The President’s Very Full Plate

DOMINICAN REPUBLIC - Report 30 Jun 2016 by Pavel Isa and Fabricio Gomez

Economic activity continues to expand rapidly. Monthly growth in April was up 10.1% over April 2015, and up 7.1% January through April. We expect lower figures starting in May, as public spending moderates. Inflation remains low, with annualized inflation at 1.71%, well below the 4% (± 1.0%) target range. Monetary aggregates and interest rates continue to be stable.
Central Bank net international reserves have fallen slightly, from $5.2 billion in December to $5 billion in May. But they’re still above the $4.8 billion of a year ago. Consistent with inflation, monetary aggregates and NIR performance, the exchange rate is also stable. The accumulated trade deficit for the year through April was $ -2.66 billion, slightly above the level for the first four months of 2015. But the deficit is at historic lows, due to lower oil prices.
Public spending jumped January through May, amid investment expansion. Total capital expenditure reached DOP 44.3 billion, or 57% of the year’s budget. The resulting central government deficit reached DOP 36.1 billion, or 47.5% of annual projected spending. But we expect public investment spending to drop significantly in H2, as fiscal authorities aim to bring the deficit within the 2.3% of GDP target.
President Danilo Medina’s Partido de la Liberación Dominicana overwhelmingly won in the May presidential elections, with the party and its allies taking 127 of 190 seats in the House, or 67%, and 29 of 32 seats in the Senate. Such a resounding victory will allow the PLD coalition to pass any kind of legislation. It could even amend the Constitution again. The coalition also won 107 out of 158 municipalities (68%), while the opposition PRM and allies its won 51 (32%).
Medina and his government face a heavy reform agenda, which could have both major political costs and uncertain results. The government must take a position on congressional leadership, cabinet reshuffling and replacement of members of the High Courts, as mandated by the Constitution -- all choices that will affect reform capacities.
Opposition parties and the business sector are demanding that political reform be a priority. Major issues are protection of the rights of political party members, and greater transparency in party fundraising and spending; pressure for cuts in subsidies to the energy sector; and fiscal reform – though there’s powerful opposition to higher taxes, and skepticism that any tax hikes would improve public services.

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