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Challenges for
the Dominican Republic
• Global outlook and risks
• DR-CAFTA: Changing trade dynamics
Robert Wood,
Senior Analyst, Latin America
FUNGLODE,
Santo Domingo
April 1st, 2005
2004 - LA fiesta, recovery in DR
Rapid GDP growth of 5.7% in Latin America

Broad-based – strong growth of private consumption,
investment and exports
Disinflation
Improved external sector performance




Trade and current-account surpluses
External debt consolidation
International reserves rise
Currencies stable
But…



Recovery from recession (DR) / underperformance
Poverty still high; income and wealth inequalities
Structural and institutional weaknesses remain
The Global Context
Key points for 2005-06
Exceptional times don’t last

2004 the best year for quarter of a century

but will not be repeated
Struggle between stocks and flows


liquidity only slowly being drained
balance sheet problems
Global imbalances remain significant



US current-account deficit
dollar weakness
OECD debt levels
Momentum has waned?
OECD growth, %
4.5
2005
2006
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
06 Q3
05 Q4
05 Q1
04 Q2
03 Q3
02 Q4
02 Q1
01 Q2
00 Q3
99 Q4
99 Q1
0.0
Y-on-Y
Global pressure points
The US dollar

America choking on its own debt
Liquidity withdrawal

risk assets vulnerable
China slowdown

slowing, slowing, gone?
Oil prices

any relief?
Physical security
United States
United States
Roaring ahead in 2004


Cheap money
Fiscal frenzy
But challenges on the horizon


trashed balance sheets
end of policy stimulus
Sector divergence?

Business caution vs household hedonism
Has the Fed lost control?
90
Q
91 1
Q
92 1
Q
93 1
Q
94 1
Q
95 1
Q
96 1
Q
97 1
Q
98 1
Q
99 1
Q
00 1
Q
01 1
Q
02 1
Q
03 1
Q
04 1
Q
1
Personal debt
120
Debt:income
15
110
Debt service:income
14
100
13
90
12
80
70
11
60
10
Real estate vulnerability
34
% of assets
14
32
House price change, %
12
10
28
8
26
6
24
4
22
2
20
0
91
Q
92 1
Q
93 1
Q
94 1
Q
95 1
Q
96 1
Q
97 1
Q
98 1
Q
99 1
Q
00 1
Q
01 1
Q
02 1
Q
03 1
Q
04 1
Q
1
30
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
% of GDP
Q1:04
Q1:03
Q1:02
Q1:01
Q1:00
Q1:99
Q1:98
Q1:97
Q1:96
Q1:95
Q1:94
Q1:93
Q1:92
Q1:91
Q1:90
Corporate profits
US net saving
% of gross
14
national
income 12
10
8
6
4
2
0
-2
-4
-6
-8
Private
Public
Total net saving
80 81 83 85 87 88 90 92 94 95 97 99 01 02 04
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
US foreign asset position
12,000
US net foreign assets
10,000
US-owned assets abroad
8,000
Foreign-owned assets in the US
6,000
4,000
2,000
0
-2,000
US$bn
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-4,000
US outlook
Problems are in the personal sector

corporate sector in reasonable shape
What will stop the consumer?

liquidity


debt service payments
balance sheets

wealth - housing, equity valuations
Debt accumulation unsustainable

saving will stabilise (or rise)
Gradual softening of GDP growth
US and the World
US current account deficit
1
100
0
0
-1
-100
-2
-200
-3
-300
-4
-400
$bn annual rate
% GDP
-5
-500
04 Q1
02 Q3
01 Q1
99 Q3
98 Q1
96 Q3
95 Q1
93 Q3
92 Q1
90 Q3
89 Q1
87 Q3
86 Q1
84 Q3
-700
83 Q1
-7
81 Q3
-600
80 Q1
-6
0
Q2:06
Q1:05
Q4:03
Q3:02
Q2:01
Q1:00
Q4:98
10
Q3:97
Q2:96
Q1:95
Q4:93
Q3:92
Q2:91
Q1:90
Fed loosing control?
12
3mth T bill
30yr mortgage
8
6
4
2
Latin America and the external
environment: no escape
L America and Dom Rep: no escape
Dependence on trade and external finance




Weak domestic demand; financial intermediation
Low savings/ investment rates
Commodity exports/ tourism; free zones (DR)
Heavy public debt burdens
2004 was an exceptional year



Strong OECD demand
High international liquidity
Stable currencies
2005-06 will be far more challenging


Global import demand softening
Foreign investors directing money into OECD
Latin America: still vulnerable
More flexible policies than in the 1990s




Floating exchange rates
Inflation targeting
Active debt management
Fiscal discipline
 Fewer external imbalances
But still vulnerable after all these years…


Brazil
Colombia, Uruguay?
Changing trade dynamics
Changing trade dynamics
Trade liberalisation

US trade policy; bilateral agreements; FTAA-lite?
DR-CAFTA: Challenges, new opportunities
 Domestic sectors exposed to increased competition
 Trade and investment flows
 regulatory discipline

A “defensive strategy”…?
Lessons from NAFTA (Mexico special case)
 Trade and investment rises
 Adjustment policies eg agriculture
 Limitations of the deal
 Need to continue structural reforms, improve institutional
capacity and competitiveness
 Need to diversify export markets (cf Chile)
Dom Rep: winner or loser?
Adjustment strategies



SMEs; clustering
Apparel – vertical integration; outsourcing to Haiti
Agriculture
Trade and investment

Role of foreign investment; transfer of technology / know-how
Competitiveness


Educational push
Vocational training; Managerial skills
Institutional upgrade

Cooperation with the US govt and émigré community?
Latin America and Dominican
Republic outlook
Domestic momentum/ pressures
Which will prevail in Latin America?
Momentum:


Increased liquidity
Business confidence


capacity utilisation/ expansion?
Consumer confidence

jobs creation? real wages? credit growth?
Pressures:


Inflationary pressures?; monetary tightening?
Constraints –structural reforms; reforming
institutions; competitiveness
Is the fiesta in Latin America over?
The best is over…


Weakening external demand
Increased reliance on domestic demand;
unable to take up slack fully



Fiscal policy is a tool of debt management, not
demand management
Growth in LA slows, but still reasonable
(annual average 3.5% in 2005-09)
Is LA more resilient to external shocks?

elections looming in ten countries…
Dominican Republic outlook
Assumptions
 Govt financing plans met
 Stabilisation consolidates
 Confidence persists
 IMF programme on track
Growth limited by
 Fiscal adjustment
 Access to credit
Risks
 Politicking affects policy?
 Global risks
2003
2004
2005
2006
Real GDP growth
-0.4
2.0
2.7
4.0
Inflation (year-end)
42.6
28.7
11
9
Short-term interbank rate
31.4
32.6
25
23
Central govt (% of GDP)
-3.8
-2.6
-0.7
-0.2
Exports of goods (US$ bn)
5.4
5.7
5.7
5.8
Imports of goods (US$ bn)
7.9
7.9
8.8
9.4
Current-account (US$ bn)
0.9
1.4
0.4
-0.3
Current-account % of GDP
5.2
7.4
1.4
-1.2
Exchange rate Ps:US$ (av)
30.8
42.1
32
38
Exchange rate Ps:US$ (yr-end)
37.3
31.1
35
40
Challenges for
the Dominican Republic
• Global outlook and risks
• DR-CAFTA: Changing trade dynamics
Robert Wood,
Senior Analyst, Latin America
FUNGLODE,
Santo Domingo
April 1st, 2005