Country Report Dominican Republic June 2009

Outlook for 2009-10

• The authority of the president, Leonel Fernandez, will weaken amid growing discontent over corruption and sharply deteriorating economic conditions, raising the prospect of increased protests and unrest in 2009-10.
• Legislation will be centred on pushing through long-delayed constitutional reforms and plans to stimulate the economy before the mid-term elections in 2010 begin to 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 mean government spending cuts in 2009, reducing the central government deficit to 2% of GDP, but lifting public debt to 43.7% of GDP. The deficit will remain at 2% in 2010.
• The worst of the US recession may now be ending but the collapse in global trade and declining domestic demand will cause Dominican GDP to contract by 2.5% in 2009. Recovery will be slow as GDP grows by just 2% in 2010.
• Annual inflation will continue to fall through most of 2009, turning negative for a few months, but will end the year at 5.6% as the peso depreciates. Inflation will average 7.2% in 2010 owing to higher commodity prices.
• We expect an adjustment in the currency, given the magnitude of the external financing requirement and adverse global conditions, and anticipate a real depreciation of 4.6% in 2009 followed by a slight further depreciation in 2010.
• Weak export earnings and remittance inflows will lead to a current-account deficit of 5.3% of GDP in 2009, despite a fall in import spending on the back of lower oil prices. This deficit will rise to 6.5% in 2010 as import costs increase.

Monthly review

• The constitutional reform process has thus far been bogged down in debate on social issues, highlighted ideological rifts among legislators.
• A surprise political pact was agreed in late-May by Mr Fernandez and the PRD's Miguel Vargas Maldonado. The pact covers seven reforms and would disallow consecutive re-election while permitting non-consecutive re-election.
• The Central Bank decided to maintain interest rates in May, halting a series of rate cuts that began in December and have come down from 9.5% to 5%.
• Annual inflation hit 0.7% in April and is likely to turn negative in the coming months as domestic demand continues to fall.
• Preliminary figures show that exports declined by 23.4% in the first quarter of 2009 compared with the year-earlier period.

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22