Interview to Euromoney Country Risk (May, 2021)

Q: (a)     To what extent are the risks associated with the pandemic (global trade and by implication commodity prices, as well as tourism), and other factors influencing your scoring, such as political stability or natural disaster recovery?

R: In the Dominican Republic (DR) I see a business-friendly government that is focused on keeping the economy afloat with some macroeconomic stability and mass vaccination against Covid-19. I also see a private sector responding positively to the economic stimulus, and willing to invest.

The free zone industry is totally recovered while the tourism sector is gradually recovering as mass vaccination in North America is motivating more people to travel abroad again.

Nonetheless, some challenges persist. The pandemic is not over yet, international commodities prices are pushing inflation upward, and natural disasters may occur especially during the hurricane season (although the projected paths for 2021 suggest that the Caribbean basin has a lower probability of getting hit by a major storm compared to last year).

Q: (b)     Is the impact of the pandemic on the deteriorating fiscal metrics (the deficit and debt levels) counterbalanced by economic recovery and strong multilateral creditor support? 

R: The deterioration of the fiscal accounts for the Dominican Republic is evident as tax revenue dropped and governmental expenditures were forced to go up, thus public debt is on the rise. Nonetheless, as the economy recovers tax collections are growing again while the government has managed to control its expenses due to a notable moderation in public works and some administrative improvements. 

Financial multilateral assistance and access to international capital markets have provided an invaluable lifeline in the short term.

Q: (c)     Are the US Joe Biden administration's plans to forge closer relations with the Caribbean helping to improve the risk outlook, or not?

R: I believe it is too soon to tell. To a certain degree, the Biden administration has continued some of the America First policies of its predecesor.

Q: (d)     Are there any particular aspects of political risk improving, or not, for particular countries you could comment on, e.g. information access/transparency, corruption and transparency, among other factors?

R: I see most countries are being careful in keeping the macroeconomic stability as intact as possible while waiting for better access to vaccines against covid-19, and benefiting from the recovery of its major trade partners. 

In my view, it is not easy to see any further improvements as the pandemic and other political issues is capturing most of the attention at the moment.

Q: (e)     Are there (briefly) any other relevant factors, e.g. improving structural dynamics such as demographics or infrastructure considerations which may be underlying your risk assessments?

R: Some demographic risks are seen in the USA, Chile and Costa Rica as fertility rates are dropping while its populations are aging. The USA seems to be leaning toward renewing its infrastructure which is good news for its trading partners and the world economy.

The DR seems to be improving in terms of transparency, but still has a way to go for further institutional development.

On the Challenge of Job Creation in the Dominican Republic

By Odalis F. Marte

Creating jobs in a developing country may not be an easy task given the multi-faceted constraints, especially when it comes to poor policy management and market imperfections. In the case of the Dominican Republic (DR), unemployment is on the rise, particularly for young and unskilled people. This can be attributed in large part to the lagged effects of the international financial crisis having an impact on the economy through diverse channels such trade, investment, remittances and tourism.

External shocks, coupled with domestic policies that are simply not doing enough in terms of job creation, pose an important challenge to the DR. In this regard, the World Bank’s MILES Framework (Macroeconomic policies, Investment climate institutions and infrastructure, Labor market 

regulations and institutions, Education and skills, and Social Protection) can provide a comprehensive outline to address some of the main issues surrounding the job market.  Under this assessment, the macroeconomic policies (both monetary and fiscal) should work in order to boost declining aggregate demand, thus fiscal policy should remain expansionary and short-term job policies, such as crisis-hit-targeted subsidies for hiring, can be considered as a way to ease the pain of the unemployed.

In recent years, the DR has tried to keep aggregate demand afloat by increasing government expenditure in public works, specifically between 2008 and 2012. Nonetheless, consolidated public debt has increased from 32.2% of gross domestic product (GDP) in 2007 to 42.1% of GDP in 2012, according to figures of the Central Bank of the Dominican Republic. This trend has attracted attention because the economy has been subject to a fiscal reform, on average, every two years since 2000 (At the end of 2012 a tax reform package was approved that combined an increase in taxes with a reduction in spending, 

which is expected to lead to a fiscal consolidation of 4% of GDP for 2013).

