Download 2012-288-IM-Dominican Republic-COMPLETO

1
DOMINICAN REPUBLIC
1. General trends
As inflationary pressures intensified and uncertainty in the international markets resurfaced, the central
bank adopted a tighter monetary policy stance in order to reduce aggregate demand. Despite these efforts,
inflation closed 2011 at 7.7%, compared with 6.2% in 2010. Economic growth meanwhile was 4.5%,
versus 7.8% in 2010. As a result of the slowdown, the balance-of-payments current account deficit
narrowed from 8.6% of GDP in 2010 to 7.9% of GDP in 2011. The net balance of payments, however,
remained positive and net international reserves accordingly increased by US$ 295.2 million.
2. Economic policy
(a)
Fiscal policy
Measures to enhance tax administration implemented in late 2010, along with adoption of Act
139-2011, made it possible to sustain revenues (which rose by 9.8% in 2011 versus 13% in 2010) despite
the economic slowdown. One of the aims of the new law was to boost receipts by the equivalent of 0.4%
of GDP by raising the income tax rate for businesses from 25% to 29%; establishing a tax of 1% on the
net productive financial assets of institutions classified as universal banks, savings and loan associations,
savings and loan banks, or loan corporations; and establishing a simplified regime for the payment of
income tax by legally operating gambling casinos. Tax revenues swelled by 12% as the income and
benefits tax take climbed 21.6% and receipts from goods and services taxes rose 10%. The tax burden
therefore stood at 12.9% at year-end 2011, compared with 12.8% in December 2010.
Total expenditure was up 9.3% and equated to 16.1% of GDP, versus 16.4% in 2010. The rise in
spending is attributable to a 10.4% increase in current spending. Transfers to the electricity sector
remained the main reason for the increase in spending, as these were up again on the back of higher prices
for oil and oil products. Debt servicing was also a major component of the rise in current expenditure
(25.2%). External sector performance and the slowing economy thus contributed to the fiscal policy
objective of narrowing the fiscal deficit, which shrank from 2.7% of GDP in 2010 to 2.6% of GDP in
2011.
The deficit was financed by increasing external public debt, which reached US$ 11.625 billion
(equivalent to 21.1% of GDP in 2011, versus 19.6% in 2010). Domestic debt meanwhile amounted to
US$ 4.968 billion (9% of GDP), taking total non-financial public sector debt to 30.2% of GDP at yearend 2011, compared with 29.2% in 2010. This was possible within the framework of the International
Monetary Fund (IMF) arrangement, which made it easier to obtain funding from multilateral financial
institutions and to issue bonds on international markets. The 28-month arrangement signed in November
2009 was to expire in the first quarter of 2012.
(b)
Monetary and macroprudential policy
With the aim of curbing the growth of lending to the private sector and avoiding a credit boom,
the monetary policy rate was raised by 175 basis points to 6.75% in May 2011. This pushed lending rates
up by a weighted average of 360 basis points, to 17.2% in December 2011. The hike in nominal loan rates
and the expectation of a retreat in inflation translated into a slowdown in lending to the private sector in
December: nominal growth dropped from 20% in December 2010 to 17.2% in late 2011.
2
Comisión Económica para América Latina y el Caribe
Central bank open-market operations has a contractionary impact consistent with the objective; at yearend 2011 outstanding central bank securities amounted to 236.99 million Dominican pesos (7.9% higher
than at year-end 2010).
The domestic contraction prompted banks to make more use of foreign lines of credit. External
liabilities amounted to US$ 813.7 million at year-end 2011, compared with US$ 510.7 million at year-end
2010, a surge of 36.8%. The use of external credit is therefore still on the rise, after hitting a low of US$
334.2 million at year-end 2009.
As inflation trended down, there was no need to raise the interest rate further; in fact, in
November the reserve requirement was lowered (1.4%), in keeping with the medium-term goal to limit
the use of direct instruments and focus on the interest rate as a policy tool.
But slower loan portfolio growth had a negative impact on financial system profits. According to
figures from the Superintendence of Banks, the return on average equity in the system, measured as rate
over equity, dropped from 23.4% at the end of 2010 to 19.9% at year-end 2011. Return on assets was
2.35%, versus 2.64% in December 2010. System capitalization continued to improve, with the net worth
of the institutions up by 17.2% to December 2011 (versus 14.3% in 2010). As lending slowed and bank
net worth increased, the system’s solvency ratio stood at at 17.45% in late 2011, exceeding the minimum
requirement by 7.45% percentage points. System liquidity, expressed as the adjusted liquidity ratio, was
also considerably above minimum levels (over three times the minimum).
3. The main variables
(a)
Economic activity
Economic activity slowed in 2011, growing by 4.5% (7.8% in 2010). This was due to faltering
domestic demand, which slowed from 9.2% in 2010 to 2.7% in 2011 as private consumption slackened
(rising by just 3.9% versus 7.7% in 2010). This in turn was a drag on public consumption, which dropped
from 3.3% in 2010 to only 0.4% in 2011 as a result of the fiscal adjustment programme. Gross fixed
capital formation contracted by 2.7%, as against a jump of 17.6% in 2010. Exports registered real growth
of 8.8%, versus 11.6% in 2010.
