Country Report Dominican Republic August 2008

Outlook for 2008-09

• Despite winning by a comfortable margin in May MrFernandez will enter his third presidential term in a weaker position than in 2004, owing to lingering discontent over corruption, slow socioeconomic progress and rising prices.
• The ruling PLD will have a secure majority in both houses of Congress until the mid-term 2010 elections. Progress on energy sector and government efficiency reforms is likely in response to price rises and fiscal strains.
• As fuel and food import prices rise and subsidies are gradually removed, we expect inflation to be in double-digit levels for the rest of 2008 before easing slightly in the second half of 2009 and ending the year around 8%.
• We expect GDP growth to slow to 4.5% in 2008 and 3.8% in 2009 as higher than expected oil and food prices pressure private consumption.
• Our revised current-account forecast is for a deficit of 7% of GDP in 2008 (previously 6% of GDP), as import costs rise on the back of higher than expected oil prices. The 2009 deficit will be above 6% of GDP.
• On the back of the wide current-account deficit (averaging 6.6% of GDP in 2008-09), we expect the currency to weaken in the outlook period.
• Economic policy will be set by the government's economic team and monitored by the IMF. The new arrangement will be signed in August and will not entail the disbursement of funds or stipulate economic targets.

Monthly review

• Younger members of the political parties and business groups have called for reform of state institutions and an end to government waste as high oil and food prices put pressure on government accounts and the economy.
• Mr Fernandez's economic policy team and the IMF agreed to replace their expired stand-by agreement with an economic monitoring programme, whereby the IMF will track economic performance in an advisory capacity.
• Preliminary data for January-April 2008 show current revenue is strong, growing by 16.3% year on year, but a 31.2% rise in current spending has reduced the overall surplus by 82%.
• The government has announced plans to phase out both diesel and propane (LPG) subsidies by August. However, the fuel subsidies will remain in place for 24,000 public transport vehicles and up to 800,000 poor households.
• Driven by increases in the prices of foodstuffs and transport, the June consumer price index increased by 2.38%, the highest monthly rise since 2005. This puts annual inflation at 12.2%, well above the Central Banks targets.

Source: Country Report