Dominican Republic Economic Report 2018

Key Data201520162017
GDP(USD billions)68.872.375.9
Per capita GDP (USD at PPP)14,39915,37216,182
Real Growth in GDP (%)7.06.64.6
Inflation (CPI %)2.31.74.2
Exchange Rate (USD –end period)45.6646.7348.46
Exchange Rate (CAD - avg)35.1934.7736.47
Current Account Balance (US$ M)-1,280-978-165
Fiscal Balance/GDP (%)0.0-2.8-2.4
International reserves (US$M)5,2666,1346,873

Sources: EIU

Key Economic Trends

The Dominican Republic’s economy  has kept a robust growth rate over the last 5 years, achieving a 4.6% of GDP in 2017.  Although having experienced a strong annual growth rate, a slowdown has been observed in the last 2 years. The DR’s GDP reached US$75.9bn in 2017, supported mainly by sectors like manufacturing (9.9%), construction (9.8%), commerce (8.5%), transportation (8.2%) and tourism (7.9%).

Tourism, one of the pillars of the Dominican economy, also kept its ever-increasing trend in 2017 with a record arrival of 6.2M visitors (6.8% increase), keeping up with the government objective of 10M visitors by 2020 and generating estimated revenues of US$7.2b. Fresh foreign investment in tourism infrastructure keeps landing into the country and, at the moment, there are many resorts and hotels being developed or scheduled to be this year. The latest investments in tourism infrastructure have been focused both on luxury hotels and resorts, as well as high-end residential projects, which are expected to increase the average spending per tourists.

With close to 2 million Dominicans living abroad, remittances represent a key source of revenues for the country and a driver of economic growth.  Rising by 13% in 2017 over 2016; it reached US$5.9bn, an equivalent to 7.8% of GDP.

The mining activity, which had grown 26.5% in 2016 propelled by the re-start of ferronickel exploitation (which had been halted since 2013), slowed down and decreased 3.4% in 2017. Gold exports from Barrick Gold’s Pueblo Viejo operations reached US$708M for the same year, making the company once again one of the key contributors to the public coffers.

The DR’s Consolidated Public Debt keeps its steady growth and at the end of 2017, reached US$37.2bn, equivalent to 48.9% of GDP. Sovereign bonds have become a regular source of financing, both internationally and domestically. In 2017 the DR issued and sold US$1.7bn worth of bonds in two blocks of US$1.2bn and US$500M, respectively. Furthermore, in February 2018, the Dominican Government issued its first international bonds in Dominican Pesos (DOP) for a total of DOP$40,000M (approx. US$822M) and also US$1.0bn in sovereign bonds of 10 years at an interest rate of 6.5%, for which demand was more than twice what the DR Government had issued. Dominican bonds continue to have good demand in the international markets and have become the tool of preference of the DR Government for external indebtedness. At the end of 2012 the cumulative total of sovereign bonds issued by the Government was US$2.8bn; by the end of 2018 this total will be US$13.1bn.

Government revenues increased by 11% in 2017 when compared to 2016, and the fiscal deficit ended at 2.4% of GDP, lower than the 2.8% of 2016. For 2018, the Government aims to reduce the deficit to 2.2% of GDP. Private sector, multilateral agencies and analysts have doubts about the Government’s ability to reach its deficit objectives, given the Budget was based on an estimate average oil price of US$48.6/barrel.

The DR Government has been adding regulations and fine-tuning its fiscal system in order to close down on tax evasion, which is widespread in the country. There is consensus among public and private sectors that a sound, integrated fiscal reform is due in the DR. However each side has a different point of view about which items should the reform be focussing on. While the Government considers that many exemptions should be eliminated and taxes revised, the private sector supports lower taxes and an improvement in Government expenses quality, with stricter regulations. The DR Tax Code is plagued with legal dispositions that generate 140 fiscal incentives or exonerations, creating a system of “special regimes” which, in the words of the Minister of Finance, have become the rule instead of the exception.

The 2018 National Budget includes 10.5% higher spending than the 2017 Budget, and also US$2.9bn in financing, which will further increase the Consolidated Public Debt. Eighty five percent (85%) of the Government expenses will be current expenses, leaving only 15% for capital expenses. The Government will be spending two and half times more money on interest payments than in capital projects this year.

In the last year, some of the multilateral economic agencies have suggested the DR needs a comprehensive fiscal reform, in order to increase revenues and reduce the fiscal deficit. Given the high informality ratio of small businesses and labour in the DR (estimated at 60%), increasing revenues through direct taxes (i.e. income tax) without heavily affecting the same segments, is a challenging task. Having done a partial fiscal reform in the early days of his first term (2013), the Medina Administration is reluctant to increase income or consumption taxes because it would have a direct effect on the population, and thus on its popularity. Therefore, reduction of tax evasion, elimination of exemptions and formalization of small businesses are expected to top the list in the Government’s fiscal agenda.

