Transcript Dominican Republic: Oportunities in Times of Crisis

Dominican Republic:
Opportunities in Times of Crisis
The global financial crisis, which originated with the collapse of the capital markets in the United States,
has not only affected the economies of developed economies. Its effects have been felt in emerging
economies such as Brazil, Eastern Europe, and some Asian nations. Central America and the Caribbean
have not been freed from the repercussions of this crisis; however its effect has been to lesser extent and
has reached these economies in a more indirect manner.
Years of lax regulation, creative financial products and an accelerated speculative rhythm in capital
markets of developed economies were the ingredients that made up the financial explosion, which also
blew away their financial system, general economy, and, as a consequence, the Latin-American markets.
The economies initially affected account for more than 50% of the global income and are the main export
markets, as well as sources of working capital and investment for Latin America.
The financial system of the Dominican Republic has largely escaped the direct effects of the crisis, but the
same cannot be said for other sectors of the economy. Given the close economic bond with the United
States, it is thought that the market crash will affect the country in two fundamental areas: commerce and
direct foreign investment, which will affect the internal market and the economic growth rate of the country.
For example, as a result of the crisis, the regulatory authorities adjusted the GDP economic growth outlook
for 2008 from 8.5% to 5.5%, along with 3% and 4.5% for 2009 and 2010, respectively. Inflation is expected
to between 13% and 14% for 2008, due to the rise in prices of imports and assuming a deterioration of
exchange rates. In spite of this, the investment risk grade of the Dominican Republic has remained stable,
as Fitch Rating demonstrated in September 2008 by maintaining the country at B rating.
Taking into consideration we operate in a global economy, what are the expectations for the Dominican
market? Ours is an open market, commercially dependent on the United States, our traditional trade
partner. Things being as they are, credit limitations and reduced levels of growth in international scenarios
will mainly reflect on the decreasing of money transfers, high level tourism and real estate tourism
investments and to a lesser extent in the export of agricultural products.
In Sinecorp’s (www.sinecorp.net) opinion, the scarce exposure of the Dominican financial sector to the
international market has served as a defense against the collapse of the markets. A great majority of the
financial operations taking place are of a short-term nature and the stock exchange only does local
transactions, focusing mainly on bonds and commercial papers. Bank loans are regulated by the monetary
authorities and the mortgage loan policy is very traditional. At the moment, the banking system is
comprised by 39 institutions: 12 commercial banks, 13 savings and loans associations y 13 savings and
loans banks. Three Dominican banks control 61% of the market. The banking system’s current liquidity
ratio is 14.7% with RD$465,000 total assets and RD$46,700 equity as of September 2008.
Commercial banks have invested roughly 2.1% of their asset abroad and they are the only agents
authorized to make operations in foreign currency. The capital market is relatively new and its participation
in the financial system is still too small to mention, with roughly RD$19,000 new offerings in September
2008. All offerings made to date are of the fixed-income kind and focus on only 13 companies.
Ave. Los Próceres esq. Euclídes
Morillo
Diamond Plaza Suite 38-B
Santo Domingo, Dom. Rep
Tel. +1 809-227-2092
Fax +1 809-563-5244
http://www.sinecorp.net
The possibility of a deterioration of the Dominican financial system will have less to do with toxic assets,
and more to do with the possible deterioration of the local cartera de creditos and its limitations when
accessing private resources in the international market. During the second half of 2008 the Central Bank of
the Dominican Republic increases the interbank exchange rate in order to stabilize the exchange and act
against inflationary tendencies and the commercial deficit. In respect to international credit lines, the
acquisition of Wachovia by Wells Fargo could affect the availability of credit for commercial banks.
Wachovia has been the main international bank for credit lines in the last few years and it is still to be
known to what point Wells Fargo will be interested in the country and the region.
At the same time multilateral agencies have increased their financing capabilities to the region to
compensate for decreased liquidity and compensate for the mitigated commercial and economic growth.
This is one option which, up to now, has not been actively used by the local market and offers a variety of
interesting types of financing. Another possibility for financing lines could be private investment fund funded
by government agencies that invest in companies with growth potential. Sinecorp has been actively
involved in the captivation of these funds and is knowledgeable of their investment interest in the country.
With the uncertainty now present in the global financial system, what commercial advantages does the
Dominican Republic offer? Could the country be an interesting market for foreign investors?
A recent study by MasterCard Worldwide places the country among the top 65 important economic centers
of the emerging economies. The Dominican Republic’s geographic position, its climate, political stability,
and a relatively and uncorrupt capital market are all opportunity factors for foreign investment and
commercial alliances.
The DR-CAFTA, signed with the United States and the economies of Central America, is also considered
an attractive trait for industrial and agroindustrial investment, because of the possibilities of entrance to
those markets provided by the trade agreement. The recent approval of the European Partnership
Agreement will enhance the possibilities of exporting to the European Union and open the market for the
import of services and technologies for the development of these exports. Additionally, the Dominican
Republic is currently negotiating trade agreements with Mexico, Canada, and Taiwan.
In Sinecorp’s opinion, investment in the energy, agriculture, and commerce sectors are of particular appeal
for the local and regional markets. This sectors offer incentives through local legislation, such as the
Renewable Energy Law, and international agreements established with the DR-CAFTA. The DR-CAFTA
along with the EPA offer Dominican production advantageous conditions and improved access to major
regional markets, such as the United States and European Union. While being in the midst of a financial
crisis and a contraction of consumption in the markets, the geographic localization and the underdeveloped
production sectors provide an interesting opportunity for the development of new businesses.
Sinecorp, S.A. offers services in gestion commercial, the development of business
and general counseling in investments. Through our associates and corporate
alliances we maintain a network of services, which allow us to offer the highest level
of quality and efficiency in services of identification, information and execution of
business and investment opportunities.
Ave. Los Próceres esq. Euclídes
Morillo
Diamond Plaza Suite 38-B
Santo Domingo, Dom. Rep
Tel. +1 809-227-2092
Fax +1 809-563-5244
http://www.sinecorp.net