominicano.com/site/cdeee-avanzaconstruccion-central-termoelectrica-2-plantas-carbon-en-punta-catalina/. 20 Delgado, Esteban, “Las plantas a carbón están limitadas por la falta de recursos,” El Dinero, December 14, 2015, accessed on December 15, 2015, http://www.eldinero.com.do/18726/las-plantas-a-carbon-estan-limitadas-por-la-falta-de-recursos/. 21 Las plantas de Catalina estarán en línea en 2018 http://www.listindiario.com/la-republica/2016/11/05/441955/ las-plantas-de-catalina-estaran-en-linea-en-2018, accessed November 21, 2016. 22 “Senado aprueba emisión de bonos por US$600 MM” http://www.listindiario.com/la-republica/2016/10/27/440700/senado-aprueba-emision-de-bonos-por-us-600-mm, accessed November 21, 2016. 23 As of November 2014, Source: Lazard estimates. 24 “Energy Imports, net (% of energy use),” World Bank, accessed on December 16, 2015, http://data.worldbank. org/indicator/EG.IMP.CONS.ZS. 25 As of December 2015, Source: Central Bank of the Dominican Republic. 26 “Statistics, Foreign Sector,” Central Bank of Dominican Republic, accessed on October 3, 2014, http://www. bancentral.gov.do/index.asp. 27 As of November 2016, Source: Central Bank of the Dominican Republic. 28 De Leon, Viviano, “Medina: la mejor inversión en el 2013 será en educación,” Listin Diario, December 27, 2012, accessed on December 16, 2015, http://www.listindiario.com/la-republica/2012/12/26/259986/Danilo-Medinala-mejor-inversion-en-el-2013-se-hara-en-la-educacion. 29 De la Rosa, Adalberto, “República Dominicana ocupa el lugar 146 de 148 países con baja calidad de educación,” Diario Libre, July 29, 2015, accessed on December 16, 2015, http://www.diariolibre.com/noticias/educacion/ republica-dominicana-ocupa-el-lugar-146-de-148-paises-con-baja-calidad-de-educacion-NG686708. 30 Sanchez Zinny, Gabriel, “Latin America’s wake-up call on global school tests,” BBC News, April 8, 2015, accessed on December 13, 2015, http://www.bbc.com/news/business-32161854. 31 As of January 2014, Source: Bank of Canada Database of Sovereign Defaults. 32 “Dominican Republic Offering Memorandum,” April 2014. 430 Important Information Published on 24 February 2017. 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