Robust Growth and Low Inflation

DOMINICAN REPUBLIC - Forecast 26 Aug 2015 by Pavel Isa and Fabricio Gomez

Growth was strong and inflation muted in H1, with GDP growth estimated at 6.4%, and accumulated inflation reaching just 0.64%. Low inflation resulted from lower oil prices, which drove down transportation prices -- but reduced pressure on the currency was a secondary factor.

We expect an increase in demand in Q3, due to relaxation of credit rules, which will help firms involved in public works projects borrow. We also anticipate monetary policy rate stability. This combination will continue to stimulate private spending. We expect to see Q3 GDP growth at 6.2%, and at 6% for the full year. This performance is likely to moderately lower unemployment, to 13.7%.

Although above-potential growth in Q3 could generate inflationary pressures, the outlook remains positive, due to favorable trade terms associated with low oil prices, and the gradual recovery of the U.S. economy.

External accounts are expected to continue to be stable, as import growth declines (2% y/y change), in part due to the commodities price slide, and a rise in total exports (up 4.6% y/y). The current account deficit is likely to come in at 2.3%-2.5% of GDP at yearend, with net international reserves stable.

Revenues increased 15.5% in H1, outperforming the budget forecast. This is likely associated with the dynamism of consumption and investment, and comes in spite of the decline in gold and oil prices. For Q3, we expect an increase in primary spending. At the end of the quarter, the NFPS deficit will reach 1.9% of GDP. It’s forecast to reach 2.5% of GDP by yearend, just above the 2.4% target.

Violence and public insecurity are again hot topics. Several high-profile cases have heightened focus on the issue, amplifying the perception of insecurity, and putting the government and security agencies on the defensive. With great political sense, President Danilo Medina has promptly acted, in an effort to keep this issue from becoming a major political liability in the runup to the May 2016 elections. But it’s likely that his actions will be insufficient for improving safety in the streets, or changing the public’s negative perception of the government’s poor performance in this area.

The country is also suffering through a severe months-long drought. Although this is mainly linked to the effects of El Niño, it’s also due to increased depredation of the country’s forests. The water supply, both for drinking and irrigation, has dwindled significantly. Although this issue probably won’t factor into the elections, the management of natural resources is another of Medina’s negative points.
The very low turnout and inconclusive results in Haiti’s recent legislative elections points toward protracted political fragmentation, and weak policies long-term policies. That’s bad news for the DR.

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