In 1492, Columbus sailed the ocean blue – a maritime feat that opened a new chapter in the story of civilisation and in the modern history of the Dominican Republic. A statue of the great pioneer stands in a quiet plaza in the country’s capital, Santo Domingo. Behind his figure stands the cathedral that he founded, the oldest in the Americas. In front is a Hard Rock Café, one of the Americas’ most recent.
At various turns in the past 500 years, the little square has seen French, Spanish, Haitian and Dominican ownership, revolution and insurrection, plots hatched and schemes foiled. And while cruise ship tourists now do most of the invading, the republic cannot quite shed a reputation for high drama.
Caught off guard
The banking crisis of 2002-03 resulted from a convergence of factors, some domestic, some internal, some inevitable and some avoidable. Catching the entire nation off guard, it paralysed the economy, sending inflation through the roof and the value of the Dominican peso through the floor. All Dominicans are determined not to let that happen again.
Sharing the island of Hispaniola with neighbouring Haiti, the nine-million strong republic has only known fully-fledged democracy since 1986, when Joaquín Balaguer (who had previously headed a more repressive regime in the Dominican Republic between 1960 and 1962 and again between 1966 and 1978) was elected president. Politics is a lively and vigorous pursuit. Dominicans like populist leaders and subtle shifts in the political arena can have marked and overnight effects on national mood and the economy.
The phenomenon was exemplified by the May 2004 election of current president Leonel Fernández. Months before he returned to power in August that year, domestic and external confidence picked up. Confidence remains high: the country is growing at a rate near unparalleled in its recent history.
“The cards are stacked in favour of the republic at the moment. [Mr] Fernández has won the support of the international community, they are showing they can turn an economy around, and there is a general appetite for emerging markets,” says one New York-based banker. “Dominicans are renowned for just getting on with stuff. They don’t mope. They do business,” says another.
Analysts generally emphasise that the events of 2002-03 were precipitated by fraud and mismanagement, but did not reflect any major macroeconomic flaws. Nonetheless, they were considerable.
Banks in trouble
After fraud and unregulated lines of credit left Baninter, the country’s third largest bank, in deep financial trouble, the central bank, Banco Central de la República Dominicana, chose to cover all its losses. Similar bail-outs were given to two other high street lenders: Banco Nacional de Credito (Bancredito) and BancoMercantil. Arguably, it went way beyond the call of duty: the central bank’s own regulation only obliged it to compensate depositors up to a ceiling of about $12,000. By guaranteeing all the bank’s liabilities, it spent an estimated 20% of the country’s GDP.
By July 2004, the value of the nation’s currency had plunged from 18 pesos to the dollar to 50 pesos to the dollar. Inflation was running at 55.6% and the government, facing a severe liquidity crunch, nearly missed coupon payments on its sovereign debt. Growth figures went into negative and unemployment reached 17%. The IMF offered, and then froze, a $670m loan.
The ruling party of then president Hipólito Mejía took the rap and Mr Mejía, a populist politician who had previously enjoyed a groundswell of support from a broad constituency, was pushed out of office.
Psychological shift
By hiking taxes, reining in spending and reaching new agreements with the IMF, the Fernández administration brought a cool flannel to the fevered brow of inflation and a shot in the arm to the peso. High interest rates at the central bank stemmed capital flight and the economy underwent a psychological shift, convincing vested interests both at home and abroad that the Dominican Republic had turned the corner.
According to a banker at one of the multilateral institutions in the republic: “People sometimes say the crisis was macroeconomic. It wasn’t. Yes, there were external factors but in reality it was caused by massive fraud in a part of the banking industry.”
Country observers elsewhere have recognised that the Dominican Republic has turned a corner. Morgan Stanley’s research team pointed to a stable and strong currency, the country’s successful negotiations with the IMF and a successful debt exchange as the bullet-point positives of a macro outlook that suggests that an improved credit rating may soon be on the cards.
Elena Villeya, president of Consejo Nacional de la Empresa Privada (Conep), the country’s largest business association, says that her members are now seeing the fruits of a successful government reform programme. “We’ve always sustained that the fundamentals were actually good – and had the capacity to respond well to coherent monetary and fiscal policies. As we believed it would, confidence has returned now that those policies have been realised,” she says.
The organisation’s members represent a broad church of industry sectors. Despite its small size, the Dominican economy is diversified and well hedged against future or more sustained difficulties. As elsewhere in the Caribbean, the sugar industry is all but dead and many of the plantations having gone to seed or have been redeployed for housing or commercial activities. Not all traditional industries have been consigned to history, though. Dominican cigars still contest the ‘Best In The World’ title with Cuban competitors. And there is plenty of rum around to accompany the smokes.
