Chances of Meeting Deficit Target Diminish
We expected this year’s powerful capital spending expansion through April to be followed by sharp contraction, as authorities aimed to hit the 2.3% of GDP 2016 deficit target. But that didn’t happen – and we now have doubts that the government will be able to meet the target.
Public investment through July reached DOP 50.7 billion, or 65.23% of the annual budget. That’s very high, even for an election year, and leaves only 35% of spending for the last five months. In July, the central government deficit reached DOP 45.9 billion, or 60.4% of the deficit planned for the year. That, too, is unusually high for that point.
Inflation continues weak. In August it closed at -0.06%, leaving accumulated inflation for the year at 0.31%, and annualized inflation at 1.47%. Monetary policy is still basically unchanged. The behavior of monetary aggregates is very consistent with the expected expansion of nominal GDP, while the Central Bank is maintaining its relatively aggressive posture in the money market.
The Bank’s net international reserves fell slightly, but were moderately higher y/y. The exchange rate was also stable. But several players are once again reporting delays in acquiring FX, especially at commercial banks. We reiterate our explanation of July: the rationing is due to "moral pressures" by the Central Bank, to force exchange operations to be done at a “suggested rate.” This may indicate faster depreciation ahead. But we don’t expect currency valuation to change drastically.
We’ve argued that dialogue aimed at achieving consensus on economic reforms, in particular on fiscal issues, would hardly begin before yearend, with political dialogue preceding it. Despite its electoral victory, the ruling PLD was left on the defensive. So it has focused on conducting a political dialogue, in order to contain criticisms and ease tensions. Talks are to center on a renovation of the political system, through the adoption of a law for parties, electoral law reform and the appointment of a new electoral board.
But dialogue has now stalled, and the political opposition has abandoned it, which also implies a postponement of fiscal reform talks. New Finance Minister Donald Guerrero has confirmed that talks toward the so-called fiscal pact won’t take place until next year. Nor has electricity sector reform dialogue achieved any significant progress.
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