Geoffrey Gottlieb of Goldman Sachs comments on the Dominican Republic’s current state of play in the economy, negotiations with official sector creditors and its pressing financing needs. To begin, Gottlieb predicts that the DR will resume its agreement with the IMF. He highlights how bond prices have rallied impressively since July, reflecting a general improvement in the perception of emerging markets bonds, as well as a lower risk in the case of DR bonds specifically.
He also comments that another part of the story are the fairly positive economic indicators that have emerged in recent months and suggest the Dominican crisis will be relatively mild by emerging market standards. Gottlieb says the DR’s economy should continue to recover.
Regarding the indicators, Gottlieb points out that real GDP growth actually increased by 0.8% during the first half of the year. He writes that, barring any unforeseen events on the debt front, a growth of at least 3% is likely by as early as 2005. Furthermore, he says the external accounts have gone from a deficit of 3.7% of the GDP in 2002 to an expected surplus of 7.4% in 2004. Nevertheless, he points out that while there has been significant import compression, there has been a rather modest export response that reflects the fact that 80% of exports (from free zones) operate entirely in dollars and are thus more immune to changes in the real exchange rate.
Another positive point is that capital flight has subsided, a fact that has allowed a substantial strengthening in the exchange rate. The peso’s appreciation is of benefit to the government, as it requires fewer pesos to pay its foreign debt and dollar-denominated obligations, such as fuel imports and debts to the electricity sector.
Gottlieb also points out that inflation has now fallen to near single digits on an annualized basis, and that the quasi-fiscal deficit resulting from the issuance of 12% of GDP in Central Bank certificates appears to be lessening.
“In general, the crisis has not been as deep as witnessed in other emerging markets and economic indicators are almost uniformly pointed in the right direction,” he writes.
In terms of challenges ahead, he describes two areas where matters are most pressing: the banking and electricity sectors. He writes that the banking sector is severely undercapitalized and has relied on its surplus liquidity so far. He describes the electricity sector as an implicit liability of the government that will need substantial regulatory improvements and a significant cash injection in order to operate effectively.
For the complete report, see http://www.dr1.com/news/2004/101204_gs.pdf