Economic pillars
But the pillars of economic growth – now nearly 7.9% – are the republic’s foreign currency earners: the free trade zones, where in-bond factories known as maquillas produce clothing for big brands such as Adidas, Gap, Nike and Reebok; tourism; and remittances.
In all likelihood, tourism will soon outperform other sectors. While still a key thread in the country’s social and economic fabric, maquillas are expected to find it hard to compete in the long term with Chinese factories – the garment industry is notoriously fickle. But Dominicans still see manufacturing industries as a big strand of the economy.
On Ms Villeya’s wish-list is a greater investment in education, skills and training. This should boost the country’s capacity to produce more sophisticated products and add value to the manufacturing process, she says. One of the main draws of the recently ratified DR-CAFTA treaty is that country-of-origin provisions are modified to allow products part-produced elsewhere but finished in the Dominican Republic to be exported as ‘Dominican’, giving a new opportunity for the country to prove that it can add value to the chain. The government says it is addressing some of these issues. A programme of new community colleges is intended to take up some of the slack in the education system and 2006 has been earmarked as “the year of job creation”.
Inevitably, the service industries will absorb many of those jobs. Like other small island nations in the Caribbean, the Dominican economy took a major knock in the fallout from the events of 9/11: a 15% fall in tourism receipts in the 2002/03 period from pre-9/11 figures. But the tourists, and related investment, are coming back. Brands such as Intercontinental, Sofitel, Spanish chain Melia, and the Hilton are stepping up their presence or achieving higher occupancy rates. Others are arriving for the first time: Marriot is a recent arrival, as is the US chain Westin, and the Mexican Palace company has ambitious plans for a hotel/convention centre in the resort of Puerto Pabla – heralded as the Caribbean’s first “planned city”. Flights now arrive direct from Europe as well as the US, and tourist spending is playing a major role in refilling the government’s post-crisis coffers, accounting for 20% of GDP in 2004.
Expatriate contribution
Paradoxically, it is Dominicans who live abroad that provide one of the country’s other main sources of hard currency, with New York widely recognised as one of the world’s largest Dominican cities. Long-established networks of expatriate Dominicans, either permanently settled in the US in particular but increasingly in Europe, provide both for their families and themselves, increasingly investing in the construction of homes to which they eventually intend to retire.
The Dominican Republic is showing all the signs of a nation embracing the future and many believe it to be an under-acknowledged future performer. Imports surged in 2005, despite high taxes and oil prices, and the country is in good favour with both the IMF and the international finance community generally. That is not to say that the president has room for complacency.
Several issues contend for the distinction of being Mr Fernández’s biggest headache. Perhaps first on the list is a near-universal perception of poor governance. A recent poll showed that 48% of the population perceive it as “the main problem facing the country”. Mr Fernández himself left office in 2000 amid accusations of government corruption. Corruption was at the root of the banking crisis. The head of the Santo Domingo office of a major international institution says wearily: “It’s just the way things operate here. There is just no real sense of accountability.”
Power struggle
The second most popular grumble is the woeful state of the power sector. Electricity is very expensive and a culture of not paying for electricity received unites the country as comprehensively as does bemoaning its cost and unreliability. Although the World Bank lent the government $150m in May 2005 specifically to reduce blackouts and boost financial sustainability and broader distribution, Dominicans do not predict any miracles soon.
There is still a significant gap between the volume of payments collected by the distribution companies and the amounts required to pay generators for the electricity they provide. Poor regulation and a failure to deliver promised subsidies pushes the distribution companies into the position of effectively subsidising the power they purchase themselves.
Another heated national debate stems from the country’s shared presence on Hispaniola with Haiti. Outside of a traditional rivalry between the two nations, economic issues dominate. Dominicans are concerned by the potential overspill of unrest and violence across the border and by the strain of a growing Haitian population in the republic (about 500,000) on public services, such as health. Another fear is that Haitians are stealing jobs although, ironically, Dominican businesses routinely cross the border to lure Haitians to work in the construction industry or on the remaining sugar plantations at rates and in conditions that local workers deem unacceptable.
However, one banker says: “What family doesn’t have issues? They won’t prevent us from working hard and showing strong growth.”
Having put behind it what has been described as “the worst banking crisis in the world ever, relative to a nation’s size”, it looks probable that the Dominican Republic can accomplish even greater feats.
