Overview

President Leonel Fernandez and the Central Bank (CB) remain optimistic about the capacity of the country to weather the current international crisis. Both have highlighted in recent statements that the country’s macroeconomic situation remains strong, with 5.3% GDP growth reported for 2008. Moreover, they have noted that the flow of investment will continue into the DR, with US$2.33 billion expected in 2009 alone, and US$14.5 billion promised over the next several years. At the same, as the CB has continued to lower benchmark rates and take other measures, one bank, the semi-autonomous Banco de Reservas, has lowered lending rates to 15-17%, depending on the type of loan. However, though it is clear that there is a great deal of pent-up liquidity in the system, lending rates in most banks have still not decreased noticeably (similarly with deposit rates). It is possible that a ‘crowding-out’ effect is taking place, with government debt being accumulated so rapidly that it is substituting the demand for private debt. But an increased debt burden, from both domestic and foreign sources, and which will include the issuance of new bonds, was foreseen in the 2009 national budget. This money will be used to overcome income shortfalls and meet a series of internal obligations. Unless there is another oil shock, or a complete deterioration of international financial markets, we believe that as the year progresses, and all or most government debt is placed, bank lending rates will eventually come down, spurring internal demand.

International Impacts

The major U.S. indices survived a volatile week marred by dismal economic reports and disappointing earnings releases as we entered the final month of the first quarter of 2009. The first week of March was particularly brutal, starting off a major selloff that led to the Dow’s lowest close in 12 years after AIG reported a $62 billion fourth-quarter loss, the largest in U.S. corporate history. Other financial stocks slipped on AIG’s news and continued to weigh heavily on the markets throughout the week. Economic reporting also sparked fluctuations in the markets as the Institute for Supply Management’s manufacturing index rose in February from January’s figure while another report showed that construction spending fell 3.3 percent in January. There was some good news, particularly since President Obama revealed his $75 billion foreclosure prevention plan. This gave investors hope that consumer spending could increase once homeowners facing foreclosure get some help. However, at the end of the week, the February jobs report was released, revealing that 651,000 jobs were eliminated in the month. Added to this, a private measure of the services sector shrank in February for the fifth straight month: the Institute for Supply Management, said that its services index fell to 41.6 last month from 42.9 in January (any reading below 50 indicates contraction). This is not surprising since major retailers including Target, Home Depot, and Macy’s Inc. reported depressed fourth-quarter results. Another widely watched index showed home prices tumbled by the sharpest annual rate on record and that sales of newly constructed homes fell 10% in January, sinking to the lowest level since the Census Bureau began keeping records in 1963.

These stark numbers unfortunately are not helped by the latest predictions for the international economy. This week, economists at the World Bank predicted that the global economy and the volume of global trade would both shrink this year for the first time since World War II. The World Bank said nations in Latin America, Africa and East Asia have had not only their growth stifled but their access to credit as well. The bank’s assessment for 2009 was gloomier than those of most private forecasters. It did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks. In late January, the International Monetary Fund reduced its estimate for global growth this year to just 0.5 percent, the lowest level in more than 60 years.

All this is bad news for the Dominican economy, which has already been impacted by the international crisis. The latest US-DR bilateral trade figures are that exports were down 5.7% and imports were up 8.5% for 2008. The DR trade deficit with the US in 2008 was US$2.62 billion, explains economist Luis Vargas, using US Department of Commerce data. Since 2005, the trade deficit has been growing. DR first posted a deficit of US$115 million in 2005, then US$818 million in 2006, which then increased to US$1.87 billion in 2007, the year of the signing of the DR-CAFTA free trade agreement. For 2008, the deficit is now at US$2.62 billion. Exports in 2004 were at US$4.52 billion, but have fallen to US$3.97 billion, four years later. Tobacco and Beverages have been the two top export performers at US$203.1 million, whereas diverse manufactured items has reaped US$960.4 million.

Inflation

Inflation for January 2009, as measured by the Consumer Price Index (CPI) registered at 0.28% for the month of January, for an annual rate of 3.68%. The Central Bank (CB) attributes the drop to a decrease in the value of fuel purchases, which in turn impacted transportation costs (decreased by 0.87%). The CB says that January’s CPI reflects an increase in prices of chicken (2.16%), rice (2.21%), milk (6.81%), eggs (3.86%), pork meat (4.05%), and cigarettes (7.04%), amongst other goods. In total, the group Food, Beverages and Tobacco increased by 0.99%.

