Dominican Republic Country Report 2005

Dominican Republic Country Report 2005 2 Dominican Republic Country Report Table of Contents Introduction Historical Overview Climate Economy Infrastructure Labor Telecommunications Taxation Education Energy Sector Summary Sources 3 3 5 6 7 8 9 9 10 11 13 13 . 2 Dominican Republic Country Report Introduction When founded in 1492, the city of Santo Domingo was established as the capital city of the New World. Due to its overtly centralised position it became the western hemisphere’s hub for shipping, commerce, and governance. Since that time, the economy and society of the Dominican Republic has gone through ups and downs, yet recently with an increase in global relationships, this island in the Caribbean is once again becoming a nucleus for international business. This sentiment was well articulated by Bradley Edson, CEO of NutraCea Foods, when he stated, “We applaud the entrepreneurial spirit of President Fernández and his staff for being a role model for the entire Caribbean and South America…and support his mandate for innovative programs fostering economic growth and development of his country.” There are seven primary reasons the Dominican Republic (Spanish: República Dominicana) is once again becoming a global hub, and they are 1) a well developed infrastructure, 2) industry-leading telecommunications, 3) a low federal taxation system, 4) a highly educated population of which many speak English, 5) proximity to most other major metropolises in the Western Hemisphere, 6) a stable economy that has a history of high growth, yet is still attractive to foreign investment, and 7) the recent signing of the Dominican Republic- Central American Free Trade Agreement (DR-CAFTA) of which the Dominican Republic is to be the main administrative location. There are, of course, myriad secondary and tertiary reasons people all over the world are starting to take more notice in this relatively small island in the middle of the Caribbean; many but not all such reasons will be covered in this report. Historical Overview Explored and claimed by Columbus on his first voyage in 1492, the island of Hispaniola became a springboard for Spanish conquest of the Caribbean and the American mainland. In 1697, Spain recognized French dominion over the western third of the island, which in 1804 became Haiti. The remainder of the island, by then known as Santo Domingo, sought to gain its own independence in 1821, but was conquered and ruled by the Haitians for 22 years; it finally attained independence as the Dominican Republic in 1844. In 1861, the Dominicans voluntarily returned to the Spanish Empire, but two years later they launched a war that restored independence in 1865. In 1905 the U.S. established a customs receivership in order to enforce payments on the Dominican Republic’s U.S. debt, and in 1916 the U.S. invaded the country, remaining until 1924. The head of the U.S. created Dominican army, General Rafael Trujillo, led a coup d’état in 1930 that overthrew the constitutionally elected president. General Trujillo was elected president the same year, setting up a brutal and corrupt dictatorship that lasted until his assassination in 1961. A Council of State of five members led the transition to democracy, convening free elections in December 1962. Juan Bosch, the leader of the PRD, was elected president, only to be overthrown by a right-wing military coup seven months later. In April 1965 supporters of the PRD, backed by a group of army officers, launched an insurrection aimed at restoring constitutional government. A brief civil war followed, prompting the intervention of more than 20,000 U.S. troops and the establishment of an Organization of American States (OAS) peace force. Elections were held in June 1966 in 3 Dominican Republic Country Report which a Trujillo protégé, Joaquin Balaguer of the Partido Reformista Social Cristiano (PRSC), was elected president; he was re-elected in 1970 and in 1974. The presidential election of 1978, the first serious electoral contest for 12 years, was won by the PRD’s Antonio Guzmán, and in 1982 another PRD candidate, Salvador Jorge Blanco, achieved a convincing victory. Both governments pursued cautious social and economic policies, and succeeded in curbing the power of the armed forces and direct military interference in politics. However, discontent with the PRD’s economic performance and divisions within that party saw Mr. Balaguer returned to power by a narrow margin in the 1986 election. He won further terms in 1990 and 1994, but following accusations of fraud in the 1994 election, Mr. Balaguer’s term was shortened to two years. The 1996 election was won in the second round by Leonel Fernández of the minority PLD. Mr. Fernández was from a new generation of political leaders and inspired hopes of political and economic reform. However, difficulties soon emerged for his administration, as both opposition parties blocked its proposals in Congress. In mid-term elections in May 1998, the PRD won control of many town councils, leading PLD to seek an alliance with the PRSC in an attempt to ensure governability. Building on its strong performance in the mid-term elections of 1998, the PRD regained presidential power in May 2000, when Hipólito Mejía was elected