FROM THE ECONOMIST INTELLIGENCE UNIT

Outlook for 2009-10

The authority of the president, Leonel Fernandez, will weaken amid growing discontent over corruption and sharply deteriorating economic conditions, raising the prospect of increased protests and unrest in 2009-10.Legislation will be centred on pushing through long-delayed constitutional reforms and plans to stimulate the economy before the mid-term elections in 2010 begin to dominate politics.The administration’s ability to meet its macroeconomic and fiscal policy goals will be limited by a severe economic downturn and structural weaknesses in the government's accounts.Tight financing conditions will mean government spending cuts in 2009, reducing the central government deficit to 2% of GDP, but lifting public debt to 43.7% of GDP. The deficit will remain at 2% in 2010.The worst of the US recession may now be ending but the collapse in global trade and declining domestic demand will cause Dominican GDP to contract by 2.5% in 2009. Recovery will be slow as GDP grows by just 2% in 2010.Annual inflation will continue to fall through most of 2009, turning negative for a few months, but will end the year at 5.6% as the peso depreciates. Inflation will average 7.2% in 2010 owing to higher commodity prices.We expect an adjustment in the currency, given the magnitude of the external financing requirement and adverse global conditions, and anticipate a real depreciation of 4.6% in 2009 followed by a slight further depreciation in 2010.Weak export earnings and remittance inflows will lead to a current-account deficit of 5.3% of GDP in 2009, despite a fall in import spending on the back of lower oil prices. This deficit will rise to 6.5% in 2010 as import costs increase.

Monthly review

The constitutional reform process has thus far been bogged down in debate on social issues, highlighted ideological rifts among legislators.A surprise political pact was agreed in late-May by Mr Fernandez and the PRD's Miguel Vargas Maldonado. The pact covers seven reforms and would disallow consecutive re-election while permitting non-consecutive re-election.The Central Bank decided to maintain interest rates in May, halting a series of rate cuts that began in December and have come down from 9.5% to 5%.Annual inflation hit 0.7% in April and is likely to turn negative in the coming months as domestic demand continues to fall.Preliminary figures show that exports declined by 23.4% in the first quarter of 2009 compared with the year-earlier period.