As we reported last month, we expect inflation in coming months to be lower, as inventories are replenished at lower market prices. The government expects a rate of inflation of 6 to 7 percent for 2009, assuming the price of oil remains at around US$50 per barrel.

Government sector

In his state of the nation address on 27 February, President Leonel Fernandez sent an optimistic message to Dominicans, saying that the country was weathering the storm of the current financial crisis and that there are positive prospects ahead. His speech noted several salient point, including the fact that the DR´s GDP was 5.3%, higher than the 4.6% average for Latin America and the Caribbean, and the world average of 3.4%. This growth was a result of a 19.9% growth in communications, 13.7% in the financial sector, 5.0% in the commercial sector, and 10.3% in the water and energy sector. Agriculture was down 3.4%, free trade zones by 1.1%, construction by 0.4% and mining activities by 30%.

Among the social works projects promised by President Fernandez to boost the economy, are completing the Santo Domingo agricultural produce market (MercaSantoDomingo); implement the Training Program for Rural Youth, to train and encourage young people to stay in rural areas; send to Congress a bill worth US$13 million for the approval of Farming Insurance; construction of industrial complexes focused on developing small and medium sized companies; send a bill to Congress to stimulate development of the DR mortgage market by creating new financing mechanisms and permitting the use of pension funds; and expedite the use of US$20 million approved by Colombia’s Bancoldex to build housing nationwide. To this is added a long list of infrastructure projects that include the construction of bridges and highways to better the access to tourist spots across the country.

Though these projects are certainly necessary, they do not address other underlying issues that have been criticized in recent weeks. The Economic Commission on Latin America and the Caribbean (ECLAC) recently published a report card grading governments on their responses to the current international crisis. Even though the government is recognized for having implemented certain monetary and financial measures to alleviate the crisis, it gets a failing grade in its use of fiscal policy; exchange rate controls, labor and social policy, and its policies regarding specific economic sectors. Locally, the government has been criticized for two areas of its fiscal policy, mainly the overall expenditure of the government and its level of indebtedness.

Indebtedness

Regarding the government’s level of indebtedness, the Office of Public Credit informs that the public debt increased by US$664.1 million in 2008, and that the internal debt had an increase of US$3,503.5. The increase in the latter was due principally to the placement of bonds in order to comply with Law 167-07 that authorized the Recapitalization of the Central Bank, as well as the debt of the Guaranteed Private Sector, which, since it was not paid by the debtor institution became obligation of the Central Government. The total of the debt is US$11,218.3 millions, equal to 24.3% of GDP, of which US$10,862.9 million belong to the Central Government and the rest to the non financial public system.

It is also important to note that 51.4% of the external debt is with bilateral organizations, while 25.3% is with multilateral organisms. The increase in 2008 of the external debt was due main to an increase in the debt with bilateral organisms, which increased 36% for a total of US$208.4 million. Regarding the internal debt, 65.8% of it corresponds to the bonds issued to recapitalize the Central Bank, whereas 65.7% of it is with commercial banks. The increase in the internal debt with the commercial banking sector was equal to US$607.2 million in 2008.

This level is not expected to decrease in 2009. The World Bank alone is expected to lend US$300 million. The DR also expects to receive US$180 million from the Inter-American Development Bank (IDB). Large portions of these funds will go towards adjusting the budget and on supporting education, health, energy and potable water programs. The government also expects to borrow US$1.9 billion from various international lenders, including the Andean Development Corporation; the Central American Economic Integration Bank; PetroCaribe; National Economic and Social Development Bank (Brazil), and Spanish Government Funds (FAD). Added to this will be around US$500 million in domestic debt, raised through bond issues and bank loans.

The other main criticism has been the level of government spending, especially considering shortfalls in tax receipts. Though the budget did not foresee an increase in spending with respect to 2008, the Secretary of Economy, Planning and Development, Temistocles Montas, announced that because of the decline in tax collections and the difficulties to access international credit, the DR will decrease public spending from 19 to 16 per cent of Gross Domestic Product (GDP) in 2009. There will also be relief in 2009 with the decline of the country’s fuel bill.