president. During the campaign he promised wide-ranging political and economic reform, including largescale public investment in infrastructure and social programs but failed to deliver on his pledges. In the economic sphere management was poor. Spending on the public-sector payroll grew rapidly, and the government borrowed heavily abroad to finance public investment. This excessively expansionary fiscal stance pushed up interest rates, crowding out the private sector, and put pressure on the balance of payments. These macroeconomic imbalances contributed to a downturn that began in 2002. In March 2003 Banco Intercontinental (Baninter), the country’s second largest commercial bank, collapsed as a result of embezzlement, fraud, and bad deals. The government fully bailed out the depositors of Baninter, as well as two smaller banks which also collapsed subsequently. Combined with the liquidity released by the bail-out, the banking shocks fuelled capital flight, leading to renewed currency depreciation and inflation. Public solvency deteriorated, forcing the government to stabilize the economy backed by USD$600 million stand-by arrangement signed with the Fund in August 2003. In the May 2004 presidential election, Mr. Fernández won 57% of the vote, comfortably defeating Mr. Mejía of the PRD, who polled 34%. By winning over half of the votes cast, Mr. Fernández was elected president outright, obviating the need for a second run-off. The result was as much a rejection of Mr. Mejía’s record in office, as it was an endorsement of Mr. Fernández. Mr. Fernández faces a daunting challenge to restore confidence to the Dominican economy following the instability caused by a series of bank crises, electricity blackouts, and poor economic management under the former president, Hipólito Mejía of the PRD. 4 Dominican Republic Country Report Climate The majority of the Dominican Republic enjoys beautiful tropical weather all year round, with the average annual temperature hovering around 25°C (77°F). Some call the Dominican Republic's climate, 'the endless summer', due to warm and sunny conditions experienced pretty much everywhere in the country, all year round. There are slight variations between the summer and winter months. The so-called 'cool' or winter season, runs from November to April. The humidity is relatively low during these months and it tends to cool down in the evenings much more than in the summer months. The coastal/beach regions generally experience highs of around 28°C (83°F) during the day and lows of about 20°C (68°F) in the evening. The mountainous interior of the country is considerably cooler, and on the highest mountain peaks the thermometer can sometimes drop below freezing point. On rare occasions frost can even be seen on the top of these peaks. The summer season in the Dominican Republic runs from May to October. Average daily highs for the coastal/beach regions rise to around 31°C (87°F) during the day, dropping down to about 22°C (72°F) at night. It is the higher humidity during this period that can make it feel much hotter during this season. Regardless of season, the coolest areas of the country are the Cordillera Central mountain region around Jarabacoa, and Constanza, where the average highs can hover around 16°C (61°F). The desert regions in the southwest of the country experience the highest average temperatures, at times soaring to over 40°C (104°F). The northern areas of the Dominican Republic tend to see the greatest amount of rainfall and do so predominantly between October and April. The southern areas of the Dominican Republic experience their greatest rainfall between May and November. Torrential downpour-like conditions can certainly occur in all areas of the Dominican Republic but the majority of this type of rainfall occurs in short bursts. Other than major storms that may move through a particular region, most showers are short-lived and have the sun shining brightly within a half hour. The differences between the summer and winter seasons are not always consistent. Regardless of what is 'typical', the Dominican Republic, like anywhere, can experience abnormal weather patterns - weeks without any rain at all, while other times there are patches of rainy and overcast weather for a several days at a time. But more often than not, visitors to the Dominican Republic can generally expect long periods of sunshine and blue skies, at any time of the year. Hurricanes in the DR The Dominican Republic, like most of the Caribbean, is located in an area where hurricanes can occur. Officially, the Caribbean hurricane season runs from the beginning of June to the end of November. Historically most hurricane activity in the Dominican Republic's part of the Caribbean has taken place in the months of August and September. 