Dominican Bank Chief Boosts Nation’s GDP Forecast to 6%

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Dominican Republic central bank Governor Hector Valdez Albizu is raising his economic forecast for what was Latin America’s fastest-growing economy last year.

The Caribbean nation’s $61 billion economy will expand about 6 percent this year, up from a previous forecast of 5 percent to 5.5 percent, Valdez said. That growth is being partly fueled by a one percentage-point reduction in the country’s benchmark interest rate this year as inflation slowed below the bank’s target range.

The bank’s actions will “impact production due to the low interest rates, which will translate into increased economic growth,” Valdez said in an e-mailed response to questions.

The most-visited destination in the Caribbean, with roughly 5 million tourists last year, the Dominican Republic has also relied on construction and tourism to fuel growth, a trend Valdez said will continue. The government forecasts receiving 5.5 million tourists this year, generating $6.1 billion in income.

“With respect to tourism, it will benefit from growth prospects in 2015 for the United States, the main source of tourists,” he said.

The economy expanded 6.5 percent in the first quarter, the central bank announced Tuesday, compared with about 1.3 percent in Latin America as a whole, according to the International Monetary Fund. Panama, backed by a $5.25 billion expansion of its inter-oceanic canal, is forecast to lead growth in the region at 6.1 percent, according to the IMF.

The peso gained 0.4 percent to 44.65 per dollar on Tuesday, the most in a month.

FDI Flows

A country of 10.4 million that shares the island of Hispaniola with Haiti, the Dominican Republic has pushed mining and energy as economic growth sectors in an effort to diversify its economy. Valdez said $2.3 billion in foreign direct investment expected this year will contribute to that effort.

Presidential elections in 2016 may end up being a drag on investment, said Cesar Arias, director at the Latin American Sovereigns Group for Fitch Ratings. He forecasts GDP growth of 5.3 percent this year and 4.5 percent in 2016.

“You will see electoral uncertainty, which could weigh on investment prospects over the next 12 months,” Arias said.

A congressional committee Tuesday will continue debating a bill that would change the constitution to allow President Danilo Medina to run for a second-consecutive term in the May 2016 election. The proposal has split the ruling Dominican Liberation Party, which could translate into a closer-than-expected vote, Arias said.

Capping Growth

“In the Dominican Republic there has been a strong relationship between high fiscal deficits and mismanagement when the elections get very competitive,” he said in a telephone interview. “That could put a cap on the economic growth in general.”

The government has held two international bond sales this year, including a January sale in which the government used proceeds to pay off almost all of the $4.1 billion it owed to Venezuela for years of subsidized oil shipments.

The country’s dollar bonds have returned 4.3 percent this year, compared to 3.8 percent for emerging markets, according to JPMorgan Chase & Co.’s EMBIG index.