Dollar-Generating Industries

Central Bank Governor Hector Valdez Albizu informed that the DR ended 2008 with a US$318 deficit in the balance of payment. Valdez Albizu says that the DR was the country in the region with second lowest level of currency depreciation and that the DR managed to obtain US$340 million in reserves. International gross reserves were US$2.64 billion, net US$2.15 billion, and liquid reserves were at US$3.76 billion.

Valdez Albizu predicts the DR will receive US$2.35 billion in direct investment in 2009. Though high, this figure is lower than the record US$2.88 billion achieved last year, which helped to balance the effects of increases in fuel, raw materials and inputs.

Remittances were US$3.1 billion, up 2.1%, compared to US$3.04 billion in 2007. It has been posited that remittances to the DR are fairly inelastic, since they go towards the purchase of basic goods and are therefore deemed by relatives to be an essential expense. However, remittances are expected to reduce as people lose their jobs, or are forced to live on a reduced budget, and are simply unable to send money.

In the free-zone sector, exports increased by 0.5%, even though the aggregated value of the sector decreased by 1.1%. This was due mainly to decreases in the textile sector where there were losses of 16.3% in the value of the exports. Jobs were reduced in the sector, but the good news is that 50 new companies applied to start operations.

Tourism receipts in 2008 totaled US$4.2 billion, up 4.3%, making it the leading foreign currency producer. However, figures for the month of January demonstrate what many had predicted: a decline of 2.05% with respect to January 2008. The impact of the international crisis clearly is limiting, and will impact, the disposable income of potential tourists, reducing their overall numbers.

Domestic Demand

January car sales are down, according to Fernando Lama, president of the Dominican Association Vehicle Concessionaires and Manufacturers (Acofave). He explains that in December 2008, some 1,474 new cars were sold, while only 1,074 new cars were sold in January 2009. This also compares negatively with respect to the sale of 2,326 new vehicles in January 2008. Meanwhile, Vehicle Dealers Association (Anadive) president Victor Ventura says sales collapsed when interest rates jumped from 14% to 30% in the second half of 2008. He added that recent interest rate cuts by the Central Bank are not enough. Some car dealers are discounting as much as US$1,000 to US$1,500 in accessories as a way to get consumers to buy.

The housing market and the complementary construction sector took steep dives last year as a result of a decrease in housing demand. According to construction sector representative Ramon Elias Hidalgo of Constructora Cohisa, house sales in 2008 dropped by 50% compared to 2007. Hidalgo believes that the outlook for 2009 is worrisome. He said that despite the decrease in interest rates there is still reticence in the market. He added that buyers are concerned about taking on debt due to the possible risk of unemployment. One of the recently announced measures was a reduction in the cost of cement, by close to 5%.

Exchange rate

The exchange rate posted a clear trend toward depreciation, even though it had several variations during the month. So far, the depreciation has not been as severe as the worst forecasts. In part, this could be helped by the fact that the government, though faced with a lower entry of dollars, has made clear that it will borrow a great amount of money from foreign banks, helping to reduce the shortfall.

Fixed Income Market and Rates

The Central Bank again cut the interest rates it is paying on deposits. Overnight deposits are now at 6%, down from 7.0%, and Lombarda deposits at 11.5%, down from 12.5%. This was the third cut in two months. Another positive news was reported by CB Governor Hector Valdez Albizu, who noted that the country’s credit “spread” dropped more than 700 points in the past month which makes it a safer haven to invest.

Easing of monetary policy, and the fact that the DR seems to be a safer investment, normally leads to greater liquidity in the financial system (overlooking the fact that M1 money supply has decreased 5.5% as of 16 February versus one year ago, since this measure takes into account a point of great liquidity in the system vs. another point after the impact of the application of restrictive monetary policy over half a year which is only now starting to reverse itself). Add to this over US$80 million in Law 119 government bonds maturing in April, and it is easy to see why there has been a three-fold increase in demand for short-term (365 days or less) CB debt since January of this year. Moreover, the pension fund system has funds equal to US$2 billion, or 5% of the Gross Domestic Product. This money can be invested in government securities.