5 Dominican Republic Country Report Economy The Dominican economy has had one of the fastest growth rates in the hemisphere over the past decade, averaging 6% a year from 1993-2003. Foreign exchange and gold reserves total USD$426 million (2004 est.). Economic activity is diversified, and the major contributors to GDP in 2003 were manufacturing (15.5%), and agriculture and commerce (11.3% each). The share of communications in total GDP has doubled in the past five years, and now accounts for 9.7%, while the share of the free-zone sector has fallen below 3% in the 2000s. Tourism is the main earner of foreign exchange, but worker’s remittances also play a significant role in the economy, accounting for over 10% of GDP. Confidence in economic management under the Fernández administration has been supported by the over-achievements of targets under the IMF standby arrangement, the success of a “market-friendly” international bond exchange in May, the stabilization of consumer prices and the currency, a reduction in interest rates, and an increase in international reserves. These developments are encouraging, since they indicate that the Dominican Republic is emerging from the Baninter banking crises that shocked the economy in 2003. The economic recovery that began in mid-2004 appears to have gathered some momentum: GDP grew by 4% year-on-year in the first quarter. However, the government still faces several policy making challenges. The government has made progress in debt-restructuring with its external creditors and the government is seeking further debt treatment from the Paris Club of creditor nations to restructure debt with other creditors and suppliers. Following the successful bond exchange in May, its financing plans for 2005-2006 now appear to be more comfortable. The stabilization of inflation has relied heavily on a restrictive monetary policy, involving the huge issuance of Central Bank certificates to absorb the liquidity created by the government bail-out of three collapsed commercial banks in 2003. Other policy challenges include: steering new tax reform through the oppositiondominated Congress, strengthening the financial sector, and improving the operational and financial health of the energy sector. An IMF mission visiting Santo Domingo from April 25th to May 6th conducted the first review of the Dominican Republic’s performance under their standby arrangement. In a statement following the visit, the Fund said that developments under the program were favorable, with preliminary information suggesting that the end-March 2005 quantitative performance criteria were met with comfortable margins. Net domestic assets (defined as the difference between money in circulation minus net international reserves converted at the exchange rate) were under half their ceiling target; net international reserves exceeded the floor by USD$287 million. Aside from seeking to achieve its performance targets, Dominican policymakers will continue to work closely with the Fund in the design and implementation of structural reforms, which form part of the program. These include strengthening fiscal management institutions and improving supervision in the financial sector. 6 Dominican Republic Country Report Gross domestic product (selected sectors) % real change; Jan-Mar 2005 Agriculture, forestry & fishing 3.7 Manufacturing 4.5 Other excl free zones 5.9 Free zones 3.5 Commerce Hotels, bars & restaurants Transportation Communications Financial services GDP 11.6 9.4 7.9 19.7 3.9 4.0 Infrastructure There are international airports at Santo Domingo, Puerto Plata, Punta Cana, La Romana, Barahona Samanán, Santiago Cibao. American Airlines is the dominant carrier, with a market share of over 50% on routes including New York, Miami, and other U.S. cities. Puerto Plata is the main airport for charter flights, followed by La Romana, El Cibao, and Herrera. Las Américas in Santo Domingo is the main airport for scheduled flights. A road-building program during the late 1990s upgraded urban roads in Santo Domingo and between principal intercity routes. Of particular note is a new super highway called Higüey la Romana that runs from the capital, Santo Domingo, to Punta Cana through La Romana; the latter two of which are major tourist destinations. There are 5,000 km of paved intercity roads and 12,000 km of rural roads, which require an investment of USD$650 million per year to maintain. A toll system is operated on some major highways. At the end of 2002 the total number of vehicles on the roads was estimated to have reached 1.2 million, an impressive amount for a small island country. The main ports are Santo Domingo, Haina, Boca Chica, and San Pedro de Macorís on the south coast and Puerto Plata in the north. Facilities have been expanded at the Haina port, which handles most imported cargo. A mega-port at Caucedo, close to the airport at Las Américas, has been built to serve the free-zone enterprises and in preparation to handle a large increase in volume created by the DR-CAFTA. In mid-2003 CSX World Terminals signed an agreement with the Caucedo Development Corporation to develop a deep-water terminal facility at the port. Improving infrastructure has been one of the primary focuses of the Fernández administration. Mr. Fernández announced plans for the construction of a ten kilometer highway to alleviate congestion on Santo Domingo’s main north-south traffic route. The government is backing another big-ticket project for the construction of a one square kilometer artificial island just off the capital’s seafront boulevard, el Malecón. The island will cost an estimated USD$400-450 million (to be financed privately) and will feature cultural centers, parks, ports, hotels, shopping centers, offices, housing, beaches, and a marina for 300 boats, helping to boost the local economy and international tourism. 