Feb. 4, 2015


Héctor Valdez Albizu

Dominican Republic

Héctor Valdez Albizu

Governor, Central Bank of the Dominican Republic

BIO

Héctor Valdez Albizu was born in 1947 and graduated in Economics in 1971 from the Autonomous University of Santo Domingo. He began his career at the Central Bank of the Dominican Republic (BCRD) in 1970 as a Technical Assistant in the Economic Research Department. Having risen through the ranks, he first became Governor in 1994. He was reconfirmed in that office in August 1996 by the then President Leonel Fernandez Reyna, and appointed Cabinet Minister, occupying that position until August 16, 2000. Again, on August 16, 2004, President Reyna, appointed him Governor of the BCRD. He was reconfirmed in the role in 2006, 2008, and 2010, and again in August 2012 by the new President, Danilo Medina.

Foreign Direct Investment (FDI) in the Dominican Republic has increased in 245.5% in the last decade. What factors drove that expansion and what are the sectors with the greatest potential?

FDI, over the last decade, went from $ 7.684 million in 2004 to $26,549,000 at the end of 2013, an increase of $18,865,000, an increase of 245.5% in 10 years. This significant increase represents an average annual flow around $ 2,000 million. The main factors that have influenced this increase in FDI are:

• The country's macroeconomic stability characterized by sustained economic growth, low inflation and relative stability of the exchange rate and a healthy financial, liquid, solvent and well capitalized system.

• The FDI Act provides facilities and guarantees to foreign investors, equal to the Dominicans, which gives legal security, with clear rules and regulations with incentives for investors in different sectors.

• In addition, we have political stability and social peace, marked by a rule of law that prevails in free enterprise and democratic rule of long standing.

• The geographical location the country enjoys, and central proximity to the US, a feature that makes it an excellent destination for FDI.

• The country's participation in major trade agreements like DR-CAFTA, the Economic Partnership Agreement (EPA) with the EU, among others, makes us an investment destination that can take advantage of these agreements.

• The existence of an excellent road, port and airport infrastructure network, the latter with 8 international airports.

• A world class telecommunications system.

Diversification in target sectors of FDI is another factor that has contributed to the increase in investment flows. In 2000, four sectors, Electric energy, Telecommunications, Trade and Tourism, accounted for 82% of FDI. Thirteen years later (2013) the spectrum of sectors expanded, appearing with great preponderance additional sectors such as: Real Estate, Construction and Finance. Of the sectors, to our knowledge, that has great potential for future growths for foreign investment are mining, agriculture, energy and tourism.

What has been the impact of the normalization of the US monetary policy in the Dominican Republic?

Undoubtedly, the process of normalization of US monetary policy will influence in an increase of interest rates internationally, affecting capital flows and changing liquidity conditions that have operated in the international financial markets during years. The Dominican Republic is no exception to this international reality. However, we understand that the country is better prepared to face any effect arising from this situation, given the early stage of development of our capital markets and strong fundamentals of our economy, as evidenced in 2013 with the first indications of the Federal Reserve United States that would be a withdrawal of monetary stimulus. The behavior of markets, at that time, showed that internationally the Dominican economy is linked to the group of emerging economies with sound macroeconomic fundamentals, as is the case in Colombia, Chile, Mexico, and Peru in Latin America. In addition, several studies in international organizations like the International Monetary Fund (IMF) and the Inter-American Development Bank (IDB) suggest that the effects of this normalization would be different in two groups of countries in Latin America. For example, countries that in addition to the US as their main trading partner and have an incipient development of their financial markets, among which are Dominican Republic, tend to benefit more from the real effects of monetary normalization, given the highest economic growth in the US, what could be affected by the tightening of international financial conditions. However, the central bank remains aware of these events to react in time when the balance of risks points to possible deviations from its inflation target and thus take the necessary measures to ensure the maintenance of macroeconomic stability in our country.

What is your evaluation of the level of assets and deposits of Dominican banks in 2014?

As of August 2014, total assets of Financial Intermediation Institutions totaled Ps1,142,723 million, a nominal growth rate of 8.6% (an increase of Ps90.915 million), relative to the amount recorded on the same date the year before. If you compare this August to December 2013, assets totaled Ps54.074 million, ie 5.0%. This growth is mainly explained by the behavior of the loan portfolio, which in August this year totaled Ps667,927,000, a variation of 12.5%. Significantly, of the total loans of the financial sector, commercial banks concentrated 86.9%. Indeed, the loan portfolio of multiple banks totaled Ps586,693.2 million in August 2014, a variation of 12.8%. Meanwhile, public deposits in the financial sector in August 2014 reached a total of Ps935.674 million, an annual increase of 10.4%, equivalent to Ps87,762,000.