All this liquidity should be pushing down interest rates, and to some extent it is. Average lending rates rates closed February at 23.39%, or 1.78% lower than January. During the first week of March, rates have even gone as low as 21.14%. This decrease is concomitant with the decrease in deposit rates, which have gone down from 12.70% in January to 11.75% in February, almost a 1% drop, and during the first week of March have gone as low as 11.10%. This is surprising taking into account the fact that the interbank rate has gone down from 14.33% in January to 11.36% in February, and currently stands at 9.17% for the first week of March. This is nearly a 5% drop.

One possible reason for the resistance by banks to lower rates is that, while private demand for loans is not increasing, and has in fact gone down, public sector indebtedness has increased. Private sector borrowing in February was down: according to official figures, bank loans to the private sector decreased by more than US$56 million during the first 16 days of February, going from US$6.88 billion to US$6.83 billion. With respect to December 2008, the last month before monetary easing began, the reduction was even more significant: a US$254 million decrease. This might be due to fears by consumers and businesses alike that the international financial storm might yet impact the country directly. Or, more likely, businesses are waiting for rates to go down before they decide to indebt themselves.

At the same time, public sector borrowing registered a significant increase this year (as well as last, nearly doubling with respect to 2007). So far this year, loans to the public sector have increased by almost US$100 million. Several analysts have criticized this rapid increase in government indebtedness, including the president of the National Business Council, Lisandro Macarulla. Some have noted that it is precisely this increase in the public debt which has not permitted interest rates to go down. However, we think this argument is not valid for three reasons: first of all, the level of debt projected for the Government for 2009 is less than that of 2008 (with commercial banks), and yet last year there did not seem to be any impact on interest rates due to government indebtedness. Second, the amount of the private debt has gone down more than the increase in public debt. This means that the public debt is not pressuring the market and is really only substituting part of the decrease in the private debt. Finally, the Banco de Reservas (one of the largest creditors of the Central Government) announced in February that it was lowering its lending rates to 15-17% for loans in the construction and home-building sectors. This proves that the banks have the capacity to lower rates in the current market.

Taking into account the fat that banks have a high level of solvency, and that therefore they do not need to capitalize themselves (maintaining artificially high the spread between the lending and deposit rates), one explanation for the high rates is that banks are waiting for the government to place most of its debt before lowering rates (especially since they know exactly how much debt the government needs to place). We expect, therefore, that as public debt is placed (relatively soon since the money is necessary to fulfill certain obligations), rates will begin to come down, especially if the private sector keep postponing placing debt.

Confirming our analysis that bank rates are artificially high, we see that the yield for letters has reduced noticeably over the month of February, with only a slight increase in the last week of March, which came after it was revealed how much the government has indebted itself over the course of 2009. An interesting situation is that whereas for the last 9 weeks, only 61% of demand for letters has been met, in the last nine weeks of 2008, nearly 95% of demand was met. This clearly indicates a great amount of liquidity in the system.

October 15, 2008.-Jamaican Money Market Brokers, JMMB, announced the successful sale of minority shares of one of its members in Trinidad, Caribbean Money Market Brokers, CMMB. In this transaction JMMB sold their share of 45% to the majority shareholder, CL Financial Group, for the price of US$ 41.37 million.  Stated transaction has created substantial gain for JMMB which will be reflected in the financial statements of the second trimester.  Negotiations between both parties began early in 2007 and the transaction was completed at the end of September 2008. 

Keith Duncan, CEO of JMMB group said “we have benefited from a mutual valuable relationship with CL Financial Group.  The CMMB project has been a success for both parties, in which JMMB obtains US$ 41.37 million of a total investment of US$1.57 million carried out only 8 years ago.”

Carrying out its business diversification strategy, JMMB decided to manage the process solely through entities in which it had majority interest or control.  With this sale JMMB will increment its business in the Dominican Republic.  In 2007 JMMB acquired 80% of its capital shares in JMMB BDI America in the Dominican Republic, allowing JMMB to further diversify its regional strategy.  Likewise, JMMB will continue its regional diversification in Trinidad through IBL (InterCommercial Bank Group).  JMMB acquired 50% of IBL shares in 2005, thus taking total directive control.