7 Dominican Republic Country Report Mr. Fernández was keen to approve the project as part of his consistent attempts at sending positive signals to foreign investors seeking opportunities in the Dominican Republic. To further the government’s objective in attracting large sums of foreign investment, President Fernández has just approved the construction of a FIA approved race complex, suitable for both cars and motorcycles. This is to be an internationally known venue with its premier event being the Formula 1 Grand Prix. The Grand Prix will most likely allow the Dominican Republic to increase its international status and gain unequivocal global exposure, in preparation for the construction of a USD$6 billion mega city; the likes of which the Western Hemisphere does not currently possess. The appeal for governments to endorse major infrastructure projects is that generally they require modest capital investment (the costs of such infrastructure projects is large, however, most are funded primarily from private sources), yet generate enormous national returns in terms of job creation, foreign direct investment, and tax revenues. Labor The Dominican Republic has a labor force of nearly 3 million people, of which 17% work in agriculture, 24.3% in manufacturing, and 58.7% comprise services and government combined. The Dominican Republic has an unemployment rate of 17% (2004), which is expected to fall dramatically under President Fernández’s economic leadership. Some specific reasons for this include preparation for the full implementation of the DR-CAFTA as well as the creation of a massive commercial city on par with Dubai in the Arabian Gulf. The Dominican Constitution provides for the right of workers to strike and for private sector employers to lock out workers. The Dominican Labor Code, which became law in June 1992, is a comprehensive piece of legislation which establishes policies and procedures for many aspects of employer/employee relationships, ranging from hours of work, overtime, and vacation pay to severance pay, causes for termination, and union registration. The Labor Code requires that 80% of non-management workers of a company be Dominican nationals. The standard workweek is 44 hours. Some labor shortages exist in professions requiring lengthy education or technical certification. An ample labor supply is otherwise available, although there is scarcity of skilled workers and technical supervisors. Most employers have found the local workforce to be competent, trainable, and cooperative. Foreign employers are not singled out when labor complaints are made. Less than 10% of the nation’s work force is unionized. The Labor Code specifies that 20 or more workers in a company may form a union, however, before a union can officially call a strike it must have the support of an absolute majority of all company workers, whether unionized or not; it must have previously attempted to resolve the conflict through mediation; it must have provided written notification to the Ministry of Labor of the intent to strike; and it must have waited ten days from that notification before striking. Collective bargaining is legal and may take place in firms in which a union has gained the support of an absolute majority of the workers. Few companies have collective bargaining pacts. The Labor Code stipulates that workers cannot be dismissed because of trade union membership or union activities. 8 Dominican Republic Country Report The Labor Code establishes a system of labor courts for dealing with all labor related disputes. Within the Free Trade Zones most manufacturers have voluntary codes of conduct that include worker rights protection clauses generally aligned with the ILO Declaration of Fundamental Principles and Rights at Work. Telecommunications In June 2004 the Dominican Republic had 930,917 fixed telephone lines in service. This represented a penetration rate of 10.7 lines per 100 inhabitants, compared with 4.2 lines per 100 inhabitants at the start of the 1990s. The main market players are Verizon Dominicana, which took over the Compañía Dominicana de Teléfonos (Codetel), Tricom, Centennial Dominicana, and France Telecom Dominicana; however, other companies are starting to enter this burgeoning telecoms market. Mobile phone use has been growing at a blistering pace, and there are now almost three times as many mobile users as fixed line users. By June 2004 there were 2.3 million subscribers, up from 141,592 at the end of 1997. The Dominican Republic’s 3G (new generation of cellular phone technology) telecommunications network is the first Lucent MSC outside of the U.S. to support over one million subscribers. The system improves network efficiency and reduced operational and real estate expenses for Verizon Dominicana. Taxation The corporate income tax rate is currently 25% on the taxable income of each fiscal year. This tax must be withheld at a corporate level from the dividends paid by the company. As to individuals, the tax rate increases in proportion to the income, the highest rate coinciding with the corporate rate of 25%. The employer must withhold this tax from the salary paid to the employee. Payments made abroad are also subject to a 25% income tax, to be