Country Report Dominican Republic June 2008

Summary

Despite winning a first-round victory by a comfortable margin in May, Mr Fernandez will enter his third term in a weaker position than in 2004, due to lingering discontent over corruption and slow socioeconomic progress.
The ruling PLD will have a comfortable majority in both houses of Congress until the mid-term 2010 elections, but weak party discipline will slow progress on Mr Fernandez's modernisation agenda, which includes constitutional reforms.
Economic policy is likely to be orthodox and market-oriented, prioritising fiscal consolidation and improvements in the financial sector, energy sector and governance.
We expect economic policy to be backed by a new IMF programme after a stand-by arrangement expired in January, but this might be of a precautionary nature as the government seeks to eventually graduate from Fund tutelage.
As GDP growth slows, from 8.5% in 2007 to 4.7% in 2008 and 4.1% in 2009, and oil prices remain high, fiscal consolidation will become more difficult.
After overshooting the 6% target ceiling in 2007, we expect inflation to be in double-digit levels for much of 2008 before easing slightly in 2009, although it will still be above the target ceiling.
The exchange rate is set to weaken as the current-account deficit widens, but our forecast assumes the adjustment will be gradual.

Mr Fernandez won his third presidential term on May 16th in the first round, with 53.8% of the vote.
Monthly inflation figures released days after the election by the Central Bank show a rise of 1.88% in prices in April, bringing the 12-month rate to 10.9%.
The government has vowed to continue costly subsidy programs designed to bring down food and fuel prices, in spite of the increased pressure on the fiscal budget.
Mr Fernandez and the government now face the difficult challenges of reining in spending and fighting rising inflation as external economic conditions weaken.
Members of the business community have publicly called on the government to improve the quality of spending and are promoting public and private initiatives to spur development.