Abinader headed for a presidential victory
Three recent surveys with the best track records in predicting electoral results have projected that Luís Abinader (PRM and allies) will win the July 5th presidential election, by a wide margin over Gonzalo Castillo (PLD and allies). On average, they estimate 52% of voting intentions for Abinader, 33% for Castillo and 11% for Leonel Fernández (FP and allies). The PLD has been in power for the last 16 years -- but it seems that the opposition is headed for a victory.
Yet these estimates are not conclusive about whether Abinader is on track to achieve the 50% of the vote necessary to win in the first round. In case of a runoff, all three surveys project a comfortable victory for Abinader, with percentages ranging from 54% to 63%.
No polling firm projected congressional results. We reiterate our prediction that the PLD will lose its majority, and that the PRM will significantly increase its share in both chambers, meaning that the next Congress will be much more divided.
The number of people with positive diagnoses of COVID-19 has increased dramatically, as the number of tests has accelerated. There are more than 30,000 positive cases. There is little doubt that this is the result of reopening some economic activities, and relaxation of social distancing measures. We believe that only a very serious situation would cause either the current or next government to reintroduce drastic social distancing measures.
Due to the pandemic, and to social distancing both at home and abroad, growth in March and April was negative. In March, the drop in the Monthly Economic Activity Indicator (IMAE) was -9.4% compared with March 2019, and -29.8% in April. This brought accumulated growth in January to April to -7.5%. We expect new negative figures for May and June, though these will likely be less intense, given gradual reopening and social distancing relaxation.
May brought the fourth consecutive month of deflation. The CPI fell 0.11% from April, accumulated inflation in the first five months of the year was -1.25%, and y/y inflation reached 0.99%. But core inflation (of monetary origin) was 3.1%. This reflects that, despite expansionary monetary policy, other factors, such as imported inflation and economic depression, are dominating price behavior. Interest rates have declined, and credit to the private sector has increased significantly. But rather than real investments, expansion of liquidity and credit has stimulated FX purchases, putting additional pressure on the FX market.
After 45 days of accelerated depreciation, the nominal exchange rate has stabilized above 58. From late April to early June, depreciation increased six-fold compared the previous two months. However, in the last three weeks, depreciation has returned to its previous speed.
In April and May, external accounts suffered the consequences of the epidemic and social distancing. In April and May exports fell by 28% compared to 2019, proceeds from tourism disappeared and family remittances declined by 8.3%. Imports also plummeted. Between January and May remittances fell 17% ($1.4 billion) compared to January-May 2019, especially due to the 35% reduction between April and May. This caused the trade deficit to decline by $1.1 billion, a fall more than offset by the decline in earnings from tourism and remittances.
COVID-19 has dramatically changed the fiscal landscape, and forced the government to ask Congress to amend the budget. Congress passed that bill last week. The new central government deficit is projected at DOP 233 billion, or 5% of GDP, and financing needs rose from 5% to 8.6% of GDP ($7 billion). The government expects 90% of new financing to come from external sources. But we believe this new budget will be temporary, because no recovery package has been considered, and revenues, deficit and financing needs have been underestimated. We think the new government will be forced to modify the budget again.
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