trade deficit Q for frederic..

[mondongo]

or any of the other posters who want to chime in....

I looked at the Central Bank website and saw a couple disturbing facts:

1) trade deficit for past quarter of US$800million.
2) foreign currency reserves drawn down by about US$200million to a net value of about US$750million.

The Centra Bank used the foreign reserves to defend the peso earlier this year. The peso continues to fall.

Q1: this annualized US$3.3B trade deficit is more than 10% of the GDP. This is a very large number, since it represents about the same amount of money the central government collects on a yearly basis. Is it dangerously high?

Q2: if this trade deficit continues to grow, it significantly increases the demand for the US$. Does this have serious, long term devaluation implications? Note that with such a small amount in reserves, the Central bank is powerless in open market interventions.

thanks in advance,
mondongo

[AmbiorixPaulino]

I don't really have a direct answer to either of your questions but I wanted to add and somehow contribute my 2¢ to what you may be getting at. I think that sooner or later the Dominican government will realize that what it is trying to sell (confidence in the economy) comes at a high price. Inflation and corruption eventually do away at the meager profits that temporarily dock at our ports in the way of tourism and imported goods, such as secondhand SUVs and rundown entertainers. The Dominican Republic has also put into effect many policies and projects that call for higher taxation of a people who can't even afford to pay actual electricity bills.

[MommC]

One thing that worries me about the recent borrowing trend by this gov't, is the consequences of the increasing debt that the country is carrying and the implications of the high debt to GDP ratio, the devaluing peso, and the ability of future gov,ts to repay their obligations. I think most Dominicans and also expats are not aware of the provision in the Dominican constitution that will allow the US to step in to "protect" American interests in the DR. This has occurred in the past when the US took control of the country's aduana to secure and repay the debt that was owed by the DR to the US. This can and will happen again if gov't does not control spending and do something to reduce the level of corruption for the benefit of gov't supporters in the country.
While Argentina is a spectre of what could happen in the DR I doubt greatly that the US would allow this scenario to happen in the DR. They WILL step in before that should happen and collect their due. Where that will leave the average Dominican people and all non-US expats is anyones guess.

[mondongo]

MommC,
Since I dont know much about the DR constitution, I was not aware that it allows the US to "step in" to collect its debt. Do you mean that they will send troops to the DR?

mondongo

[MommC]

but that's what I've been lead to believe, first by an American landowner in San Cristobal (been in the DR 50 yrs and checked it out with the US Embassy before he purchased his land) and by a Dominican legal eagle who is at present an advisor to Hippo.
Since I haven't personally read the entire Dominican constitution I'm only repeating what I've been told and what I've heard about the last time the US took control of Dominican customs to recoup the monies owed them.
Perhaps Golo or one of the other locals could tell you more.
All I know for sure is our friend in SC said not to worry about buying a place in the DR as he was farily sure that in protecting US holdings the Americans would also look kindly on their northern neighbours and assist them also!! (That I have my reservations about!!)

[Pib]

Do you honestly believe that ANY country would introduce a clause in its constitution that would allow another country to invade it in order to collect a debt (or any other reason for that matter)?

Do you honestly believe that the US (or any military power) needs a clause in the constitution of an *enemy* country to invade it?

^{Hmmm... makes me wonder}


Mrs. Rice: Sir, we checked the constitution of Afghanistan, it doesn't give us the right to invade it.

Bush: I guess we can't do anything. Dammit!

[MommC]

dept. in the Dr in the past and it is my understanding that they had quite a hand in the writing of the DR constitution so Lord knows what is written into it. As I stated I haven't read it (come to think of it I don't think I've read all of the Canadian constitution either!!) Have you read your constitution??
What I believe and what I've been told are sometimes two different things, however I did state that this is what I've been told by someone who made it a point to find out what his options were before he plumked his hard earned cash down to buy property in the DR 50 yrs ago and by a Dominican lawyer who is in a position to have some knowledge of the constitution.
If it is true (which I really can't say one way or the other not having read the document) I wondered what effect it would have on the monetary/deficit situation in the DR.
Perhaps someone reading this thread could enlighten us all........

[Pib]

Excuse me, but I thought that it was somewhat obvious that... never mind.

I don't know how the constitution ended up involved in a thread about trade deficits and such. IMHO the constitution doesn't have much influence in the mighty powers of world finances, that BTW, I don't claim to understand in the least.

Yes, the US took hold of our Customs in 1905, actually *created* it to collect an old debt that the country had with old Uncle Sam. Did the Dominican constitution give the US "the right" to do so? I doubt it. And frankly it is not like they needed it, huh?

The *deal* ended when Trujillo canceled the remaining of the debt and the DR government took hold of the Customs Service. When you go by the malecón check for one of the two monuments there. One of them (Obelisco Hembra) was originally built to commemorate the Trujillo-Hull treaty (IIRC), that ended the "embargo" on our Aduanas in 1940.

edited by Pib to add:

Curious note, the remaining debt paid by Trujillo was only a little over 9 million USD

[Pib]

No, the US had no *saying* in our original constitution, although I admit that the US had *inspired* the idea of DR. I don't think that in 1844 the US had *that much* influence in the area, I am up for a correction if I am wrong.


First paragraphs of our constitution:

De la Nación, de su Soberanía y de su Gobierno.

ART. 1.- El pueblo dominicano constituye una Nación organizada en Estado libre e independiente, con el nombre de República Dominicana.

ART. 2.- La soberanía nacional corresponde al pueblo, de quien emanan todos los poderes del Estado, los cuales se ejercen por representación.

ART. 3.- La Soberanía de la Nación dominicana, como Estado libre e independiente es inviolable. La República es y será siempre libre e independiente de todo poder extranjero. Por consiguiente, ninguno de los poderes públicos organizados por la presente Constitución podrá realizar o permitir la realización de actos que constituyan una intervención directa o indirecta en los asuntos internos o externos de la República Dominicana o una injerencia que atente contra la personalidad e integridad del Estado y de los atributos que se le reconocen y consagran en esta Constitución. El principio de la no intervención constituye una norma invariable de la política internacional dominicana.

^{emphasis added by Pib}

Having thoroughly hijacked this thread and used it to spew some irrelevant information, I now proceed to bug off and let you continue educating me with some more financial wisdom (which I sorely lack).

[Escott]

I think that the trade deficit number is skewed by the one time Sovereign Bonds and contracts in 2 quarters.