Jose Luis de Ramon of Grant Thornton told his audience speaking at an American Chamber of Commerce breakfast event that the main reason for the peso’s recent appreciation is that the supply of dollars is up at a time when the demand for dollars is low in the Dominican Republic. He explained that monetary emissions are under control and that there has been a reduction in bank lending as well as a commercial surplus given the competitiveness of exports. Meanwhile, the nation has faced down a recession and, because the government has accumulated arrears on the payment of its foreign debt, there has been a net flow of US$391 million. Furthermore, de Ramon attributed the local currency’s upward climb to the confidence generated by the new government and expectations for a resumed agreement with the IMF.
Monetary emissions went from RD$75 billion in August 2004 to RD$72 billion in November 2004, returning to the same level as when the Mejia government lost the election in May. He mentioned that the “errors and omissions” account in the Balance of Payments reported by the Central Bank dropped 69%. This account usually reflects money in circulation not backed by reserves, known here as “inorganicos.”
He explained that internal demand is expected to be 11% less than it was in 2002 and commercial banks are lending less. He furthermore said that the loans portfolio of commercial banks in 2003 stood at RD$141 billion, but descended to RD$130 billion in September 2004. He cited the reason for this as being the implementation of new banking rules that were stricter and more prudent and the fact that the high-yielding Central Bank’s certificates of deposit are a risk-free and easy investment instrument, preferred by the banks over dealing with individual clients.
The country has enjoyed a surplus of the current account with the higher exchange rate providing an incentive for remittances, which had risen 6.5% by September 2004, and the export of goods and services. In 2002, the current account showed a deficit of US$798 billion, but by 2004 it had been converted to a US$1.3-billion surplus.
“The appreciation of the peso has surprised even the most optimistic,” he said during the breakfast meeting held at the American Chamber of Commerce in Santo Domingo yesterday. From a RD$48-to-US$1 rate in June of this year, the dollar now commands a much lesser rate of RD$29 ? a level last seen in June 2003.
Interestingly, De Ramon said that while confidence has grown in the new government, contrary to what has been stated, there has not been a significant return of flown capitals. He explained that deposits in dollars and pesos in banks increased more during the May-August government transition period than during the first months of the new government.
Deposits for March-May represented US$420 million, from June-August they stood at US$701 million and from September-November they were put at US$283 million.
De Ramon explained that the increase in the Central Bank reserves has contributed to an upswing in confidence. He informed that from July to the present time, there has been an increase in net reserves of US$247.4 billion, which is 3.5 times the amount of reserves held in January 2004.
He felt that the dollar is reaping fewer pesos because the supply will continue to exceed the demand over the next few months and mentioned the US$1 billion in disbursements that will come with the December or January signing of the IMF agreement, the approval of the fiscal reform that provided the government with additional funds, the receipts of incoming dollars in insurance payments following Hurricane Jeanne, plus the normal rise in US dollars that accompanies the thousands of visitors arriving for the holidays.
The speaker said he didn’t feel that the peso’s new valuation was sustainable, however, and expected the dollar to perform a recovery on domestic markets by March 2005. He said that the currency appreciation has contributed to a weakening of Dominican goods’ and services’ ability to compete at a time when costs such as electricity, wages and taxes are burgeoning. He predicted that internal conditions would exert pressure on the exchange rate in 2005 and felt a lower exchange rate would stimulate an increase in imports, while the lost competitive edge would result in fewer exports. He also attributed this to the payments the government must make on its accumulated foreign debt, including the cost to buy back the power distribution companies.
http://www.dr1.com/news/2004/120104_GT.ppt