Political uncertainty hampers growth
Economic activity growth declined in Q2. GDP expansion reached 3.7%, compared with Q2 2018, and notably below the 5.7% observed in Q1. The result for H1 was growth of 4.7%. There is a broad consensus that political uncertainty has been the main cause for this slowdown. In July IMAE growth rebounded, rising by 4.7%. It is unclear if this is episodic, or has a longer trajectory due to the continuous monetary stimulus provided since June.
But the Central Bank’s end-of-August announcement of another policy rate cut (the third in three months), from 4.75% to 4.5%, suggests that authorities are not convinced that July's recovery will last over the medium term. Despite the expansionary stance, inflation remains low: reaching 1.17% from January to June, with a y/y rate of 0.94%.
External accounts are also performing well. In H1, the current account closed with a deficit of $99 million. Although in H1 2018 it closed with a surplus of $95.3 million, the negative balance for 2019 was low. In H1 the central government deficit closed at DOP 20.6 billion, equivalent to 27.2% of what was planned in the budget law. However, recall that the accumulated deficit throughout the year is a bad indicator of its yearend figure.
In addition to the political uncertainty, reservations and occupancy rates in hotels fell, due to negative media reports about tourism, which will affect growth. Still, the government is in a comfortable cash position to stimulate growth, by boosting expenditures as monetary policy effects kick in. We expect Q3 growth rates to be about 5.1%. This means the decline in unemployment won’t continue this year.
We expect inflation to remain low, as the monetary program remains in place, and the international reserve position stays strong. Inflation by the end of the year is likely to be close to 3%. The exchange rate would be sliding, and by the end of Q3 should reach DOP 51.60 per dollar.
In 2019 the current account will close with a deficit equivalent to 1.1% -1.3% of GDP. We expect low import growth associated with a relatively stable oil bill, a modest expansion of non-oil imports, a stable performance of exports of goods, an absolute (though not catastrophic) fall in tourism revenues and sustained growth in revenues from remittances.
In the race for the PLD presidential nomination, Minister of Public Works Gonzalo Castillo is gaining enormous momentum, and is becoming the most likely candidate to represent President Danilo Medina’s faction in a primary challenge to ex-president Leonel Fernández. We still believe that Fernández has the greater chance to become the PLD nominee.
Amending the Constitution is still on the political agenda. The amendment’s true purpose is to allow Medina to run for president in the future. His political future may depend upon it.
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