withheld by the Dominican party. Interests owed to foreign financial institutions are taxed with a lower rate of 5%. A 10% tax rate applies to income obtained in the course of business activities, such as fees, commissions, etc., which has to be withheld by the person or company making the payment. Foreigners are only required to pay tax on income of Dominican origin and, after the third year of residence in the country, also on income of foreign source. Branches of foreign companies are given the same tax treatment as Dominican companies. The Dominican equivalent of the VAT is the ITBIS, which applies to (i) the transfer of industrialized goods, calculated on the net transfer price plus accessory services, (ii) the import of industrialized goods, calculated on the CIF value of the goods plus custom duties, and (iii) the provision and lease of services, calculated on the value of service excluding mandatory tips. The ITBIS rate is currently 12%. Advertising services are taxed with a lower rate of 6%. 9 Dominican Republic Country Report The Selective Consumption Tax applies to the transfer of certain goods manufactured in the country, to the import of certain products and to the provision of certain services. Examples of these goods and services are alcohol and tobacco derivatives, vehicles, jewelry, certain home appliances, hotel rooms, etc. The tax rate ranges from 5% to 80% and is payable monthly. Law 146-00 established a selective tax to vehicles, which ranges form 15% to 80% depending on the CIF value of the vehicle. As part of the IMF program, the government has committed itself to implementing tax reform in order to compensate for the reduction in custom duties associated with the approval of the DR-CAFTA with the U.S., the planned reduction of the exchange commission, and the elimination of the temporary financial transactions tax. According to its commitments with the Fund, the reform is designed to simplify the tax system and broaden the tax base. In order to broaden the tax base, the government issued a decree in January dismantling some tax and customs exemptions. Education School enrollment rates in the Dominican Republic are relatively high, with a survey in 1996 estimating that 92% of children aged between six and fifteen attended school. Of these, an estimated 18.2% attended private schools. The UN’s Human Development Report (1998) put the adult literacy rate at 82.8%. The Fernández administration recently launched a project in conjunction with the World Bank to further improve educational development in the Dominican Republic in order to move the economy toward knowledge-intensive/high technology industries. The objectives of the Second Basic Education Development Project will be to: 1) improve the quality of basic education; 2) increase enrollment and especially completion rates, with priority directed to children from low income families; and 3) strengthen technical and resource management capabilities for basic education. The project components designed to promote educational development are: 1) national curriculum reform through promotional campaign, curriculum implementation, on-going monitoring and evaluation; 2) educational materials and resources by providing textbooks, workbooks, and teacher's guides, supplementary learning materials, classroom materials and supplies, and institutionalization; 3) human resources development through in-service certificate training, in-service advanced training, and pre-service training; 4) national student assessment through institutional strengthening, improving design and quality of basic education, and studies; 5) school nutrition programs to include school feeding, micronutrients, deparasitation, institutional strengthening, and information, education and communication programs; 6) improving school facilities; and 7) designing a pilot program to support private schools assisting low-income populations. The project also includes institutional strengthening and staff development for school administrators; management information system development; and on-going monitoring and evaluation of the project. 10 Dominican Republic Country Report Energy Sector The only indigenous fossil fuel is lignite, found in the Sánchez-Samaná peninsula, while annual consumption of fire wood is estimated at 1 million tons and charcoal at 500,000 tons. The cutting of trees for firewood in poor rural areas has contributed to deforestation. Although some effort has been made to develop the country’s hydroelectric capacity, imported oil still constitutes around 85% of the primary energy supply, and Mexico and Venezuela have traditionally supplied oil to the Dominican Republic through preferential accords. The power sector is mired by high costs, underinvestment and frequent blackouts, and suffers recurrent payment arrears run up by the public sector. Demand for power, which reached 1,500 megawatts (mw) in 2004, has outstripped supply in recent years, and the industry has a deficit estimated at 550 mw. New plants are being planned to alleviate the problem. AES, which already owns a 210 mw oil-fired plant, brought on stream a larger plant in 2001, powered by imported natural gas. However, incentives for companies to invest in the Dominican power industry are dulled by payment arrears and