Challenges for

1

• Challenges for
• the Dominican Republic
• Global outlook and risks
• DR-CAFTA Changing trade dynamics
• Robert Wood,
• Senior Analyst, Latin America
• FUNGLODE,
• Santo Domingo
• April 1st, 2005

2
2004 - LA fiesta, recovery in DR

• Rapid GDP growth of 5.7 in Latin America
• Broad-based strong growth of private
  consumption, investment and exports
• Disinflation
• Improved external sector performance
• Trade and current-account surpluses
• External debt consolidation
• International reserves rise
• Currencies stable
• But
• Recovery from recession (DR) / underperformance
• Poverty still high income and wealth
  inequalities
• Structural and institutional weaknesses remain

3
The Global Context
4
Key points for 2005-06

• Exceptional times dont last
• 2004 the best year for quarter of a century
• but will not be repeated
• Struggle between stocks and flows
• liquidity only slowly being drained
• balance sheet problems
• Global imbalances remain significant
• US current-account deficit
• dollar weakness
• OECD debt levels

5
Momentum has waned?
OECD growth,
Y-on-Y
6
Global pressure points

• The US dollar
• America choking on its own debt
• Liquidity withdrawal
• risk assets vulnerable
• China slowdown
• slowing, slowing, gone?
• Oil prices
• any relief?
• Physical security

7
United States
8
United States

• Roaring ahead in 2004
• Cheap money
• Fiscal frenzy
• But challenges on the horizon
• trashed balance sheets
• end of policy stimulus
• Sector divergence?
• Business caution vs household hedonism
• Has the Fed lost control?

9
Personal debt
10
Real estate vulnerability
11
Corporate profits
of GDP
12
US net saving
of gross national income
13
US foreign asset position
USbn
14
US outlook

• Problems are in the personal sector
• corporate sector in reasonable shape
• What will stop the consumer?
• liquidity
• debt service payments
• balance sheets
• wealth - housing, equity valuations
• Debt accumulation unsustainable
• saving will stabilise (or rise)
• Gradual softening of GDP growth

15
US and the World
16
US current account deficit
17
Fed loosing control?
18
Latin America and the external environment no
escape
19
L America and Dom Rep no escape

• Dependence on trade and external finance
• Weak domestic demand financial intermediation
• Low savings/ investment rates
• Commodity exports/ tourism free zones (DR)
• Heavy public debt burdens
• 2004 was an exceptional year
• Strong OECD demand
• High international liquidity
• Stable currencies
• 2005-06 will be far more challenging
• Global import demand softening
• Foreign investors directing money into OECD

20
Latin America still vulnerable

• More flexible policies than in the 1990s
• Floating exchange rates
• Inflation targeting
• Active debt management
• Fiscal discipline
• Fewer external imbalances
• But still vulnerable after all these years
• Brazil
• Colombia, Uruguay?

21
Changing trade dynamics
22
Changing trade dynamics

• Trade liberalisation
• US trade policy bilateral agreements FTAA-lite?
• DR-CAFTA Challenges, new opportunities
• Domestic sectors exposed to increased competition
• Trade and investment flows
• regulatory discipline
• A defensive strategy?
• Lessons from NAFTA (Mexico special case)
• Trade and investment rises
• Adjustment policies eg agriculture
• Limitations of the deal
• Need to continue structural reforms, improve
  institutional capacity and competitiveness
• Need to diversify export markets (cf Chile)

23
Dom Rep winner or loser?

• Adjustment strategies
• SMEs clustering
• Apparel vertical integration outsourcing to
  Haiti
• Agriculture
• Trade and investment
• Role of foreign investment transfer of
  technology / know-how
• Competitiveness
• Educational push
• Vocational training Managerial skills
• Institutional upgrade
• Cooperation with the US govt and émigré
  community?

24
Latin America and Dominican Republic outlook
25
Domestic momentum/ pressures

• Which will prevail in Latin America?
• Momentum
• Increased liquidity
• Business confidence
• capacity utilisation/ expansion?
• Consumer confidence
• jobs creation? real wages? credit growth?
• Pressures
• Inflationary pressures? monetary tightening?
• Constraints structural reforms reforming
  institutions competitiveness

26
Is the fiesta in Latin America over?

• The best is over
• Weakening external demand
• Increased reliance on domestic demand unable to
  take up slack fully
• Fiscal policy is a tool of debt management, not
  demand management
• Growth in LA slows, but still reasonable (annual
  average 3.5 in 2005-09)
• Is LA more resilient to external shocks?
• elections looming in ten countries

27
Dominican Republic outlook

• Assumptions
• Govt financing plans met
• Stabilisation consolidates
• Confidence persists
• IMF programme on track
• Growth limited by
• Fiscal adjustment
• Access to credit
• Risks
• Politicking affects policy?
• Global risks

28

• Challenges for
• the Dominican Republic
• Global outlook and risks
• DR-CAFTA Changing trade dynamics
• Robert Wood,
• Senior Analyst, Latin America
• FUNGLODE,
• Santo Domingo
• April 1st, 2005