The domestic currency deposits grew faster compared to the same period of the previous year, 12.9%; while foreign currency deposits increased by only 3.6%. In August 2014, the share of domestic currency deposits in total deposits in the financial system was 74.6%, up 1.7 percentage ratio to that shown in August 2013 (72.9%) points, reflecting a decline in the share of foreign currency deposits, which went from 27.1% to 25.4% during the period. An important element worth noting is the fact that during the period August 2013 to August 2014, Financial Intermediaries decreased their exposure to credit risk by maintaining the downward trend in its NPL ratio, which went from 2.9% to 2.2%, driven by lower coefficients shown in commercial banks and savings and loans.

In particular, multiple banking delinquencies rates fell from 2.9% to 1.9% and provision coverage of nonperforming loans increased from 117.0% to 164.3 percent. Overall, the Dominican financial system has adequate liquidity, profitability and capital strengthening. The solvency ratio remained above the 10% minimum required, reaching 18.18% in July 2014, last available figure, while the return on assets (ROA) and average equity (ROE) for August was 2.02% and 18.33% respectively in the same month. Commercial Banks showed levels of 2.05% ROA and ROE of 21.45%. This behavior of the entities of the Dominican financial system is mainly due to the implementation of bylaws and regulations, by the Monetary Board, in line with the Basel core principles and international best practices.

In the recently celebrated Invest in DR Summit, the central bank estimated that the national economy would grow between 5.5% and 6% in 2014, quadrupling Latin American growth. What are the main growth drivers?

During the period January-June 2014, the performance of the Dominican economy as measured by Gross Domestic Product (GDP) in real terms (reference year 2007), recorded an annual increase of 7.2%. This trend allows forecasting growth for the year 2014 between 5.5% and 6.0%, higher than originally envisaged in the macroeconomic framework of a real GDP growth of 4.5%. The driving forces of economic growth expected for 2014 are agricultural, mining, construction, trade and hotels, bars and restaurants, due to the dynamism exhibited since late last year. In the case of Latin America, Consensus Forecast predicts average growth of 1.4% for 2014, figures that have been revised downwards during the year due to decreases in estimates of growth in several of the largest economies the region, such as Mexico, Brazil, Chile, Argentina and Venezuela. For the last two year changes in Real GDP at end-2014 of -1.6% and -2.6% respectively are forecast, reducing the average growth in the region.

What are the main policies the Central Bank is to implement in 2015 to boost investment and commerce?

The central bank's policies to encourage investment are aimed at ensuring macroeconomic stability, which the country enjoys. In this sense, from January 2012, the central bank adopted an Inflation Targeting Scheme as a transparent and modern way to make monetary policy, consistent with the mandate of maintaining price stability established in the Constitution of the Republic and the Monetary and Financial Law 183-02. Under this scheme, the central bank will continue its proactive and vigilant monetary policy of external and internal shocks that may affect its inflation target, maintaining proper coordination with fiscal policy, in order to promote certainty for economic operators and a climate favorable investment. Another important aspect is to ensure relative exchange rate stability under the managed floating exchange rate regime that the country possesses. For this, the central bank will continue to monitor fluctuations in the exchange rate, so that when sudden movements act are verified in the rate that may affect the expectations of economic agents, and ensuring that the real exchange rate, as so far, stay aligned with the macro fundamentals of the Dominican economy.

What's your general outlook for the economy of the Dominican Republic in 2015?

According to estimates of Macroeconomic Framework, the Dominican economy would grow at around 5.0% in 2015, with an inflation rate that point to the center of the target range of 4.0% ± 1% of the central bank. This is accompanied by a relative stability of exchange rate, since the strengthening of international reserves that are expected to hold a minimum of 3 months of imports of goods and services associated with larger flows of foreign exchange by the improved performance of the external sector. Indeed, in a preliminary way, the projections indicate that by 2015 deficit on current account is expected around 4.0% of GDP, and future estimates downward, in line with the historical average of 3.5%.

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