Sun | Aug 9, 2020

Walter Molano | Dom Rep: Political silver lining

Published:Friday | July 3, 2020 | 12:29 AM
President of Dominican Republic, Danilo Medina.
President of Dominican Republic, Danilo Medina.

OP-ED CONTRIBUTION: EMERGING MARKET ADVISER

With the presidential elections in the Dominican Republic less than a week away, many people are wondering what lies ahead.

Over the last five years, the Dominican economy has been one of the best performing economies in Latin America, averaging a GDP growth rate of 6.2 per cent y/y. This year, with the onset of the coronavirus pandemic, the economy will not do as well.

The International Monetary Fund, IMF, expects growth to be flat, due to the collapse of tourism, which represents eight per cent of GDP. The coronavirus hit the country hard, with the third-highest number of deaths per 100,000 inhabitants in Latin America. The Dominican government was forced to enact a strict quarantine a few months ago, which led to a sharp decline in economic activity.

Given that much of the economy is in the informal sector, the government also introduced a ‘stay-at-home’ social assistance programme for the poorest part of the population, which provided RD5,000 (roughly US$85) per month. This programme will soon be boosted by a new complementary budget, which will add another RD150 million for social spending.

The slowdown in domestic demand also led to a drop in consumer prices, with inflation easing to almost one per cent y/y. Yet, there are concerns that the social assistance programmes, which were partly funded through monetary expansion, could lead to inflationary problems when the economy begins to reopen later in the year.

Not surprisingly, there has been a meaningful deterioration of the fiscal accounts. The operational fiscal deficit may increase to 6 per cent of GDP this year. It will also lead to a corresponding increase in the debt stock, with the debt-to-GDP level rising to 46 per cent on a gross level and 32 per cent of GDP on a net level.

The current account deficit also widened out by 250 basis points to 3.7 per cent of GDP. Last of all, the Dominican peso increased its pace of devaluation, losing 7.4 per cent this year; and international reserves dropping by almost US$2 billion.

Yet, the onset of COVID-19 had a political silver lining for President Danilo Medina.

The president was seen as proactive during the pandemic, and his popularity rose — particularly after he introduced the social assistance programme. This was an important development, given the ongoing presidential race.

The elections were initially scheduled for May 17, 2020, but they were rescheduled for July 5. President Medina cannot run again, but his former Public Works Minister, Gonzalo Castillo, is running as his chosen successor.

One of the problems the president faced was the control for his PLD party, after he had a very public falling out with former President Leonel Fernandez.

Fernandez broke away and launched his own presidential campaign — splitting the party in two. This created serious problems for Castillo, particularly as he faced the challenger from the main PRM opposition candidate, Luis Abinader.

The split of the PLD allowed Abinader to pull ahead, polling at more than 50 per cent. However, if no candidate wins an outright majority on July 5, a run-off election will take place on July 26.

There are two major issues in this campaign. The first is COVID-19. The Dominican Republic was caught unprepared for the disease, as confirmed by the high death toll. There is a general consensus that the country needs to revamp its health system and dramatically increase spending.

The question is, how? The candidates are also proposing different measures to reactivate the economy after the lockdown ends. Abinader is pushing for the expansion of private-public projects, or PPPs, while Castillo wants to continue with the existing government assistance programs. The second campaign topic is how to restart the tourism sector.

Abinader hails from the sector and knows tourism well. He wants to accelerate the reopening of hotels and flights, as soon as possible. Meanwhile, Castillo is aiming for a more gradual approach. Naturally, Abinader has the more popular position, since tourism is so important to the formal and informal sectors.

The two other lesser campaign topics are Punta Catalina and the Social Security Devolution. One of the sad legacies of the country is the low investment in infrastructure. This became painfully clear in early 2000s, when the country suffered continuous blackouts. As a result, there was a commitment to build new power plants.

One of the most ambitious projects was Punta Catalina. The problem was that it became embroiled in the Odebrecht tangle of corruption, which ensnared and tainted the PLD. Another topic is the social security devolution. The PLD is pushing through legislation to return up to 30 per cent of individual retirement savings, and it has been mainly a ploy to woo middle-class voters. The problem is that the move will defund the pension system, which has been an important source of domestic savings.

All in all, both candidates are competent, but Abinader seems to be the better choice. Fortunately, he is the one who is leading in the polls.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com