Country Report Dominican Republic April 2009

Outlook for 2009-10

• MrFernandez's popularity has held up, but his position will weaken amid growing discontent over corruption and sharply deteriorating economic conditions, raising the prospect of increased protests and unrest in 2009-10.
• The PLD's legislative programme will focus on plans to stimulate the economy and push through long-delayed constitutional reforms before the mid-term elections in 2010 dominate politics.
• The administrations ability to meet its macroeconomic and fiscal policy goals will be limited by a severe economic downturn and structural weaknesses in the government's accounts.
• Tight financing conditions will limit government spending in 2009, reducing the central government deficit to 1.8% of GDP, but still lifting public debt/GDP to 40%. Increased spending in 2010, an election year, will lift the deficit to 2%.
• Given the forecast for a stronger US contraction and tighter fiscal and financing conditions, we now expect that GDP will contract by 1.2% in 2009 (previously 1%). Recovery will be slow as GDP grows by 2.2% in 2010.
• Annual inflation will continue to fall in early 2009, but will end the year just above 7% as the peso depreciates. Inflation will average 8.5% in 2010.
• Risks to our projection of a weakening of the currency in the outlook period are weighted on the downside, given the magnitude of the Dominican Republic's external financing requirement and adverse global conditions.
• As import costs decline on the back of lower oil prices in 2009 we forecast a reduction in the current-account deficit to 4% of GDP. Weak export earnings and stronger import prices in 2010 will lead to a deficit of 5.2% of GDP.

Monthly review

• Recent polls show that Mr Fernandez has managed to maintain his popularity at the same level that secured his re-election in 2008.
• Corruption and crime are eroding confidence. The World Economic Forum's global competitiveness index has ranked the Dominican Republic 129th out of 134 countries for corruption and 131st for wasteful government spending.
• The Central Bank now estimates that the NFPS deficit reached 3.5% of GDP (previously 3%), with a primary deficit of around 2% of GDP (down from a 2.1% surplus in 2007).
• GDP growth slowed in 2008 to 5.3% (compared with 8.5% in 2007), but held up better than expected, underpinned by increases in private consumption.
• Preliminary results show that the current-account deficit reached a record US$4.4bn or 9.6% of estimated GDP in 2008, as export earnings fell by 3%.