This sale will strategically position JMMB, whilst increasing its capital.

Dr. Noel Lyon, President of JMMB Group said, “This is just another example of how JMMB’s diversification strategy has provided results for the Group during the past 10 years.  JMMB is committed to it’s 2025 vision and on being the market leader of the Caribbean and Central America, in both international and national markets.”

Dr. Noel Lyon,  Presidente del Grupo JMMB añadió, “Esto es otro ejemplo de cómo la estrategia de diversificación de JMMB ha dado resultado para el Grupo durante los 10 años pasados.  JMMB sigue comprometido con su visión 2025 y a ser el líder en el mercado del Caribe y Centroamérica, tanto en los mercados internacionales como nacionales.”

History

CMMB was founded in the year 1999 as a joint company between Jamaica Money Market Brokers Limited (JMMB) owners of 45% of the shares, Clico Investment Bank (CIB) and CL Financial, together owners of 55%.  Caribean Money Market Brokers (CMMB) were the first to offer a complete brokerage service in Trinidad and Tobago, offering investments in public debt and corporate shares.  CMMB was launched in August 2000.  JMMB had invested US$ 1.57 million in this joint company.  During the past 8 years CMMB has expanded its offices to Barbados and St. Lucia.

Overview

The Dominican economy has had some good news during the month of January, which has been tempered by the sobering reality of the global recession. The most important news was the second cut in the overnight rate and the rate at which the CB lends to other banks. More importantly, the banking system ended the year with a solid performance, with solvency and profits reaching record highs. It is also expected that inflation (though not yet reported for the month) will tend to be negative this month as well, as the government has reached agreements with importers to reduce the price of certain goods, even though gasoline prices have not decreased noticeably this month. Unfortunately, the global recession, and the concomitant decrease in local demand, has impacted several of the main sources of government revenue, including remittances, taxes on fuel and goods, as well as import duties. This has meant a decrease in government revenues, which has been met by increased internal financing. Equally worrisome is the fact that lay-offs in free zones and mining have totaled 126,000 by September of 2008, with more expected to be reported in the last quarter of 2008. Overall, it appears that caution is warranted in the 2009 outlook for the DR economy, substantiating predictions by the IMF that, for example, the growth in GDP predicted for 2009 will be 1.8%.

International Impacts

The US stock market continues to vary considerably from week to week: the last week of the month of January, stocks enjoyed gains throughout the first three trading days, only to experience major selloffs Thursday and Friday. Early in the week, investors helped pull the markets up as they scooped up bargains from last week’s declines. Much of this was based on reports that December existing home sales rose by 6.5% from the previous month, topping forecasts, and that the index of leading economic indicators rose 0.3% in December, also inspiring confidence. This was coupled with news of the stimulus package and President Obama’s “bad bank” plan, which gave a much needed boost to financial stocks. As has been the case, bad news chased the good, as dismal corporate earnings reports and news of large layoffs across the country were also reported. To this was added to a report that new housing sales reached a record low and that new initial unemployment claims reached record highs. A Commerce Department report on the last Friday of the month showed that the economy contracted at its fastest pace in almost 27 years in the fourth quarter. The only silver lining on the horizon is the stimulus package currently under discussion in the Senate. Also on the bright side, oil remains at around US$ 42 per barrel.

As commented last month, the weaker US economy impacts the DR economy directly, hurting exports and curtailing access to financing for tourism projects and other types of direct investment. The lower price of oil gives some relief to external accounts, but it might not be enough to offset reduced exports. Already, some effects are being felt: as a result of the economic contraction caused by the global economic crisis, the year has begun with less money entering the national coffers. According to official figures, as of 19 January 2009, collections have fallen by RD$9.43 billion after reaching RD$12.4 billion during the same period in 2008. The greatest reduction came in customs collections, which went down from RD$2.952 billion to just RD$1.70 billion for the period. This was influenced by two elements: the crisis and the lowering of tariffs according to international agreements. In the case of the Tax Department, collections fell from RD$7.97 billion to RD$6.215 billion. At the same time, Treasury receipts also went down from RD$1.4 billion to RD$1.35 billion. These figures do not include foreign or local loans. According to newspaper sources, one element that stands out is the fact that income from the selective tax on fuels fell from RD$862 million to RD$331 million. Collections for this tax represented 38.4% of what was collected in the former period and 52.9% of what was budgeted. This could provide an explanation for the very controversial increase in the price of fuels in January, despite the fact that world oil prices have maintained low.

