Coming out of a pandemic year, the Dominican Republic is posting a notable accumulated average of 12.4% for the first 10 months of 2021. The inter-annual variation for October is 9.7%.
Central Bank Governor Hector Valdez Albizu held a virtual press conference on 30 November 2021 to report that the expansion of the Dominican economy has been higher than expected. The Central Bank is updating its forecast for GDP growth by year’s end to a record 11% that places the Dominican Republic as one of the fastest-growing economies in Latin America and one of the countries with the best relative performance when comparing the levels of economic activity in 2021 to pre-pandemic 2019.
The Central Bank Governor said: “I am confident the outlook for the Dominican economy will positive, driven by the strong recovery of private investment and public-private partnerships. He spoke of the strong support of the Abinader administration to the productive sectors. In addition, there has been an acceleration of public investment, a trend that is expected to continue in the coming year as public spending in infrastructure increase. The Central Bank is also bullish on growth of GDP for 2022.
Valdez Albizu said that external inflationary pressures have been more persistent than anticipated, due to the increase in commodity prices, disruptions in supply chains and the rise in freight and container costs, as well as international geopolitical problems that have affected trade. This 2021 domestic inflation is at 7.72% and interannual core inflation at 6.31% at the end of October.
He said for this reason the monetary authorities increased the monetary policy rate by 50 basis points, from 3.00% to 3.50%. The measure seeks to bring inflation to the target range of 4% ± 1% in the second half of 2022 and to keep economic agents’ expectations anchored.
The Central Bank shared the Bank of America’s positive assessment of the country delivered in a report published on 29 November 2021: “We consider that the Dominican Republic is probably the Latin American economy with the most promising macroeconomic outlook for the coming years.”
Valdez Albizu explained the two-stage normalization plan. In the first stage, since August 2021, the resources disbursed by the financial intermediation entities during the pandemic have begun to return in an orderly and gradual manner. Companies and households are amortizing the installments of the loans granted through the different liquidity facilities.
In a second stage, to maintain price stability, the Central Bank decided to increase its monetary policy rate by 50 basis points (bps). Other Latin American central banks have taken similar steps. The regional increases have been: Brazil (575 bps), Paraguay (325 bps), Chile (225 bps), Peru (175 bps), Uruguay (125 bps), Mexico (75 bps) and Colombia (75 bps).
Additionally, the Governor of the Central Bank stated that the US Federal Reserve began the gradual withdrawal of its monetary stimulus, reducing the pace of monthly purchases of treasury bonds among other assets, to prepare the ground for the normalization of the interest rate, foreseeing possible hikes in 2022 and for inflation to gradually return to the average target of 2.0%.
The Central Bank highlights that the US economy has experienced inflationary pressures. US inflation was 6.2% in October 2021, the highest in the past 31 years, tripling its target of 2.0%. Valdez Albizu also emphasized that the Euro Zone recently published its inflation rate, which stands at 4.9% in November 2021, the highest in the history of this bloc of countries.
Governor Valdez Albizu pointed out that the monetary authorities considered that the growth of loans to the private sector in local currency is around 10% and that the financial system has sufficient liquidity levels, a fact that was highlighted by the Asociación de Bancos Múltiples (ABA), which would allow it to meet the future demand for credit, expected to increase between 8% and 10% during 2022, according to the monetary program. The Central Bank expects inflation to gradually approach the target by the second half of 2022.
Valdez Albizu says that the recent increase in the monetary policy rate will not affect the interest rate conditions of the loans still in force that were granted through the Central Bank stimulus facilities and windows and were disbursed at rates of no more than 8.0 % with fixed for three years in most cases, benefiting the productive sectors, households and micro, small and medium-sized enterprises (MSMEs), to mitigate the adverse economic impact of the COVID-19 pandemic, which have been decisive in the process of economic recovery.
The Central Bank gave details on the performance of economic sectors during January-October 2021 period. The sectors that registered the most significant year-on-year variations with respect to 2020 were: hotels, bars and restaurants (36.1%); construction (24.9%); free zone manufacturing (21.9%); transportation and storage (13.2%); commerce (11.3%); local manufacturing (10.9%); mining and quarrying (5.4%) and other service activities (5.0%).
The value-added of the construction activity in the first ten months of the year 2021 is due to the dynamism in building housing projects, the expansion of the installed tourist capacity, and execution with public capital of initiatives for the reconstruction and maintenance of road infrastructure and urban improvement.
