Franco Uccelli, analyst for Bear Stearns, has sent out a positive note on improvements in the Dominican economy, based on inputs from the Central Bank’s third-quarter macroeconomic report. He concludes that the report shows that the country’s recovery “continues to consolidate around higher than expected growth and better than anticipated fiscal results.”
He states that the latest macro numbers reveal that both the country’s IMF quantitative performance criteria and indicative targets for the third quarter were met with relative ease. “The evidence also suggests that the Dominican Republic’s economic fundamentals remain very much on track to meet (and in many cases exceed) year-end targets,” he writes.
In his outlook on the Dominican economy, Uccelli states: “We remain bullish on the country’s medium term macroeconomic prospects. We also recognize, however, that a number of key challenges (passage of the government’s pending fiscal reform, sanctioning of next year’s budget, the effective implementation of CAFTA, compliance with the IMF program, the formulation of a plan to ensure the financial sustainability of the electricity sector) must be overcome for the latest gains to become more permanent fixtures of the Dominican Republic’s economic reality.”
In his report, Uccelli states:
* GDP growth – The Dominican economy expanded by a whopping 10.6% in the third quarter, boosting the year-to-date growth through September to 7.3%, compared with growth of only 1.3% recorded during the same period of 2004. The country’s robust levels of economic activity were largely supported by a 26% expansion in the communications and a 19% expansion in the commerce sectors, which together account for more than 28% of the Dominican Republic’s GDP. On the back of stronger than expected performance, the Central Bank has revised its growth forecast for the year as a whole to 6.6%, a bit lower than the 7% level that a number high ranking officials have telegraphed for some time now.
* Inflation – After dipping to negative territory between June and August, DR’s 12-month rate of inflation closed the third quarter at 4.2% before dropping to 4% in October. With the cumulative year-to-date rate running at 6.1% in September (and 7.3% in October), the Central Bank is now forecasting inflation to close the year at 9.4%, which would be down from last year’s 28.7% and in line with the stated goal to keep inflation in the single-digits. The main pressures on inflation are coming from the transportation, education and housing sectors.
* Monetary accounts – DR’s Central Bank credits the recovery in market and consumer confidence, which in turn were prompted by the implementation of effective monetary and fiscal policies, with the restoration of monetary stability in the country. Such stability has been characterized by a reduction in inflationary pressures, a decrease in benchmark rates (from around 26% earlier in the year to 14% at the moment), and a build up in net international reserves (which, excluding foreign currency deposits from commercial banks soared by 266% though the end of October). All of these outcomes were facilitated by careful management of the size of the country’s monetary base, which was consistently kept well below targeted ceiling levels. Despite a sizeable increase (+34%) in the stock of Central Bank certificates since the end of last year, we believe that the decline in interest rates should ensure that quasi-fiscal losses remain within the IMF program guidelines, which call for a quasi-fiscal deficit of no more than 3.2% of GDP for 2005.
* Fiscal accounts – The central government delivered an impressive performance in the nine months through September, recording a healthy 1.8% of GDP budget surplus, compared with the 5.2% of GDP deficit it registered during the same period of 2004. This was facilitated by a 25% increase in total government revenues compared with a more modest 7% increase in total expenditures. The government’s remarkable performance was replicated at the non-financial public sector level, where a US$200 million IMF deficit target for the first three quarters of the year was significantly outperformed by the US$300 million surplus that was recorded instead. While the pace of public expenditure will likely pick up during the last quarter of the year, we do not believe that believe that it will intensify enough to take the NFPS year-end balance beyond the current 0.8% of GDP deficit target. Indeed, we believe that given recent trends a balanced or close-to-balanced result can not be ruled out.
* External accounts – The US$900 million current account surplus recorded during the first nine months of 2004 gave way to a US$137 million deficit (equivalent to 0.7% of GDP) during the same period of this year. The more than US$1 billion swing reflected a sizeable increase in DR’s non-FTZ imports (FTZ imports actually decreased by US$80 million during the period), which soared by more than 37% from US$3.8 billion between January-September 2004 to US$5.3 billion during the same period of 2005. Total exports, on the other hand, rose by some US$200 million (+4.7%) during the first three quarters and their expansion was outpaced by higher growth registered by both tourism revenues (+14.2%) and remittances (5.1%). Although the government expects the external current account surplus to decline from 7.6% of GDP in 2004 to 1.6% this year, with the balance already in negative territory we believe that a small deficit (around 1% of GDP) will be the most likely outcome for this year. The behavior of DR’s external accounts during the first nine months of the year is consistent with its sharp recovery in economic activity and with the appreciation experienced by its currency during the first half of the year.
For the full Central Bank source document on the third-quarter macroeconomic results in Spanish, see http://www.bancentral.gov.do/