electricity theft. In 1999 the government split the Corporación Dominicana de Electridad (CDE) into separate generation, distribution and transmission arms. Generation and distribution assets were privatized, while transmission remained in the public domain. However, the new system does not work efficiently owing to flawed regulatory framework and the lack of market pricing mechanisms. Faced with high power costs, consumers, including public sector entities, regularly run up payment arrears. An agreement with private generators and distributors in September 2002 provided for large tariff increases, the elimination of state subsidies, and the negotiation of contracts with private companies, but failed to resolve the long-standing crises as it was not implemented fully. It had also been altered owing to rising oil prices, devaluation, and because of the acute fiscal difficulties faced by the government in 2003. The administration under Leonel Fernández vows to address the crises by: revising contracts for the purchase and sale of power among CDE companies and independent producers, as well as between generators and distributors; making sectoral costs transparent; limiting electricity subsidy to households that consume up to 200 kilowatt hours per month; increasing collections; privatizing the Ede Norte and Ede Sure distribution companies; and by strengthening regulatory bodies. The government will seek financial support from the World Bank and hopes to encourage new private investment in the sector. The administration’s partnership with the World Bank is known as The Power Sector Technical Assistance (TA) Project for the Dominican Republic. The Power Sector Technical Assistance (TA) Project for the Dominican Republic aims to: 1) strengthen the Government's regulatory and consumer protection performance, 2) improve policy formulation and implementation, 3) design the transmission grid and the wholesale power market, 4) increase the quantity and quality o f electricity for the poor, and 5) protect the environment. There are five main components added to which is a project management component. Component 1 reviews and corrects problems with the regulatory system and the institutional structure, and strengthens the Electricity Superintendence (SIE) and the Consumer Protection Office (PROTECOM). 11 Dominican Republic Country Report Component 2 (i) promotes a national dialogue to achieve a consensus on required reforms and the participation of The Power Sector Technical Assistance (TA) Project for the Dominican Republic aims to: 1) strengthen the Government's regulatory and consumer protection performance, 2) improve policy formulation and implementation, 3) design the transmission grid and the wholesale power market, 4) increase the quantity and quality of electricity for the poor, and 5) protect the environment. There are five main components added to which is a project management component. Component 1 reviews and corrects problems with the regulatory system and the institutional structure, and strengthens the Electricity Superintendence (SIE) and the Consumer Protection Office (PROTECOM). Component 2 (i) promotes a national dialogue to achieve a consensus on required reforms and the participation of the private sector; (ii) strengthens the National Energy Commission (CNE); (iii) funds public consultation processes; and (iv) improves the management of Government interests as shareholder in power sector enterprises through the Fondo Patrimonial (FONPER). Component 3 improves system reliability and increases competition in the wholesale power market by supporting business plan creation, installing training programs, identifying alternatives for private sector participation, establishing a transmission expansion plan, and reviewing the methodology used for setting transmission charges. Component 4 improves rural electrification programs and the Blackout Reduction Program in urban barrios. Component 5 supports the preparation of sectoral environmental documents. 12 Dominican Republic Country Report Summary The intent of this report is to give an objective perspective of the Dominican Republic. It has been specially prepared for readers who are unfamiliar with the Dominican Republic in general and those who previously had less knowledge regarding the government, society, economy, industry sectors, and current position of the country in terms of global status and direction. All figures and information contained within have been thoroughly researched for accuracy from some of the most reliable sources available on country data. However, prior to investing in any economy it is prudent to execute independent research and perform all necessary due diligence. For further information on any of the topics covered in this report, please visit the sourced websites or contact Panam Management Group, Inc., as we would be pleased to answer any questions you may have regarding the Dominican Republic. Sources www.worldbank.org www.economist.com www.gurupedia.com www.dominicanrepublicindex.com www.ustr.gov www.dr1.com www.dgii.gov.do www.cnzfe.gov.do www.firstinitiative.org www.forbes.com www.hispaniola.com www.phlaw.com Motorsport Industry Association CIA World Fact Book Economist Intelligence Unit UK Trade & Investment 13 Dominican Republic Country Report