Assessing the new relationship with China
Economic activity expansion has been amazing all year, rising 6.9% to Q3, while the Monthly Indicator of Economic Activity showed an expansion of 8.6% in September.
Inflation remained low (0.22%) in October, and the annualized rate reached 3.52%, within the target range set in the monetary program (4% ± 1.0%). The accumulated rate since January reached 1.75%.
Monetary policy continues to be tight. Aggregates maintained the trend of preceding months. The restricted monetary base was 6.4% lower than in December (in September it was 6.2% lower), the broad monetary base was 15.7% lower, and money in circulation grew only 3.2%. In contrast, Central Bank titles grew 14.1%, with intensity not only during Q1, as usual, but also at the beginning of Q3, when the authorities sought to counteract the inflationary effects of the oil price rise. As a reflection, weighed average interest rates continued to rise. The lending rate rose by 44 points compared to September, and the borrowing rate by 16 points.
Net international reserves reached $6.98 billion in October, $400 million lower than in August. This was expected, due to interventions in the FX market to contain devaluation pressures linked to oil price rises. So devaluation accelerated.
The current account recorded a deficit of $751 million, January to September. That was a significant increase from the previous quarter, since to June it had reached only $124 million. The hike was associated with an increase of 38% ($779 million) in the oil bill, compared to January-September 2017. But export growth and remittances helped cushion the impact of the increase.
Between Q1 and Q3 total central government spending amounted to the equivalent of almost 74% of the total budgeted for the year, and revenues to 83%. The budget result was negative, but just by DOP 9 billion, or 10.40% of the amount budgeted. It’s not yet clear how the 2018 fiscal accounts could close, but typically expenditure and the deficit for the Non-Financial Public Sector (NFPS) surpass the budget targets.
President Danilo Medina in November made the first official visit ever of a Dominican Republic head of state to China, and was received by President Xi Jinping, after the April announcement of the start of formal diplomatic relations. Below we discuss the ramifications, for trade, investment, lending and tourism. There is little the United States can do to interrupt this development, besides threatening to review the DR-CAFTA, though the country could dissuade other governments in the region from deepening relations with China.
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