Monetary policy can play a role working to help maintain price and financial stability, along with adequate exchange rate flexibility to help the economy absorb external shocks that minimize volatility in economic activity.

Continuing with the MILES Framework approach, an important factor to take into consideration is the investment climate for businesses including risks, costs and barriers to competition. These factors include property rights, rule of law, macroeconomic stability and fair competition. The 2014 Doing Business publication (http://www.doingbusiness.org/data/exploreeconomies/dominican-republic?topic=getting-credit) suggests that the DR has just fell in key areas such as starting a business, dealing with construction permits, getting credit, and registering property. It suggests that the DR fell many positions; the DR was just praised as a major reformer by the Doing Business publication a few years ago. That result should be taken as a challenge for microeconomic policies oriented to boost a business friendly environment for the private sector to invest.

Regarding labor market regulation, the DR government has engaged in talks with the private sector in order to explore ways to make the labor market more flexible. This represents a formidable task, particularly given the power of the unions and their tendency to oppose possible reductions of certain benefits for the employed.

In the case of education and efforts to raise the skills in the labor supply, recently the government decided to start implementing a law that would oblige it to spend up to 4 percent of GDP on education for the poor. In the first year of implementing this strategy, the DR proved to have a lack of managerial ability to spend a large increase in budget for building new schools and hiring new teachers. Nonetheless, by 2014 it is expected there it will be possible to comply with the Education Law.

In terms of social protection, the DR has a way to go, but has experienced important advances in the last ten years. For example, while the country has been relatively successful in extending social protection coverage, it has not had as much success in targetingemployment programs throughout disadvantaged communities.

A brief on the Dominican Republic’s Labor Market Conditions: The SupplySide

By Odalis F. Marte

@ofmarte

During the last forty years, the Dominican Republic has transitioned from an agriculture-based economy to a services one, despite efforts to create an import-substitution-based national industry that failed to absorb the excess labor out of the primary sector. That import-substitution-based industry received generous incentives and subsidies that ended up hurting the economy as a whole, as it constituted a burden for the agricultural export sector. This, in turn, fueled the mass migrations from the countryside to the cities, leading to a rise in informal economic activities, as well as emigration to more developed countries, as young people’s efforts to seek employment proved to be in vain.

After a domestic financial crisis in 2003 that reportedly accounted for 20% of GDP, the Dominican Republic’s economy began a strong recovery, growing by an average of around 6% between 2005 and 2008. Following the international financial crisis and ensuing global economic slowdown, the Dominican economy decelerated and the unemployment rate began to rise. In fact, according to official figures from the Central Bank of the Dominican Republic, in 2004 the open unemployment rate was 6.3% with a decreasing tendency until 2008, when it fell to 4.6%. Beginning in 2009, this rate started to climb, rising to 4.9% in that year, followed by 5.0% in 2010, 5.6% in 2011, 5.9% in 2012, and the current 7.0% in the first half of 2013.

During the past six years, the participation rate in the DR’s labor market has been around 56% (68% men; 44% women), except in 2009 when in dropped to 54%. It is important to mention that the informal sector accounts for around 60% of the labor market, and more than half of the new jobs were generated by informal small businesses. Between 2000 and 2012, the government was responsible for 62% of the 285,000 formal new jobs created in the economy.

Overall, the unemployment rate in young people is around twice the labor market’s unemployment rate, which can be explained by a lack of skills, deficiencies in the education system (including its coverage and quality), as well as the rigidities in the labor market that makes firing expensive for businesses. This benefits those individuals who are currently employed, at the expense of those seeking employment, especially the unskilled and less experienced ones.

The Dominican government has expressed its will to help create 400,000 jobs in 4 years, so it is actively implementing some policies in other areas to support small businesses, especially in the rural areas. Nonetheless, the DR economy is experiencing the impact of the poor performance of the world economy, especially the United States’, its major trade partner.