Inflation

Inflation for the month of January has not yet been reported. The expectation is that it will tend to be negative, especially since the government finally convinced importers to reduce prices by 15%, the amount that the government estimated is above what prices should be at considering reductions in the price of oil and the reduction in the international price of food and other commodities.

Despite the fact that the price of oil has dropped by more than 70% over the last six months, the cost of many basic consumer goods in the Dominican Republic remains very high. According to newspaper sources, on the New York Stock Exchange, a barrel of West Texas Intermediate cost US$147 on 11 July 2008, and as of late January 2009 the price was around US$42.00, a decrease in over US$100 dollars. But there are still many products that have gone up considerably, and are still the same or even priced higher than what they were when the price of crude oil was at its highest. The National Food Retailers Federation (Fenacodep) says that this is because many industrialists and importers need to reduce their inventories before they can reduce prices. If this is the case, the adjustment should be felt in January, or February at the latest.

Government sector

The IMF expressed its support for economic policies implemented by the Dominican government to help protect the economy from the effects of the economic financial crisis that began last September, including the DR’s ability to maintain exchange rate stability. In its review of the DR’s post Stand-by Arrangement monitoring program, the IMF says that proper fiscal planning in 2009 will help ease external pressures and create a margin for monetary flexibility. The report says that the IMF is satisfied with the government’s macroeconomic policies, which seek to rebalance fiscal and monetary policies, aiming to place the DR in a position to effectively deal with international financial concerns. The report highlights the capitalization of the nation’s banks, their liquidity and their profitably and the fact that recent stresses have proved they can handle shocks to the markets, but warns that if external pressures continue the DR must be ready to apply even more flexible exchange rate policies. However, according to IMF projections, the DR’s GDP growth will only total 1.8% due to external economic pressures. This is visibly lower than the 3% projection by Dominican authorities, and lower than the 4.8% and 8.5% economic growth registered in 2008 and 2007. The Economist Intelligence Unit forecasts a contraction of 0.8%.

The government is trying to meet its obligations, particularly to energy generators. The government will undertake payment of some of the debt it has with electricity generators through a bond issue for US$250 million. The total debt comes to more than US$700 million. The generators, nonetheless, have conditioned their acceptance of the payment because they have not been told when the bonds come due or the condition of the rest of the debt. Pedro Pena Rubio, Coordinator of the CDEEE Distribution Committee says that authorization from the Ministry of the Hacienda is pending, and this will determine the conditions and the interest rate that will be paid.

On the negative side, financial analyst Alejandro Fernandez Whipple mentions that pension plan savings by Dominicans are being increasingly invested in government securities. “Money belonging to Dominican workers is being invested to sustain government deficits, contributing very little to the creation of value in the Dominican economy,” he points out. Though this is legal, the argument is that the government is lending money to itself, via the decentralized but state-controlled Banco de Reservas, thus helping to finance its own deficit. Fernandez suggests that the government instead needs to reduce its spending.

However, instead of reducing spending, the Tax Department (DGII) is finding ways of increasing collections for taxes already on the books. To this end DGII has updated the way assessors value a property with the intention of increasing collections on taxes on real estate properties (IPI) or taxes on homes or plots considered in the luxury residence category (IVSS) for the 2009 fiscal year. According to newspaper sources, once the adjustments are made by the DGII a house that was valued at RD$4 million in 2005 could now be valued at RD$6 million, and will have to pay 1% of its value in taxes. The government also raised the departure fee for all passengers leaving from the Dominican Republic, from US$10 to US$15, parts of which will be directly used to fund various government initiatives. Other initiatives are currently being discussed in order to raise money for the increases in the salaries to doctors, which include taxing capital gains and increasing the tax on bank payments or transfers.

