Dominican Republic: Peso sinks amid weaker external sector and rising uncertainty
The Dominican peso has fallen markedly against the USD in recent weeks, and on 12 June traded at 58.0 per USD, down 5.3% month-on-month and 8.7% year-to-date.
The Covid-19 pandemic is the key factor behind the depreciation. The virus has led to a collapse in tourism, and depressed exports and remittances, all three of which are key sources of foreign currency. Moreover, in response to the pandemic the Central Bank has markedly loosened its monetary stance through rate cuts and extra liquidity, further weighing on the peso. In addition, concerns over the health of the domestic economy and rising uncertainty have boosted the demand for dollars.
In an effort to support the currency, the Central Bank secured roughly USD 650 million in assistance from the IMF and has intervened in the currency market. The Bank also issued a public appeal for calm in late May, urging businesses and citizens to avoid the panic-buying of dollars.
The currency depreciation poses a risk to public debt sustainability, given the sizeable share of foreign currency denominated government debt (roughly half of total government debt according to the IMF). Moreover, the weaker peso is limiting the ability of the Central Bank to lower rates in order to support the economy, and is weighing on FX reserves—which were down USD 2.4 billion from January to May.