Slower growth and fiscal misalignment mark 2017
Deceleration of economic activity was the main feature of economic performance in 2017. Despite a robust rebound in November, and possibly in December, hopes that real GDP growth would end at 5% faded. Cumulative growth between January and November was 4.2%, and the expected rate for the year ranges between 4.5% and 4.7%. The economic cycle, declining terms of trade, the effects of two hurricanes and fiscal constraints are the main reasons for this performance.
In November inflation reached 0.76%, the highest rate of the year. Accumulated inflation from January through November was 3.20%, and year-over-year inflation 4.12%. Hence, annual inflation is likely to end very close to that of the Monetary Program target (4%).
Monetary policy continues to be less restrictive, facilitating higher levels of liquidity and driving down interest rates. In December, average lending rates in the banking system reached a record low for recent years. December was the fifth consecutive month to show a reduction. Since July, the lending rate has fallen 250 basis points, and since August, the borrowing rate has fallen 84 points.
In November, international net reserves reached USD 6.05 bn. This is 8.9% higher than in November 2016, but we don’t expect they’ll reach the December 2016 level (USD 6.7 bn) since higher demand for foreign currency associated with higher oil prices is putting pressure on the market. Exchange rates rose slightly, to DOP 48.10 per USD on the last day of transactions in November, to DOP 48.3 per USD on the last day of December. The rate of devaluation of the DOP accelerated slightly in November and December, but continues at a stable and moderate pace.
Fiscal misalignment is another remarkable economic feature of 2017, while official data seems to lack credibility. As of November, expenditure continues to lag, which translates into an accumulated deficit that barely equals 24.4% of the budget deficit. However, that figure is simply not trustworthy. There is most likely a significant fiscal misalignment, deriving mainly from the costs of the Punta Catalina coal plants project.
In December, Congress approved a modification to the 2017 budget requested by President Medina. Although in last month's report we discussed some of the implications of such a modification, the information was limited. It is evident now that its scope was greater than we initially reported.
The amendment increases primary expenditure by DOP 69 bn (close to USD 1.46 bn), equivalent to 13.5% of the primary expenditure authorized in the original budget, and to 1.9% of GDP. Of that, 37% corresponds to expenditures associated with the construction of the Punta Catalina coal plants, the financing of which had already been approved and signed for in June, but was not included in the 2017 budget law. Forty-three percent corresponds to interest payments on the bonds issued by the Ministry of Finance to capitalize the Central Bank, which are not to be paid to that institution, but used instead to pay public debt associated with expenses that were not authorized in the budget law. Fourteen percent is short-term credit operations mainly with the state-owned Banco de Reservas, which will become long-term debt.
The authorization for the increase of the budget financing totaled DOP 39.2 bn, but the effective increase in the financing of the non-financial public sector (NFPS) is only DOP 13.5 bn (about 285 million dollars) because the financing for USD 500 million (DOP 25.5 bn or 0.7% of GDP) for the Punta Catalina project had already been obtained. From all the above, the increase in the deficit of the consolidated public sector could reach an amount equivalent to 1.9% of GDP, of which an amount equivalent to 1.1% of GDP (DOP 39.2 billion) corresponds to the non-financial public sector (SPNF) and 0.8% of GDP (DOP 29.5 bn) to the financial public sector (Central Bank).
The Ministry of Finance indicated that the government deficit will only increase by 0.3% of GDP. However, it is not clear how they arrived at such a low figure. The lack of transparency in budget figures prevents validation of that projection. The Ministry revealed that the decision not to pay interest on the bonds for the recapitalization of the Central Bank was because in 2017 they had made large interest payments arrears from previous years. This clarification, rather than reassuring, is disturbing because it reveals that the Ministry has not been fulfilling its budgetary obligations as consigned in the budget laws. Also, the justification for requesting authorization to increase the financial sources to make payments associated with the Punta Catalina project is troubling. It was argued that those provisions were not included in the budget law because it was not foreseeable that the project would advance as fast as it did. It seems rather that the intention was not to increase the deficit target of the public sector consigned in the budget law, and thus to present a more frugal fiscal projection than would actually materialize.
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