In the export free zone manufacturing sector, exports were US$5.96 billion from January to October, for an inter-annual growth of 23.2%. On the other hand, the local manufacturing industry continues to increase its production volumes, mainly in oil refining activities, manufacture of base metals, construction inputs, manufacture of alcoholic and non-alcoholic beverages, and tobacco products, among others.
The Central Bank reports that trade and transportation showed a notable rebound in their value-added in January-October 2021, with increases of 11.3% and 13.2%, respectively. This performance reflects the dynamism in land passenger transportation and in the distribution and commercialization of locally produced and imported goods in the economy.
The tourism sector presented a cumulative increase of 36.1% in terms of real value added from January to October 2021 period. This inter-annual result is evidenced by the outstanding flow of non-resident passengers that entered the country over the year. In October alone, 443,016 non-resident visitors arrived by air, 70,811 travelers (19%) more than those who came in pre-pandemic October 2019. Such performance allows projecting that the arrival of non-residents will be around five million visitors in 2021, a significant achievement for the country.
The official unemployment rate has maintained a downward trend this year, decreasing from 8.0% in January-March 2021, to 7.6% in the second quarter, to 6.8% in July-September. By the end of 2021, it is expected to be close to the average value of 6.2% in 2019.
In addition to the better-than-expected recovery of tourism, remittances and domestic and free zone exports continue to show significant dynamism, with annualized growth of 3.1%, 6.0% and 9.1% in October, respectively. Foreign direct investment (FDI) has remained in line with its historical average. FDI registered US$2.33 billion during January-September and is expected to reach US$3.0 billion by the end of the year.
As reported, the external sector’s performance has been remarkable throughout the year and foreign exchange flows have contributed to exchange rate stability, such that at the end of October, the Dominican peso showed an appreciation of 3.1%, contrary to the currencies of most Latin American countries. The inflow of foreign currency resources has allowed the accumulation of international reserves, which reached US$12.50 billion at the end of October, equivalent to 6.3 months of imports and 13.4% of GDP, above the traditional metrics of three months of imports and 10.0% of GDP, recommended by the International Monetary Fund (IMF).
According to data from the Superintendency of Banks, financial intermediation entities recorded RD$348.89 billion more assets as of 31 October 2021 for an inter-annual growth of 15.2%, while return on equity (ROE) and return on average assets (ROA) was 21.2% and 2.3%, respectively. Likewise, the loan portfolio delinquency rate was only 1.4%, with provisions covering 329.4% of its past-due portfolio, evidencing a low level of risk for the financial system’s loan portfolio. As of October 2021, the banking system’s solvency ratio stands at 19.6%, well above the 10% required by regulation.
Commercial banks that are 87.8% of the national banking system presented solvency of 17.3%, a return on equity of 23.3% and on assets of 2.3%. The delinquency rate of the loan portfolio was 1.4%, equal to the average of the financial system as a whole, with provisions covering 352.2% of the past-due portfolio, which shows that commercial banks continue to be stable and with strong capitalization.
Valdez Albizu shared as positive news that, during the Black Friday offers, comprised between November 25 and 28 of this year, an amount of RD$8.40 billion was transacted using credit and debit cards, for a growth of 20.1% with respect to 2019, that is, the pre-pandemic period, and of 7.8% for the same period in 2020.
The Central Bank explains that the adequate implementation of the national vaccination plan has positively impacted the economy. 77 % of the adult population has one dose and more than 64% have two doses as of November 2021, one of the highest vaccination rates in the region. The Central Bank says the forecast is that 70% of the target population will have the two doses by the end of this year. The Central Bank praised the extraordinary job done by the Health Cabinet presided by Vice President Raquel Peña.
The monetary authorities speak of the remarkable resilience of the Dominican economy and highlight the significant reactivation shown by domestic demand in the face of an uncertain and challenging international environment.
The Central Bank points out that global monetary and fiscal authorities remain alert to the effects of the health crisis, now with the threat of new variants of the coronavirus, such as the recently discovered omicron, which could affect the global recovery in terms of economic growth and employment. The Central Bank observes that the Chairman of the US Federal Reserve (FED), Jerome Powell has stated that if the problems in supply chains intensify, this could exacerbate the factors that drive inflation upwards.
The Central Bank concludes that it will continue to evaluate the persistence of exogenous shocks on domestic inflation to take all the necessary monetary measures in a timely manner to keep economic agents’ expectations anchored.
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1 December 2021