Economic activity resilient -- at least for now
The Dominican economy strengthened in Q1 2026, with growth accelerating from 2.2% in 2025 to 4.1%, supported by a gradual decline in inflation toward the 4% target. Headline inflation moderated to 4.63% in March.
This performance reflects strong external inflows and improved financial conditions, as lower bank interest rates supported domestic activity. International reserves rose above $16 billion, while the domestic currency appreciated modestly in y/y terms, although FX volatility increased in March.
On the fiscal side, emerging pressures are becoming more evident. While revenue growth remains supported by stronger activity, expenditure growth (14.8%) has outpaced revenues (11.6%), driven by a sharp increase in current spending, particularly in energy subsidies following the onset of the war in the Middle East. This dynamic points to a growing reliance on spending reallocation, and increases risks for capital expenditure execution.
However, the onset of the Middle East conflict has increased uncertainty over the external outlook, particularly through its impact on energy prices and global growth.
Under a baseline scenario—assuming U.S. growth of 2.3% and an average WTI oil price of around $87 per barrel—our projections point to real GDP growth of approximately 3.6% in 2026, with inflation rising to about 6%, above the target range. This reflects a shift in the growth profile, with a stronger-than-expected Q1 offset by weaker prospects for H2.
Under a downside scenario, characterized by weaker U.S. growth and higher oil prices (around $100 per barrel), growth could moderate to around 3%, while inflation may approach 8%.
Under both scenarios, policy responses are expected to involve higher energy subsidies, and increasingly complex tradeoffs. For the Central Bank, this implies balancing inflation containment against growth support, while on the fiscal side, adjustment is likely to fall on expenditure reallocation, with potential implications for public investment.
Now read on...
Register to sample a report