Central Bank governor bullish on recovery of Dominican economy

The Governor of the BCRD Hector Valdez Albizu rendered an outlook of the Dominican economy to investors meeting for a videoconference on Central America and the Caribbean organized by the Bank of America Securities, the multinational investment bank.

Domestic and international bank and investor analyst groups have already forecast the Dominican Republic is on its way to recovery and is an ideal investment destination. During his virtual speech, Valdez Albizu reviewed the implementation of monetary measures to address the impact of the Covid-19 and provided key information on the Dominican Republic’s outlook in a regional context. He forecast the country will recover the fastest in the region from the crisis caused by the pandemic. He attributed this to the strong fundamentals in place and the country’s proven resilience.

Historic reduction in interest rate
In his presentation, the governor pointed out the reduction to a historical level of the monetary policy rate, down 150 basic points, from 4.50% to 3% annually. He also reported that the Dominican Republic has implemented the most extensive monetary stimulus plan in Central America and the Caribbean. He said RD$190 billion (more than 4% of GDP) was injected into the economy to counteract the major business shutdowns from March to July. This has contributed to boosting private credit, in addition to encouraging refinancing at lower interest rates and more favorable terms for debtors affected by the crisis. Some RD$144 billion have been disbursed to date to households and strategic sectors such as construction, tourism, manufacturing, commerce and MSMEs, benefiting approximately 54,000 credit recipients.

Price stability and the foreign exchange market
Valdez Albizu reported that accumulated inflation to September was 3.74%, while annualized inflation to September was 5%, influenced by temporary shocks in the production of some foodstuffs affected by the drought at the beginning of the year and then by tropical storms Isaiah and Laura. In that sense, he explained that the Central Bank’s forecast and the expectations of the economic agents indicate that inflation would converge to the center of the target range of 4.0% +/- 1.0% during 2021, granting enough space for favorable monetary conditions to boost domestic demand.

Among his assessments, the governor was emphatic in pointing out to international investors that “the BCRD does not expect additional exchange rate pressures, neither for the rest of 2020, nor for next year 2021, when foreign exchange generation activities will continue to improve.” Likewise, he highlighted the Central Bank’s active participation in the exchange market in these times of uncertainty due to the pandemic. He said the dynamism of remittances from abroad and the recent increases in exports have also been key to maintaining the exchange rate’s relative stability.

Sustained recovery trend
Regarding the economic reactivation, Central Bank Governor Valdez Albizu informed that in September, the interannual variation of the Monthly Economic Activity Indicator (MEAI) was -5.6%, registering a substantial improvement of 24.2 percentage points compared to -29.8% in April, that is, a decline five times less than the most critical economic moment due to the pandemic. He forecast the consolidation of the productive sectors as the economy continues to improve in a sustained manner, driven by the Central Bank’s flexibilization measures and in coordination with the government’s fiscal policy.

In this regard, Valdez Albizu described the Abinader administration efforts to promote foreign investment, foster a rapid recovery in tourism and underpin the implementation of key projects through Public-Private Partnerships. He mentioned new major initiatives, such as the Port of Manzanillo’s development as a logistics and foreign trade center for the entire northern region, and the Amber Road, an express link for Santiago de los Caballeros and Puerto Plata.

Valdez Albizu also spoke of the reactivation of public investment through the execution of other road infrastructure projects, including the Baní and Azua ring roads.

The implementation of these economic policies, together with the gradual normalization of tourism, will allow the process of economic recovery to accelerate during 2021, registering economic growth of more than 6.0%, greater than its potential, in a context of strong fundamentals and the maintenance of macroeconomic stability. “This is an economy in whose future we can bet and invest on its proven capacity for resilience,” said the governor.

External sector performs better than expected
Valdez Albizu indicated that the balance of payments shows the great resilience of the country. He highlighted the remittances’ dynamism that grew during October by 36.1% inter-annual and reached some US$6.64 billion during January-October. He also reported that free zone companies are operating at more than 90% capacity and that their exports increased by 9.8% during September. He expects year 2020 to close with a current account deficit of around 3.0% of the GDP. A 2.5% deficit of the GDP is expected for 2021.

On the other hand, he pointed out that direct foreign investment continues to flow into the country, reaching US$2.06 billion in January-September, an amount that allows for financing the current account deficit for more than two months. The Central Bank forecasts the year will close with foreign investment at around US$2.5 billion, same as the average for the last decade, reflecting investors’ confidence in the Dominican economy’s capacity to face the recent challenges successfully.

Optimistic with the project to modify the BCRD Law of Recapitalization

In view of investors’ interest on the advances in the process of modification of the Central Bank Recapitalization Law, Governor Valdez Albizu informed that the bill passed in the Senate and is expected to be reviewed in the Chamber of Deputies. Valdez Albizu says the bill is proposed as a fiscally viable solution to the Central Bank’s quasi-fiscal losses. The Central Bank proposes to capitalize these over a period of approximately seven years.

At the end of his presentation, Valdez Albizu told international investors that the public policies being implemented, together with the strength of the Dominican economy’s fundamentals, will contribute to the return in sustained growth, in a context of macroeconomic stability. In this sense, he urged international investors to continue to trust the Dominican Republic, an attractive, safe and reliable destination for investment.

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Central Bank

16 November 2020