The Dominican Republic is the site where Europeans first established a permanent settlement in the Americas. Since the time Christopher Columbus set foot in Santo Domingo, the land that was to become the Dominican Republic has had a troubled history. The country was ruled or occupied by Spain, France, Haiti, and the United States. Oddly enough, a twist of American history put this article in â€œforeign finance.â€ In 1869, U.S. President Ulysses S. Grant negotiated a treaty to annex the Dominican Republic, as Texas and California had been annexed before. However, the Senate refused to ratify the treaty. Party politics were never easy.
Today, many people in the United States who are familiar with the Dominican Republic only know it as the birthplace of Sammy Sosa and a multitude of other exceptional major-league baseball players. The underlying truth of that superficial knowledge is that many talented people have emigrated from the Dominican Republic to the United States in the last three decades. Dominicans make up the largest foreign-born population in New York City; at close to 370,000 people, they represent nearly 5 percent of the cityâ€™s residents.
A large flow of immigrants to the United States usually points to economic or political problems in the home country. The Dominican Republic has indeed had its share of problems. In addition to disastrous floods and chronic instability in neighboring Haiti, the country went through a rough patch when its second largest bank, Banco Intercontinental, collapsed in 2003. The fallout from the collapse had serious repercussions for the government, which eventually bailed out the bank depositors. But the cost was steep and the general appearance of mismanagement alienated most of the population. Inflation and devaluation followed.
There are, however, many positive aspects of the Dominican Republicâ€™s recent history. For most of the mid- to late â€˜90s , the Dominican Republic was growing steadily â€” at an average rate of 7.7 percent. The global slowdown and the local banking crisis took their toll in recent years, but the economy should begin to grow strongly again in 2005. In late 2003, the country began negotiations to join CAFTA (the Central American Free Trade Association), which would give it favorable trade conditions with El Salvador, Nicaragua, Costa Rica, Honduras, Guatemala, and the United States. Ratified in 2004, the agreement was an important boost to its long-term growth prospects. As part of its negotiating position, the United States requested that the Dominican government provide stronger protection to foreign investors. The result was that various restrictions on foreign investment have been abolished, and that many regulatory risks have been substantially reduced or eliminated. Obviously, there are still risks involved â€” the Dominican peso has fluctuated quite a bit over the past few years. Inflation is still a problem. The interest rates available tend to reflect this, with 16 to 24 percent rates for peso deposits. However, it is possible to receive 8 to 9 percent interest on U.S. dollar deposits in the Dominican Republic.
The securities on offer also have good peso rates of return. Most of the offerings and secondary trading are done in bonds rather than equities. The equities market is almost dormant. The Bolsa de Valores de La Republica Dominicana (BVRD) deals primarily in commercial paper. It has grown substantially in volume since its inception in 1991, when the exchange recorded US$400,000 in transactions. The exchange recorded US$1.3 billion in transactions during 2001.
There is a substantial expatriate U.S. population in the DR â€” over 60,000 by U.S. embassy estimates. There is a much larger population of Dominicans living in the United States: more than 1 million, including the large concentration in New York. Many of the Dominicans in the United States maintain strong ties to their home country. The DRâ€™s current President, Leonel FernÃ¡ndez Reyna, spent most of his childhood in the United States.
With over 10 percent of its population living in the United States, the Dominican Republic is in growing need of strong financial ties between the two countries. Banks have historically been the most important actors in financial transactions between the two nations â€” Citibank and Banco Popular currently operate in the DR. The banks have also dominated the emerging brokerage industry. Eight of the 17 brokerage firms currently operating in the DR are owned by banks. Until very recently, they were eight of 13. The banks have generally treated the securities market as a possible competitor to their savings and loan operations, as opposed to a complementary service. The result is that the securities market has a great deal of untapped potential. Many, if not most, of the business owners in the Dominican Republic have spent substantial amounts of time in the United States and would appreciate better financial offerings. Many also keep investment accounts in the United States that they might repatriate if comparable accounts were available in the DR.
Well-educated personnel are still inexpensive in the Dominican Republic. Although Spanish is the official language, many people are fluent in English, and a fair number are fluent in French. Real estate is also somewhat less expensive than in the United States. However, prices for most goods are comparable or more expensive than in the U.S., as many goods are imported. The road system is decent, but the infrastructure for electricity is a problem. Despite that, the DR has comparable Internet and wireless services to the United States, and many businesses have backup power generation.
Overall, the Dominican Republic looks like a great opportunity for investment companies. There is good reason to believe that there will be solid economic growth for many years to come, and that securities firms will play an increasing role in Dominican business life and in Dominican personal and institutional investments. Political instability seems to be over, and â€” due primarily to treaty obligations with the United States â€” the government has become much more tolerant of foreigners and foreign capital.