Dominican Republic economy faces tricky crosswinds

A protester waves a Dominican Republic flag as thousands of Dominicans protested against fiscal reform in the independence park, in Santo Domingo November 11, 2012. REUTERS/Ricardo Rojas

(Reuters Breakingviews) - The Dominican Republic’s beneficial perfect storm won’t keep blowing forever. The Caribbean nation of 10 million has notched the strongest economic growth in the Western Hemisphere for the third year running - over 6 percent for 2016, according to U.N. estimates. President Danilo Medina, who cruised to a second term in May with over 60 percent of the vote, has made the most of the favorable climate.

Robust growth has helped keep a lid on the fiscal deficit, which fell from close to 7 percent in 2012 when Medina first took office to less than 3 percent in 2015, even as the country doubled education spending and invested more in infrastructure. Pro-business reforms and subdued inflation have further boosted investor confidence.

It’s a contrast to the turmoil elsewhere in the region. Brazil’s economy shrank nearly 4 percent in 2015 as the massive Petrobras corruption scandal spooked investors, and the negative trend continued in 2016. In Venezuela, President Nicolas Maduro is attempting to hold on to power in the face of mass protests and financial collapse.

Some of that pain has been Dominican Republic’s gain. Venezuelan money partly explains the forest of cranes dotting the traffic-choked capital city of Santo Domingo, for example. A $1.9 billion debt-cancellation deal with Venezuela’s state-backed oil company in 2015 allowed the DR to wipe out borrowings worth some 3 percent of GDP at a 50 percent discount.

Even more important has been the ongoing economic rebound in the United States, which accounts for about half of the DR’s exports, a big chunk of its tourism dollars, and another 8 percent of GDP - which totaled $67 billion last year - in the form of remittances.

U.S. economic growth looks steady for now, but replicating recent performance will still be difficult. Crude oil prices have almost doubled from early 2016 lows, and Medina has made little progress reforming an inefficient energy sector. And the exodus from Venezuela will slow once most of those who can afford to leave have done so. The U.N. Economic Commission for Latin America and the Caribbean expects GDP growth to clock in at 6.4 percent for 2016 - down from 7 percent last year - and ease further next year.

The DR’s poverty rate has fallen, but it’s still a developing country and income inequality, corruption and the drug trade are persistent problems. External crosswinds are starting to whip up. The president needs to brace for trickier navigation.


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