The energy subsidy, an enduring heavy burden carried by the Government finances year after year, have costed an average of US$843M a year to the DR for the last 5 years. For the 2018 National Budget, the Government estimated a US$645M subsidy, a figure that looks highly unrealistic considering the  US$48.6 oil price used for the calculation. Despite the Government announcement of restarting the national dialogue towards the “Energy Act” to deeply reform the electricity sector, and the scheduled addition of the Punta Catalina coal-fired plants in early 2018, subsidy levels are expected to remain unless the losses and fraud issues hindering the energy distributors are tackled.

Economic Structure (2017)

GDP by sector:

Manufacturing 9.9%
Construction 9.8%
Trade 8.5%
Transportation 8.2%
Tourism 7.9%

Major Industries:

Mining
Sugar processing
Tourism
Textiles
Cement
Food processing

Major export destinations (2017):

  1. US 53%
  2. Haiti 9.8%
  3. Canada 9.5%
  4. India 5.3

Key Exports:

Free Trade Zone output (misc.)
Metals & minerals
Sugar & by-products
Cocoa & by-products

Major import sources:

  1. US 42%
  2. China 9.2%
  3. Venezuela 5.6%
  4. Trinidad & Tobago 4.5%

Economic Policies

The DR Government constantly mentions the need to increase revenues in order to reduce the fiscal deficit, definitely neglecting to mention expenses. However, for a Government whose expenses are 85% current expenses and a merely 15% of capital expenses, there is a general consensus that this should be the priority.

The submission and approval of an expansionary budget for 2018 supported by external financing seems to confirm that the Government has no real intentions of properly addressing the fiscal deficit for now. The prevision for expenses increase by 10.5% is a worrying sign that despite consecutive deficits over the years and endless proofs of resources squandering, the current government has no real plan to set the house in order. With Presidential elections looming ahead (2020), it could be said that the deficit will only increase in the short term.

Since 2012, the Medina Administration has maintains its borrowing and spending patterns. As a result, the Non-Financial Public Sector public debt (all Government entities except the Central Bank) has increased 25.66% in the last 3 years. In 2017, the DR Government dedicated 23% of its fiscal incomes to interest payment, and it is projected to reach 22% in 2018.

Inflation, which had been quite low over the last years, ended 2017 at 4.2%, well above the 1.7% achieved in 2016. The DR Central Bank increased its policy rate in March 2018 to 5.75% for the second time over the last 7 months.

The 2018 DR Government Budget is DOP$814b (approx. US$16.4b), a 14% increase over the 2017 Budget. It includes increased funds for education, public health, public safety and social programs. This budget estimates a fiscal deficit of 2.2% of GDP, and lays out a plan to issue US$1.9bn in Sovereign bonds on international markets to partially compensate for this deficit and cover payment of older debts.

As it has been the norm over the last years, the announcement of the 2018 Government Budget once again raised red flags in regards to the burden of the debt and the diversity of subsidies on the country’s finances. Another worrying sign, according to economic analysts is the budgeted increase of 10.5% in Government expense, considering there has been 10 consecutive years of fiscal deficits.  

Foreign Direct Investment & Trade

The stats from the Dominican Central Bank up until 2016 show Canada as the 2nd largest all-time foreign investor in the country (USA being 1st), with a total cumulative investments of US$5.94 billion. Canadian investments are mostly concentrated in mining, financial services, manufacturing, tourism, renewable energy and agriculture.

A large share of the Canadian investment was made by Barrick Gold and Gold Corp, which have invested in the Pueblo Viejo mining project. Barrick Gold and Gold Corp’s investment is the single largest foreign investment in the Dominican Republic.

The DR received US$3.6bn of foreign investment in 2017 according to the Dominican Central Bank, a 45% increase over 2016. The country had received US$2.4bn in FDI in 2016.

The DR exported US$10.1bn worth of goods in 2017, up from US$9.8b in 2016. Gold export (from the Pueblo Viejo project), reached US$708M in 2017, maintaining its status as a key export since 2013. Imports also grew in 2017 to reach US$17.7b, placing the country’s trade deficit at US$7.6b, slightly lower than in 2016.

Trade Agreements and Canadian trade with Dominican Republic

Membership in trade agreements and other multilateral agreements: The DR is signatory of DR-CAFTA, the Free Trade Agreement between the US, 4 Central American Countries and the Dominican Republic. DR-CAFTA entered into its 10th year, providing duty-free or preferential tariffs to many products from member countries. The Dominican Republic also has an Economic Partnership Agreement (EPA) with the EU since 2008. The EPA is a more comprehensive agreement than a Free Trade Agreement (FTA), and has created better market access conditions to the EU market for Dominican products, and vice versa.

