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Cuba, Dominican Republic and Puerto Rico Country Risk Report Q3 2016

  • May 2016
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views Growth in the Dominican Republic will moderate amid declining gold output, but relatively robust private consumption and tourism will help sustain the economy. Puerto Rico's fiscal crisis will result in decreased government spending, lower household consumption, and increased emigration, all weighing on growth. The Cuban economy holds immense potential given the island's large size and proximity to lucrative US markets. However, investment and growth will depend on political dynamics on both sides of the Florida Straits. Major Forecast Changes Puerto Rico will undergo a painful internal devaluation, leading to the continuation of its recession over the next five years. This devaluation will see wages fall and lay-offs increase, decreasing the overall cost of employment on the island over a prolonged period and leading to a significant negative impact on private consumption.

We have downgraded our expectation for the island's growth trajectory, and we now expect an average contraction of 1.4% through 2020, compared to our previous forecast for an average of 0.8%. We have upgraded our end-2016 policy rate forecast for the Dominican Republic to 5.00% from 4.50% previously, implying no changes from the current level. A gradual uptick in inflation will see headline price growth return within the Banco Central de la República Dominicana's inflation tolerance band this year, in light of statistical base effects and rising oil prices. As a result, we expect the bank will keep its policy rate on hold in the months ahead, following 125 basis points of cuts in 2015.

Table Of Contents

Cuba, Dominican Republic and Puerto Rico Country Risk Report Q3 2016
BMI Indices - Brief Methodology 5
BMI Risk Index - Cuba6
BMI Risk Index - Dominican Republic7
BMI Risk Index - Puerto Rico8
BMI Risk Index League Tables9
Regional SWOTS 10
Executive Summary - Regional 13
Core Views 13
Major Forecast Changes 13
Key Risk 13
Chapter 11: Economic Outlook - Cuba 15
Economic Growth Outlook 15
Relaxed US Policies Bolster Integration Efforts15
The US government's easing of travel, trade and financial restrictions on Cuba will support the island's gradual integration into the global
economy
TABLE: MACROECONOMIC FORECASTS15
Chapter 12: 10-Year Forecast - Cuba 17
The Cuban Economy To 2025 17
Reforms And Global Integration To Drive Stronger Growth17
Economic growth in Cuba will pick up in the coming decade, due to incremental reforms on the part of the government and greater
engagement with the global economy
TABLE: LONG-TERM MACROECONOMIC FORECASTS17
TABLE: THE CUBAN BUSINESS ENVIRONMENT TWO-STEP18
Chapter 13: Political Outlook - Cuba 21
Domestic Politics 21
Leadership Rhetoric Points To Sluggish Pace Of Reform21
The Cuban government will remain wary of rapid changes to the country's economic system, which authorities view as a threat to the
country's broader political philosophy
TABLE: POLITICAL OVERVIEW21
Long-Term Political Outlook 23
Political Change To Come, Despite Legacy Of Intransigence23
The Cuban political system is heading for substantial change and uncertainty, as the Castro brothers prepare to leave office in 2018
after more than 50 years in power
Chapter 21: Economic Outlook - Dominican Republic 27
Economic Growth Outlook 27
Household Consumption Will Remain A Bright Spot27
Headline growth in the Dominican Republic will moderate over the coming years, as declining gold output weighs on real export growth
and fixed investment moderates
Monetary Policy 28
Easing Cycle Has Bottomed Out28
The BCRD's easing cycle has run its course, and the bank will hold its benchmark rate at 500% through year-end This comes as
price growth will rise back above the lower bound of the bank's inflation tolerance band and economic activity will remain relatively
robust
Chapter 22: 10-Year Forecast - Dominican Republic 31
The Dominican Republic Economy To 2025 31
Recovery In Tourism To Drive Growth31
The Dominican Republic's economic outlook is bright over the next decade, with the country set to benefit both directly and indirectly
from growth in the US
TABLE: LONG-TERM MACROECONOMIC FORECASTS31
Chapter 23: Political Outlook - Dominican Republic 33
Domestic Politics 33
Medina Second Term Highly Likely33
President Danilo Medina is highly likely to secure a second term on May 15 Another Medina term will ensure that broad policy continuity
persists, with the government remaining focused on attracting foreign investment into sectors such as mining and tourism
Long-Term Political Outlook 34
Economic Improvements To Support Policy Continuity34
Government policies will remain business-friendly in the Dominican Republic in the coming years, as strong economic growth ensures
the current political direction of the country remains popular
Chapter 31: Economic Outlook - Puerto Rico 37
Economic Growth Outlook 37
Internal Devaluation Ahead37
Puerto Rico's recession will continue into 2016, with domestic demand facing significant headwinds stemming from an internal
devaluation Private investment will contract, as federal oversight of the island's finances will lead to the end of tax credits in an attempt
to shore up revenue
Fiscal Policy And Public Debt Outlook 39
Default Increases Impetus For Debt Restructuring Framework39
Puerto Rico's latest debt default demonstrates the government's seriousness in prioritising essential services over debt
payments
Chapter 32: 10-Year Forecast - Puerto Rico 41
The Puerto Rican Economy To 2025 41
Growth Will Remain Subdued Amid Unfavourable Demographics41
Economic growth in Puerto Rico will remain subdued in the coming years, in large part due to unfavourable demographics and labour
market dynamics Weak fixed investment will further weigh on the long-term growth prospects of the economy
TABLE: LONG-TERM MACROECONOMIC FORECASTS41
Chapter 33: Political Outlook - Puerto Rico 45
Domestic Politics 45
Debt Agreement In US Congress Will Lead To Sharp Fiscal Adjustments45
The government of Puerto Rico will receive the ability to enter debt negotiations from the US Congress, at the cost of handing its budget
oversight to a federal government-appointed advisory board This will lead to sharp cuts to social services in the coming years
Long-Term Political Outlook 46
No Change In Sight To Political Status With The US46
Puerto Rico's political status as a territory of the US is unlikely to change over the coming decade, given the unfavourable tax effects
that statehood would imply for residents
TABLE: IMPACT OF PUERTO RICO STATEHOOD ON SELECT FEDERAL PROGRAMMES 47
Chapter 4: BMI Global Macro Outlook 49
Global Macro Outlook 49
Tentative Stability, But New Risks Emerging49
TABLE: GLOBAL ASSUMPTIONS49
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 50
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %51
TABLE: CUBA, DOMINICAN REPUBLIC and PUERTO RICO - MACROECONOMIC DATA and FORECASTS 53

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