Despite the economic slowdown, most sectors performed favourably, albeit at modest growth
rates compared with 2010. Manufacturing grew by 5.1%, as against 7.7% in 2010. This cooldown was
due to a steep decline in the production of beverages and tobacco products, which grew by just 2.2% in
2011 versus 12% in 2010. The manufacture of oil refining products slid by 4.2% after growing 7.8% in
2010. Another sector contributing to the sharp deceleration in economic activity was construction,
because of its considerable backwards and forwards multiplier effects in the economy. Construction grew
by just 1.4%, contrasting with an expansion of 11% in 2010. The services sector also experienced a sharp
slowdown, expanding by only 2.4% in 2011 versus 7.3% in 2010. Within this sector, commerce was
particularly lacklustre, posting growth of 4.3% in 2011 compared with 13.6% in 2010. Financial
intermediation, insurance and related activities also recorded a lower growth rate in 2011 (4%, as against
12.5% in 2010).
3
By contrast, manufacturing in free trade zones expanded by 14%, compared with 3.4% in 2010.
This was powered by rising demand from the United States for textile products, the output of which
surged by 31.7% in 2011 versus 5.4% in 2010. Another factor was the burgeoning production of
pharmaceutical products, which grew by 25.5% as against 1.5% in 2010. Meanwhile, the mining and
quarrying sector also performed well in terms of value added, which soared by 79.7% versus 2.9% in
2010 as the production of ferronickel for export resumed.
(b)
Prices, wages and employment
Thanks to monetary policy measures and lower international food prices, inflation fell back to
7.76% at the end of 2011 after topping 10% in August. The spike in inflation during 2011 was primarily
due to rising international food and oil prices. Prices for food and non-alcoholic beverages were up 9.7%,
accounting for 31.4% of annual inflation. The products with the most impact were soybean oil (20.3%),
cassava (33.8%), eggs (18.4%) and fresh chicken (19%). Transport prices were also substantially higher
(13%) since these are directly correlated with fuel prices, and were responsible for 30% of the variation in
the consumer price index. The third largest contribution was from housing prices, which were up 10.3%
and accounted for 15.3% of the price variation.
With regard to the labour market, according to the national workforce survey the open
unemployment rate increased marginally in 2011, from 5.6% in April to 5.9% in October. The overall
participation rate, which ended 2010 at 55%, reached 56.3% in October 2011, a return to the levels
recorded during the second half of 2007. However, the survey also revealed that the informal sector
expanded slightly during 2011, accounting for 57% of all employed persons.
Following renegotiation in early 2011, the minimum wage was raised by 17%. Average real
wages nevertheless only rose by 1.3%.
(c)
The external sector
Owing to the economic slowdown and in particular the cooling of imports, coupled with the
robust expansion of exports, the balance-of-payments current account deficit narrowed from 8.6% in 2010
to 7.9% in 2011.
Total goods exports stood at US$ 8.536 billion, an expansion of 26.4%, fuelled by rising sales of
minor products (non-traditional exports) and the resumption of ferronickel exports. Sales of goods in
ports were up by US$ 147 million (34.9%) as were sales of goods produced in free trade zones, which
rose by US$ 667 million (15.8%).
Imports slowed markedly, posting growth of 12.5% in 2011 versus 26% in 2010, even after an
increase of 33.4% in the weighted average fuel price. Capital goods imports were down 10% on 2010
levels, while imports of consumer durables fell 9.1%. Imports of processed and semi-processed foods
grew by 10% and imports of raw materials and intermediate goods by 25.9%.
One positive element of the improvement in the current account deficit was the upturn in income
from family remittances, which rose by 6.7% compared with a drop of 1.6% in 2010.
Although the current account deficit shrank in GDP terms, it widened in absolute terms. This
increase, however, was almost entirely offset by larger foreign direct investment inflows, which amounted
to US$ 475 million (25% up on 2010).
4
Comisión Económica para América Latina y el Caribe
4. General trends (first quarter of 2012)
ECLAC estimates that economic growth in 2012 will be around 4.5% and inflation at the end of the year
will be very close to the lower limit of the range set by the central bank (5.5%). To April, the annualized
rate of inflation was 4.04% and the accumulated rate was 0.95%. The lending rate to May was 15.5%, and
the banking system loan portfolio is expected to grow by 12.5% by the end of the year. As inflation
receded, the central bank decided to lower its monetary policy rate by 75 basis points, to 6% from 1 June.
This decision was made taking into consideration that the economy was growing below potential in
March, at 3.8%, and with the aim of avoiding a more severe economic slowdown.
In March 2012 private sector lending expanded by 11.2%, significantly below the 19.8% posted
during the first quarter of 2011.
The agricultural sector was more buoyant during the first three months of 2012, with growth of
2.3%, exceeding the 0.5% recorded during the first quarter of 2011. By contrast, the mining and quarrying
sector slowed dramatically, growing 25.6% during the first quarter of 2012 compared with 42.4% for the
same period of 2011. This was attributable to lower demand for construction materials such as marble and
limestone, down 19.7% and 27.7%, respectively. Manufacturing also faltered, growing by just 3.3%. A
drop in the value-added of sugar production and a slackening of activity in free trade zones also
contributed to this result. Lastly, commerce picked up slightly, expanding by 6.8% during the first quarter
of 2012 versus 5.4% over the same period of 2011.
Family remittances grew by 3.6% to March 2012 but slowed nevertheless in comparison with the
strong growth observed the year before. Total exports to March registered growth of 12.2%, driven by
rising exports of ferronickel and non-traditional exports. To the same date, general imports demonstrated
moderate growth of 5.7%, largely explained by a meagre increase in consumer goods imports. Export
growth outstripped imports, meaning that the balance-of-payments current account deficit may be slightly
smaller than in 2011.