Dollar-Generating Industries

Freddy Ortiz, president of the Dominican Association of Remittances Companies (ADEREDI) said yesterday that 2009 could see a steep decline in remittance levels as a result of the recession that hit the US in late 2008, as reported in El Caribe. It has been expected that the DR would follow the present regional trend of reduced remittances. Ortiz added that since August 2008 there has been a downward trend in remittances to the Dominican Republic compared to previous years. He explains that from January to September 2008, remittances were RD$2.33 billion, which was US$109.9 million more than last year, for a low 5% increase so far. He says there has been a significant decline in remittances as of August, reflecting the number of Dominicans losing their jobs in the US and Europe. Ortiz says the outlook for 2009 is bleak and that recent news reports coming in from the US and Europe focus on the downturn.

Thus far, we maintain our predictions of last month that FDI flows will also be affected. A positive note is the recent call by Fernando Gonzalez Nicolas, president of the Commonwealth Round Table in the Dominican Republic, encouraging Dominicans to seek new business, investment and trade partners in the 53 countries that make up the Commonwealth. “The current global crisis means that public and private sectors should redouble efforts in place to diversify Dominican trade,” and that they should reach out to non-traditional partners. Gonzalez feels the DR could develop more business, investment and trade with India, Australia, New Zealand, South Africa, Singapore, Malaysia, Canada and Great Britain, among others. He sees new markets for Dominican rum, cigars, bananas and a selection of industrial free zone products.

In recent declarations, the top executives of the nation’s free zone companies hope that the 53 industrial free zones and their 530 companies and 130,000 employees will get the needed boost for the sector that exported US$4.5 billion last year. Lower demand has slowed down their activity significantly.

Domestic Demand

The Association of Vehicle Producer Concessionaires has announced that new car sales dipped by 29% in 2008 and forecasts a similar trend for 2009. Acofave indicates that vendors will sell 12,000 new vehicles, at most. Acofave director Enrique Fernandez said the situation could be similar to the one in 2003, which was the worst year for car sales in recent history. Fernandez said that an increase in bank interest rates have adversely affected car sales. Fernandez is calling for lower interest rates, a review of vehicle importation laws and a review of transport taxes paid for the right to drive a vehicle.

Dominican banks finished 2008 with assets totaling RD$596.5 billion, for an increase of RD$60 billion over 2007. Bank Superintendent Rafael Camilo also announced that banks made RD$12 billion in earnings, RD$2.6 billion more than in 2007. He said banks paid RD$3 billion in taxes in 2008. He also explained that credit increased by 17.2%. Bank solvency rate also registered an increase of 1.4%, reaching 14.5 in 2008.

Exchange rate

There was a clear upward trend in rates in the month of January. Not surprisingly, the EIU forecasts a real depreciation of around 8% in 2009 (to a rate of around 41 pesos to one USD) followed by a more moderate depreciation in 2010. This is mainly due to a reduction in fiscal income and a worsening international environment. The Central Bank has been able to intervene to prevent a sharper deceleration in 2008, but it is not clear if it will do so in 2009, especially given the warning by the IMF regarding this type of intervention.

Fixed Income Market and RatesThe Central Bank has again cut the interest rates it is paying on deposits. Overnight deposits are now at 7%, down from 8.5%, and Lombarda deposits at 12.5%, down from 14%. It also reduced 2% from interest rates on all certificates of deposit. This is the second cut in less than a month.

It is expected that the Central Bank will continue reducing rates in 2009 to help arrest the decline in internal demand, but it also needs to keep an eye on the exchange rate. According to the EIU, further rate cuts will also be complicated by the need to manage the large stock of Central Bank certificates issued in the wake of the 2003 banking collapse, which amount to the equivalent of 18% of GDP, and impose a quasi-fiscal servicing cost of an estimated 1.3% of GDP. Too sharp a reduction in interest rates could fuel capital flight.

Weighted average commercial lending rates remain around 24%. Annual private-sector credit growth slowed sharply in 2008 to just 8.4% (down from 31% in 2007). The main monetary aggregates have been shrinking since June 2008, with the decline deepening sharply in October-December 2008.

A positive note has been the recent reduction in the rates of letters with maturity between one month and one year. Though the rates ended higher for the last week of January, the average for the month was a decline in comparison to December.

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