Dominican Republic: Sectoral Financial Positions and Macroeconomic Vulnerabilities

IMF Working Papers, October 17, 2016

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This paper examines the financial position of the key sectors of the Dominican Republic using the balance sheet approach to identify financial interlinkages and vulnerabilities.
The balance sheet of the economy has been weakening, particularly in foreign currency, due to persistent fiscal deficits.
Risks from a weaker foreign currency position appear mitigated by long-term maturities on government debt and increasing accumulation of foreign currency assets.
Network analysis indicates that, despite stronger financial positions in other sectors, they could be adversely affected in an external stress scenario because of strong links with the public sector.
Exposures to the public sector are particularly pronounced in the domestic financial system (directly) and households (indirectly, through pension funds).

Balance sheet deterioration:
- The overall balance sheet of the Dominican Republic economy has been weakening.
- Weakening is concentrated in foreign currency positions and is attributed to persistent fiscal deficits.
Mitigating factors:
- Long-term maturities on government debt reduce immediate rollover pressures.
- There is an increasing accumulation of foreign currency assets that buffers FX vulnerabilities.
Network interlinkages:
- Strong interconnections exist between the public sector and the rest of the economy.
- Network analysis suggests contagion risk: adverse external shocks to the public sector could transmit to other sectors.
Sectoral exposures:
- Domestic financial system: pronounced direct exposures to the public sector.
- Households: pronounced indirect exposures to the public sector through pension funds.

Monitor and address fiscal deficits to prevent further weakening of the economy’s balance sheet, particularly its foreign currency position.
Continue policies that extend debt maturities to preserve resilience against rollover and liquidity risks.
Sustain or enhance accumulation of foreign currency assets as a buffer against FX shocks.
Strengthen oversight of financial system exposures to the public sector to limit direct transmission channels.
Assess pension fund linkages to public sector assets and consider measures to reduce household indirect exposure where appropriate.
Use network-analysis tools in macroeconomic surveillance to identify and mitigate potential contagion pathways from the public sector to other sectors.

IMF Working Papers — Dominican Republic: Sectoral Financial Positions and Macroeconomic Vulnerabilities

1. Net Intersectoral Financial Positions
- 1. Net Intersectoral Financial Positions (Markdown version)
- 1. Net Intersectoral Financial Positions (PDF)