Set Course for Prosperity

Set Course for Prosperity

REFORM ON THE MIND

In response to the enormous challenges faced by the region and the wider world in the wake of the 2008 crisis, the Dominican Republic has sought to act as pragmatically as possible to alleviate the negative effects suffered. Impressive growth throughout the mid-2000s was impeded by the catastrophic consequences of the emergency. Meanwhile, significant trade with countries such as the US, guaranteed by NAFTA and CAFTA-DR, was hampered, and continues to suffer due to a generally slow recovery. Added to this is the definite rise inexternaldebt stocks, from $7.7 billion in 2005 to a disquieting $16.8 billion in 2012. Dominican exports as a percentage of GDP dropped sharply from 42.3% in 2004 to just 22.2% in 2009. This has leveled out in subsequent years, as the government embraces proven policies that will offset challenges and establish a more diversified economy.

BRING IT ON

Firstly, Law 16-95 guarantees equal treatment for Dominican investors and those from overseas. The only limitation on FDI activity in the country is for hazardous waste disposal and storage, or any operations that could adversely affect the population. The free repatriation of dividends and capital is another major incentive, with everything available to be remitted abroad in a foreign currency at the end of the fiscal year. The National Export Free Zone Council manages and supervises this key sector that has been the target of a significant share of invested foreign capital in recent years. Specific incentives for industrial, services, border, and special free zones include a 15-year exemption from income tax payment, as well as the bulk of other particular tariffs on exports, re-exports, and myriad costs related to equipment and property. There is also a 50% reduction on transit charges and port and airport fees. These trade-friendly policies have provided ample motivation for international firms interested in working in the country.

A CHANGING DYNAMIC

The Dominican Republic has traditionally been an exporter of sugar, tobacco, and coffee, but agriculture has been largely replaced by expanding tourism, the free trade zone (FTZ) segment, and ICT, while remittances from Dominicans living abroad comprise 5% of GDP. In 2013, 4.69 million non-residents arrived by air, representing growth of 2.7% YoY. Successful beach resorts such as Punta Cana drive the sector, and heavy investment from Spanish firms, among others, is expanding the hospitality offering around the coast. Medical tourism, in particular, has grown as a result of the cutting-edge technology and unrivalled quality of human resources available for cosmetic surgery and dentistry, as well as other segments.

Efforts to establish the country as a regional ICT hub are being pursued actively, and the “eDominicana” concept, a form of e-government, is aimed at switching business and government online with areas such as health, culture, justice, and commerce being prioritized. This will encourage SMEs, which already constitute an important part of the economy. Crucially, the nation’s FTZs, scattered across the nation but concentrated around Santo Domingo and Valverde provinces, are stimulating strong growth. Manufacturing, specifically of medical devices and clothing and textiles, makes up a significant proportion of FTZ production in the country, and the benefits of setting up operations here not been lost on investors. Total investment in FTZ companies grew by 7.6% YoY in 2012, with almost half of this coming from the US. Medical and pharmaceutical products represented 19.6% of this investment, tobacco and related products 16.2%, while the production of garments and clothing, encouraged by FTAs with the US, amounted to 25.3% of the overall figure.

Dominican exports to the US were valued at $4.3 billion in 2013, while imports from the latter were $7.2 billion. As the 38th export market for US goods in terms of size, the positive effects of FTAs such as CAFTA—DR are showing that even with a generally sluggish economic recovery on the part of the larger partner, trade between the two countries is maintaining impressive figures. US FDI in the Dominican Republic grew from $1.5 billion in 2011, to $1.7 billion in 2012. The CAFTA—DR market is the third largest for the US in Latin America, and the agreement has been particularly helpful for the garment manufacturing industry, which was facing heavy competition from Asian rivals. Other popular areas for foreign investment have been ICT, tourism, and mining.

NOT ALONE

In other areas, the government and the Central Bank have made broader attempts to bridge the current account deficit that is, unfortunately, holding the economy back from the promising growth potential it once showed. In conversation with TBY, Juan Temí­stocles Montás Domí­nguez, Minister of Economy, Planning, and Development, hinted at some of these. “In order to maintain macroeconomic stability, the authorities approved a budget that reduced government spending and the deficit and passed a tax reform to raise revenues and keep public finances on the right path.” The effects of a tax reform package from November 2012 and notable reductions in government spending are showing, and though the deficit still exists, these strategic choices offer the nation a chance to make its fortune. In late 2012, Fitch revised its Dominican Republic outlook to stable. Then, the 2013 budget stipulated a reduction in state spending to less than 3% of GDP, a marked saving compared with the 2012 budget’s 6.6%. In addition, the government placed bonds in 2013, which have allowed for the financing of some of the deficit. In 2Q2013, $1 billion in 2024 bonds with a 5.87% coupon were issued, followed by a $500 million bond in October of the same year.

The Dominican economy has weathered the enormous challenges posed by the past decade’s global economic turmoil. While some issues remain, an adroit and experienced leadership is guiding the nation toward renewed and sustainable growth guaranteed by its diversified production matrix and advantageous free trade policies. As it overcomes hurdle after hurdle, those tasked with navigating the natural challenges that smaller island economies face can take solace in the knowledge that they are not alone, and that their counterparts throughout the Caribbean will not be far.