Seeking Money, While Putting Fiscal Reform on Ice
Q1-Q3 GDP growth was once again remarkable: up 6.9%, compared with the same period in 2015, according to preliminary Central Bank estimates. The Dominican Republic continues to lead growth in Latin America and the Caribbean.
CPI rose only 0.04%, putting accumulated inflation for the year through August at 0.35%, and y/y inflation at 1.35%, well below the 3% lower boundary of the target range. No news is coming from the monetary front, and the average interest rate continues remarkably stable.
Exchange rate pressures felt in recent months, with the expected outcome: acceleration in the rate of nominal depreciation of DOP, from 46.01 to 46.45 per dollar. Yet FX rationing persists, according to our sources, and mid-sized importers continue to suffer long queues to obtain dollars.
Preliminary balance of payments results for Q1-Q3 reiterate this relatively favorable scenario. The current account deficit dropped to $281.9 million, down 36% from the same period of 2015.
The August budget suggests fiscal policy has maintained its course. We have warned that the government might find it difficult to reach the year-end target for the Non-Financial Public Sector (NFPS) deficit. The new data indicates that nothing has changed. Spending reached 65.2% of the budget, while financial results reached DOP 51.2 billion, or 67.4% of the target. Since both current and capital expenditure usually increase late in the year, we reiterate our skepticism about the likelihood of reaching the target.
President Danilo Medina submitted his 2017 proposed budget to Congress. It is generally very similar, in real, GDP and compositional terms, to the 2016 budget. It proposes a 7.3% spending rise over the 2016 budget, and sets the central government deficit target at DOP 83.9 billion, equivalent to 2.3% of GDP, and flat on 2016.
It’s clear that the government is working to raise tax revenues via administrative measures. In the 2017 budget, the government set a target for increasing tax collection by as much as 0.6% of GDP. Meeting that target will be unlikely, but it must be acknowledged that the administration has spent lots of “ammunition” fast, to try to raise revenues. This suggests that the government is not counting on revenue from tax reform. And, as we predicted, it has no near-term plan to expend much political capital on addressing the fiscal problem. A recent statement by the administrative minister of the presidency suggests that tax reform, at least for now, is being put on ice.
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