Country Report Dominican Republic October 2008

Outlook for 2009-10

• Despite winning by a comfortable margin in May elections Mr Fernandez is in a weaker position than during his previous term (2004-08), owing to lingering discontent over corruption, slow socioeconomic progress and rising prices.
• The ruling PLD has just a small window of opportunity to advance its legislative programme ahead of mid-term elections in 2010, when its majority in both houses of Congress will likely be reduced.
• The administration’s past record in meeting fiscal and other macroeconomic targets will help to maintain confidence in the short term; however, policy credibility will be quickly eroded if targets are not met in the outlook period.
• GDP growth in 2009 will decline to 3.4% from an estimated 5.5% in 2008 as external conditions worsen and domestic demand declines.
• As subsidies are slowly phased out we expect a primary surplus averaging 0.2% of GDP in 2009-10, after an estimated primary deficit of 0.6% of GDP in 2008 on the back of increased spending on the election and fuel subsidies.
• As import costs remain high on the back of high oil prices and continue to outpace export earnings we forecast current-account deficits of 7.5% and 6.9% of GDP in 2009 and 2010 respectively.
• We expect that price rises will begin to ease by end-2008 but annual inflation is likely to remain in double digits in the first half of 2009 before ending the year at 7.8% and averaging 7.2% in 2010.
• The risks to our projection of a steady weakening of the currency in the outlook period are weighted on the downside, given the magnitude of the Dominican Republic's external financing requirement.

Monthly review

• The PLD is preparing legislation that would amend the constitution in order to combine presidential and legislative elections and allow the possibility of a third, although non-consecutive, presidential term.
• Political patronage continues to compromise the PLD government's reform agenda, particularly with regard to professionalising the civil service.
• The Fernandez administration announced in late September that it would not sign a Post Programme Monitoring agreement with the IMF as previously expected.
• GDP growth in the first half of 2008 was a strong 7.5% on the back of robust domestic demand growth boosted by a major pre-electoral fiscal stimulus.
• The current-account deficit reportedly reached US$2.7bn in the first half of 2008, more than three times larger than in the year-earlier period.

Source: Country Report