The republic’s finance minister, Vicente Bengoa, talks to The Banker about economic strategy.

Meeting IMF targets. Maintaining strong fiscal performance. Keeping macroeconomic stability. The Dominican Republic’s finance minister, Vicente Bengoa, spends most of his time on these goals while working closely with the country’s president, Leonel Fernández, the central bank governor, Héctor Valdez, and Juan Temístocles, among other cabinet members.

Overall growth forecasts for the year are at about 8%, putting the Dominican Republic on track to become one of the best performing economies in Latin America this year.

What a difference from 2003, when a financial sector crisis triggered economic deterioration and forced the government to seek out financial assistance from the IMF. In total, the government bail-out of collapsed banks cost about 20% of GDP. The currency sank, investment took flight and the unemployment rate shot up to nearly 20%. In May 2004, Mr Fernández won the presidency and confidence has recovered considerably.

Mr Bengoa says that recovery from the 2003-04 economic crisis has meant higher levels of private consumption and investment. Private investment grew by nearly 20% in 2006. At the same time, during the 2004-06 period, private consumption increased by an average rate of 10.7%.

So far in 2007, the high growth rates are mostly explained by strong investment and activity in the financial sector, along with the retail, communication and services sectors. Another key economic driver is public investment in construction, which increased year on year by 46% in the first quarter of 2007. Churning in the background is a stronger banking sector.

“Financial sector reforms, namely in terms of supervision and regulation, have significantly reduced the probability of a crisis,” says Mr Bengoa. Specifically, he points to new regulations for monitoring liquidity risk. On-site audits are also new, along with tighter corporate governance laws.

Transformation

In terms of investment trends this year, Mr Bengoa acknowledges that a transformation is under way. Activity in the free zone industrial sector has dropped in terms of factories dedicated to textile production and shoemaking, but the decrease is offset by a positive outlook for businesses focused on tobacco exports, jewellery, medical equipment, electronics and the manufacture of plastic goods. This factor “has allowed for stable levels of exports in free-trade zones, particularly in terms of serving the US market”, says Mr Bengoa.

The number of companies housed in free trade zones was 555 in 2006, unchanged from 2005, according to the country’s National Council for Free Trade Zones. The council expects five new multinational companies to set up shop in free trade zones this year.

While investment levels recover from the 2003-04 crisis, business leaders in the Dominican Republic still complain about the country’s weak infrastructure and routine power outages. Yet Mr Bengoa stresses that improvements to infrastructure are being made, particularly in terms of roads. New laws allow for more public-private partnerships on this front.

“In the area of energy, total production in recent years has increased by about 5%,” says Mr Bengoa.

The private sector is also taking on important investments in terms of diversifying energy sources, by tapping ethanol and constructing carbon plants. “The government is also moving ahead on large investments in hydroelectric plants,” in line with its overall electricity recuperation plan, says Mr Bengoa.

Such improvements are necessary if the country wants to take full advantage of the Dominican Republic-Central American Free Trade Agreement (DR-Cafta), which took effect on March 1. Countries belonging to DR-Cafta “have a high level of economic and commercial dependence on the US”, according to Mr Bengoa.

Gains to be made

The accord is expected to increase inflows of foreign direct investment. In 2006, 40% of outside investment was from the US. “No doubt, the Dominican economy will be able to increase its export levels of goods and services, especially in terms of the communication and tourism sectors,” says Mr Bengoa.

The pact “represents opportunities and challenges, which is why it is important to move ahead on programmes that improve competitiveness”, he says. In this vein, he emphasises negotiations that are under way between the government and the Inter-American Development Bank for $180m to fund such programmes.

Vicente Bengoa, finance minister of the Dominican Republic.

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