Trump-Inspired Damage is Unlikely
Despite uncertainties surrounding the policies of U.S. President-elect Donald Trump, we don’t expect the effects on the Dominican economy to be dramatic, over either the short or the medium term. Expansionary fiscal policies aimed at strengthening U.S. infrastructure could boost demand and attract imports, though monetary tightening could have the opposite effect. The effects on labor markets, and therefore, on remittances and tourism, are so far uncertain.
But we think it unlikely that trade with Central America and the Dominican Republic will become U.S. targets. It would be very difficult to significantly change the terms of regional and bilateral trade deals. Nor does it seem likely that a tightening of immigration rules would hit the DR hard. Migration has declined from past decades; the proportion of undocumented Dominicans in the United States is lower than from other countries; and remittances depend mostly upon the state of the U.S. labor market and economy.
Q3 DR growth closed strong, signaling a real GDP growth rate of 6.8% for the year, very low inflation (0.65% accumulated for the year), and a narrowing CAD. But fiscal performance for 2016 unclear. We’ve warned that government spending wasn’t slowing enough to hit the deficit target (of 2.3% of GDP). While spending hasn’t changed, the government’s comfortable cash flow position could bridge much of the gap.
Projections put Q4 GDP growth at 6.5%, so unemployment should decline to 13.1%. Growth above potential output in Q3 could raise domestic inflationary pressures. However, the outlook remains positive, considering an improvement in the terms of trade and employment recovery in the United States.
Due to potential inflationary pressures, the Monetary Board tightened by 50 bp, to 5.5%. This will likely lead to a fall in lending growth to the private sector. Yet economic dynamism, especially as seasonal peak spending kicks in, would imply greater credit demand.
The CAD is expected to remain stable, due to lower import growth and stable export performance. By the end of 2016, it could reach 1.7%-2% of GDP. We also expect the exchange rate to remain relatively stable by the end of Q4, at about DOP 46.70 per dollar, and net international reserves to close at $5.15 billion, $450 million higher than at the end of Q3.
The Senate, controlled by the ruling PLD, last week elected the new members of the Central Electoral Board. With this, the first political knots that interfere with the advance of the most important economic reforms, such as fiscal reform, have started to loosen. The appointments were not uncontroversial and, as expected, the PLD maintained control. The opposition couldn’t stop the PLD from dominating the Electoral Board, and it appears it can’t influence other pending political issues, either.
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