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Dominican Republic looks to cash in on growth story

Strong trade with the US and healthy remittances have fuelled the Dominican Republic's economy. Now the government is betting on improved infrastructure and energy investment, plus new links with China, to boost growth. Lucien Chauvin reports.
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Santo Domingo

The Dominican Republic will see the fastest economic expansion in the Americas in 2018, keeping up a growth run that began more than a quarter century ago.  

Despite a souring global outlook, the World Bank and the International Monetary Fund (IMF) have increased their forecasts for the country in 2018. Earlier in the year, the World Bank estimated growth at 5.8%, while the IMF, in a report released in early October, forecasts growth increasing by 6.4%, the strongest in Latin America and the Caribbean. Inflation was 3.8% through to August and is forecast to remain within the 1% to 4% target band.

On the up

The country is benefiting from the strong rebound in the US, its chief trading partner, an increasing number of tourists and cash sent home from Dominicans abroad. The impact of the latter cannot be underestimated, with remittances close to $5.7bn in 2017, representing 7.4% of gross domestic product (GDP).

S&P Global affirmed its BB- rating with a 'stable' outlook for the country in April, with Fitch Ratings following suit in September. “The Dominican Republic is stable, with growth picking up in critical sectors,” says Larisa Arteaga, head of Caribbean financial institutions at Fitch Ratings.

Manuel Orozco, a sovereign analyst for the Dominican Republic at S&P, says growth should continue for the foreseeable future. “This is one of the fastest growing economies in Latin America and has been for the last couple of years,” he adds.

A tourism titan

Strong growth is expected to come from traditional sectors, such as tourism and mining, but the government is also investing to correct long-standing impediments to faster growth, setting the stage for a continued economic transformation.

Tourism continues to provide huge direct and indirect impacts on the economy. Tourism contributed $4.1bn in 2017, equivalent to 5.4% of GDP, and is expected to top $7bn by the end of the decade. The central bank reported 6.2 million tourists in 2017 – a historic high and 3.8% above the previous year. The numbers are set to be even better in 2018, with a 5.5% increase in the first eight months. Direct investment in tourism was $632m in 2017 and is forecast to increase by 8% in 2018, and the government forecasts investment close to $1bn annually by the end of the decade. Tourism in its different segments accounts for  close to 15% of employment in the country.

Focus is now turning to specialised segments that generate higher incomes. The Palladium Hotel Group is completing an adults-only hotel in Cap Cana and other big chains are following suit. High-end tourism, from luxury to adventure sports options, are joining the traditional package deals.   

The government has set an ambitious goal of 10 million tourists a year by 2023, which will not only require more hotels, but additional basic infrastructure that will impact the energy, telecom and transportation sectors.

Building boom

An indicator for the Dominican Republic's tourism sector – and the economy in general – is construction. Construction projects were up 13.2% in the first half of 2018 and is forecast to increase as fast in the second half of the year and into 2019. “Construction has been a significant driver for growth for the past three or four years, and is expected to continue to be so during our base case [2018 to 2021],” says Mr Orozco.

President Danilo Medina’s government has been expanding transportation infrastructure, including new roads to tourism zones and urban transportation. This year additional kilometres will be added to the second line of the Santo Domingo Metro, which serves the capital.

The  mining sector, often not associated with the Dominican Republic, continues to expand, keeping the construction sector buoyant. The country is home to one of the world’s most cost-efficient gold mines, Pueblo Viejo, operated by Canada’s Barrick Gold. The mine is the country’s single largest investment, at $4.5bn, and produces, on average, 1 million ounces of gold and 5 million ounces of silver a year. Exports from Pueblo Viejo were $708m in 2017.

The Dominican Republic also produces and exports copper, nickel and zinc. It has 120 mines, the vast majority producing non-metallic minerals. The government is evaluating dozens of requests from mining companies, primarily in precious metals, for new concessions. 

The country is also attracting investment in communication services. In early October it was announced Mexico’s América Móvil would invest $1bn over the coming three years to improve service as the country moves toward 5G technology.

Powering growth

The Dominican Republic's big issue, however, is power generation and transmission – areas where the country has traditionally scored low in international competitive rankings. Imported fuel is one of the largest bills for country – 71% of power generation depends on imported fuel oil or natural gas – and electricity transmission has been problematic. The country ranked 125th out of 137 countries for supply of electricity in the World Economic Forum's 2017-18 Global Competitiveness Index.

The power transmission system loses an estimated 30% because of structural problems with the grid and inadequate billing systems, and in a World Bank survey in 2016, 14% of Dominican companies ranked electricity supply as the main barrier to growth. Fixing the problem has been a key issue for successive governments, but loss rates have only dropped slightly throughout the decade.

While the World Bank and IMF have increased the country's economic growth forecasts, they also warn that rising fuel prices could shave points off growth. Oil was $71.67 per barrel using the WTI marker, a benchmark in oil pricing, in mid-October, up slightly more than $20 per barrel on the previous year, and some analysts are speculating that it could again top $100 per barrel.

The government has been working for the past few years to get away from expensive fuels, adding natural gas-fired thermal plants and renewable energy, such as solar and wind, to the mix. The National Energy Commission, for example, gave the go-ahead on October 9 to another phase of a solar plant. The $180m second phase of the Montecristi solar park will add nearly 58 megawatts to the existing park, bringing installed capacity to 116 megawatts.

In July, the government agreed to a 48-megawatt wind farm, with work expected to start in the first quarter of 2019. It will be the fifth wind farm operated by Denmark’s Vestas in the Dominican Republic, and the two new projects will bring installed capacity from non-hydroelectric renewable plants to nearly 450 megawatts by the end of 2019.

The big change, however, will come with the full operation in 2019 of the $1.9bn, 752-megawatt Punta Catalina coal-fired thermal electric plant, which is equivalent to 30% of current demand. The country needs to add 120 megawatts annually in new installed capacity to meet energy demand. 

Mr Orozco says Punta Catalina is “an important change, helping to reduce the cost of energy production”, while cautioning that adding supply is only part of the solution. He says the state needs to deal with underlying problems related to energy transmission and distribution.

Changing allegiances

Political and economic analysts are waiting to see if the Dominican Republic government’s decision to make a major foreign relations switch in May will bring investment dividends. It cut diplomatic relations with Taiwan and established ties with mainland China, and is one of three countries in the region, including El Salvador and Panama, to switch since 2017. 

Chinese foreign minister Wang Yi was in the Dominican Republic in late September for the opening of the country’s embassy. At the event, Zhang Run, China’s first ambassador to the Dominican Republic, said the country would make a good fit with China’s expanding Belt and Road Initiative. He touched on all the big points the Medina government has been stressing, saying China was willing to collaborate in construction, electricity and information technology.  

Dominican authorities are hoping to leverage the new relationship to land investment, boost exports and attract Chinese tourists. The Dominican Republic imported $2.6bn from China in 2017, while exporting just $145m.

It is looking to join other Latin American countries in tapping into China’s demand for fresh produce – avocados and pineapples top the list – as well as competing with some of its signature exports, such as cigars and coffee. Tobacco is the Dominican Republic’s third largest export earner, bringing in close to $800m annually, while it is the world’s 27th largest coffee producer, averaging about 53 million pounds annually.  

S&P’s Mr Orozco says it is too early to tell what kind of impact the Dominican-Chinese relationship will have, but that opportunities to boost exports would be helpful. “Diversification of the export base will make the economy much more resilient,” he says.

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