On December 2007, the DR started negotiations for a FTA with Canada. However, the negotiations were disrupted because of unexpected changes proposed by the DR to the original scope and nature of the agreement. After several failed attempts by Canada to try to re-engage the DR into the originally discussed agreement, negotiations reached a dead point and have not moved forward since.

As Canada does not have a FTA with the DR, Canadian companies are less competitive in the DR as the tariffs are lowered every year with the United States and European Union. An FTA would be instrumental for Canadian companies to re-gain, keep or improve their market shares in the DR.

The Dominican Republic is a member of many multilateral institutions including: WTO, WCO, ACS, ECLAC, G-77, IADB, IMF, OAS, UN, and the Central American Common Market, among others.

On April 30, 2018 the DR announced the establishment of Diplomatic Relations with China, while breaking up a longstanding and very cooperative relation with Taiwan. The announcement was received with optimism by the business community, claiming that China represents a large potential market for DR exports and tourism. China is the second source of DR imports with over US$2bn a year, but Dominican exports to China are limited. Following the announcement, DR officials have said that both countries are preparing several bilateral agreements for mutual benefits.

Main Canadian exports to the DR: Canada exported C$165.8 million of goods to the DR in 2017. The main exports from Canada were: wheat, smoked herring, paper, fertilizers and medicaments. With regards to services, Canada has a strong presence in the financial sector, as well as in tourism, and consulting services.

Main Canadian imports from the DR: Canada imports from the Dominican Republic were C$1.22 billion. This high value is attributable to the gold imported from Barrick Gold/Gold Corp’s project in the Dominican Republic, which totaled C$919.3 million. Other key imports were silver, medical supplies, electrical and electronic components, cocoa and textiles.

Canadian tourism to the DR kept a steady increase of close to 10% over the last 2 years, reaching 828,000 Canadians visiting the country in 2017. Tourism generates large economic activity in the DR, which directly benefits local suppliers of several products and services. Canadian investment in the Tourism sector has been growing as well, with investments in resorts, tour operators, hotel supplying companies, and small restaurants.

Sources: Embassy of Canada in Dominican Republic, EIU, Strategis, Statistics Canada, Dominican Central Bank

Overall Business Environment

The Dominican Republic economy has 4 main pillars: tourism, free zone manufacturing, remittances and mining, all of which are very dependent on the American economy, and to a lesser extent, on the European economy. The country’s economy has achieved steady growth in the last decade but studies suggest that this growth has not reached all socio-economic levels and has done little to reduce poverty. The Medina administration has focused on small agricultural producers by financing them to allow them to modernize and add value to their production. This Program has helped hundreds of small producers throughout the country.

The DR is a net importer of finished goods of many kinds. Imports have increased considerably in the last 5 years, partly as a result of the DR-CAFTA. In the case of exports, the bulk of Dominican exports come out of the free zones and the mining sector, with agrifood also being an important contributor.

The Pan-American Odebrecht corruption scandal has strong ramifications in the Dominican Republic where the Brazilian company developed several projects between 2012 and 2016. Confessions of the company in its home country revealed bribes for at least US$92M to DR Government officials, and hundreds of thousands of dollars in overvaluations of works. The omni-presence of Odebretch in all the relevant Government infrastructure projects during those years made many countries wary and discouraged companies from other countries to even participate in international bids. The fact that the DR Government progress on this file has been slow in the prosecution of officials involved, like other countries have experimented, has enhanced an environment of distrust in Government procurement transparency among local and international business. 

Per capita GDP (at PPP) has increased roughly 30% in the last 5 years, ending 2017 at US$16,182. Private consumption grew 4.3% in 2017, keeping the growing trend of the last 3 years. Consumption patterns of Dominicans often contrast with the country’s low per capita GDP (especially in urban centers), with considerable amount of money being spent in non-essentials. Mid-to-high socioeconomic sectors have a preference for import products over the local ones.

Electricity supply has been a longstanding problem in the DR, and is still nowadays a key issue affecting business costs, security and competitiveness. Even though there has been considerable improvement in many regions of the country through large investments by Government and private sector, the DR’s electrical system keeps being unreliable, and daily blackouts are counteracted by businesses and individuals with their own emergency generators. In order to cover the losses of the system (mainly fraud and technical losses) the Government has to subsidize the energy distributors with hundreds of millions of dollars each year, which seriously affects its capacity to make other much-needed investments in the country.

Business legislation has made significant progress in the Dominican Republic, with significant improvements in tax reporting, customs procedures, banking supervision, and in the law regarding the constitution of commercial companies, among others. However, there are improvements to be made in other areas. Rule of Law is far from ideal, and Administrative Discretion is often used by Government officials in of all ranks. It is recommended that Canadian companies wishing to enter the Dominican Republic market seek legal advice before entering into a formal agreement with a local counterpart, be it private or public.