Country Report Dominican Republic September 2008

Outlook for 2008-09

• Despite winning by a comfortable margin in May Mr Fernandez 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. Support for energy sector and government efficiency reforms will increase in response to price rises and fiscal strains.
• Economic policy will be set by the government's economic team and tracked by the IMF in a new monitoring arrangement.
• We have revised our 2008 GDP growth forecast up to 5.7% (from 4.5%), based on government claims that growth was 7.5% in the first half of the year and assuming that consumption growth has held up better than expected.
• Fiscal accounts are under pressure as a result of the supplemental budget (US$910m) aimed at dealing with high import prices and expensive subsidies to the energy sector. We now forecast a 2008 primary deficit of 0.4% of GDP.
• We now forecast a current-account deficit of 6.2% of GDP in 2008 (previously 7%), as import costs rise on the back of high (but lower than initially expected) oil prices. In 2009 the deficit will narrow as the oil import bill falls.
• Although oil and food import prices have dropped from their second-quarter highs, the gradual removal of subsidies will keep annual inflation in double-digit levels for the rest of 2008 before it eases into single-digits in 2009.
• We expect the currency to weaken in the outlook period on the back of the wide current-account deficits in 2008-09.

Monthly review

• Mr Fernandez was sworn in on August 16th for a third presidential term with his PLD party united behind him.
• The president has announced his economic programme, providing broad policy continuity, but with little detail regarding how he plans to address underlying economic and fiscal imbalances, and structural problems.
• A supplementary budget was approved by the Congress in August. The bill allots funds to go to subsidising the energy sector, increasing the minimum public sector wage and expanding government transfers to poor households.
• The trade deficit between the Dominican Republic and the US increased by 82% year on year in June, as imports outpaced exports.
• Annual inflation hit 13.7% in July. Average weighted lending rates have surged to 24% in August in response to an increase in the Central Bank's overnight lending rate.

Source: Country Report