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Capital Markets in the Dominican Republic

Tapping the Potential for Development

image of Capital Markets in the Dominican Republic

This report presents a detailed analysis of the Dominican Republic’s financial system and offers a series recommendations to develop the country’s capital markets. The country has recently made big advances in the development of its capital markets, achieving high solvency in the banking sector, improving  the institutional framework for the management of public debt and experiencing steady growth in the value of both the private bond market and the assets of pension funds. However, the level of financing directed to the economy is still small, given the country’s level of development, and there are important structural challenges that need to be addressed. Both the Central Bank and the Finance Ministry issue public debt, each with different purposes, and there appears to be little coordination between the two organs in terms of rate of returns and maturity of the issued bonds. The primary market of private bonds suffers from a long and complicated issuing process that stems from coordination and communication problems among the different regulators. The bond secondary market lacks key aspects of market infrastructure. Finally, institutional investors invest mostly on public debt instruments and bonds issued by finance sector firms.

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Macroeconomic context

OECD Development Centre

The bank bailout introduced by the Central Bank after the financial crisis of 2003 deteriorated its balance sheet and also affected the fiscal accounts of the central government. Regarding the balance of payments, the current account deficit was mainly due to the limited mechanisms available to the Dominican Republic, as a net importer of commodities, to counter price shocks on imports. It would be advisable to develop a fund with a counter-cyclical component to help mitigate shocks on the trade balance and to implement an inflation targeting policy aimed at eliminating Central Bank transactions in the exchange market through bond issues.

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Graphs

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