COVID-19 changes the political scenario
COVID-19 has changed the political scenario, in the runup to the July 5th elections. One of the most prestigious polling firms has projected a technical tie in the preferences for Luis Abinader (PRM & allies) and Gonzalo Castillo (PLD & allies), with 39% for Abinader (down 4% from January) and 37% for Castillo (up 9%), and 10% for Leonel Fernández (FP & allies, down 9%. These results suggest that the race will be polarized. The percentage of undecided voters rose from 3% to 13%. Although Abinader’s rating had been expected to drop, and Castillo's popularity to increase, the magnitude of the change was a surprise. The poll also found that Abinader would have a greater chance of success in a second round, with 46%, vs. Castillo, with 42%. Some doubts about the reliability of these results due to the extreme circumstances under which the poll was conducted, should be clarified after the results of other polls are published.
The number of COVID-19 cases continues to grow, to over 16,000 at the end of last week, while the number of new cases per day has remained at above 300 since the beginning of May. The Dominican Republic has the highest number of cases in Central America and the Caribbean, and the second highest number per thousand people – with the highest number of deaths, at about 500.
Economic reopening began in mid-May, via a four-phase plan. To ensure compliance, President Danilo Medina asked Congress for authorization to extend the state of emergency for 25 more days, starting on June 2nd. But his request sparked a serious political fight, as the opposition accused the government of using the curfew and the prohibition on gatherings to restrict its ability to campaign, while Castillo and the PLD candidates for Congress can move about unrestricted, and even under official protection. The parties agreed, and voted for a 12-day extension of the state of emergency, to mid-June. The opposition has already warned that this will be the last authorization it will support.
Q1 2020 ended with zero growth, deflation and deterioration in the fiscal accounts -- just the beginning of much deeper troubles. In January and February real GDP growth was 4.7% and 5.3%, respectively. However, due to social distancing measures, paralysis of non-essential economic activities, closure of borders to people and a curfew in last 10 days of March, economic activity fell 9.4%.
To March, accumulated inflation since January was -0.32% and y/y inflation reached 2.45%, well below the monetary program inflation target (4% +/- 1%). In April, inflation turned negative again. The CPI fell 0.82%, bringing accumulated inflation for the year to -1.14%, and annualized inflation to 1.07%.
In March, tourist arrivals were only 38% of those in March 2019, and over the quarter, 28% lower than in Q1 2019. The country saw practically zero arrivals in April. Remittances were $1.7 billion, 2.3% less than in Q1 2019, due to a 13% drop in March compared to February. FDI inflows also declined.
Based on the assumption of a 6% GDP contraction in 2020, we expect -20% growth in Q2. But in Q3, contraction should slow to -4%. Broad unemployment will rise from just over 10% in Q4 2019 to nearly 30% in Q2 2020, then decline to around 15% in Q3.
Inflation risk is extremely low. However, monetary expansion combined with the severe FX constraints is accelerating peso devaluation. We expect the exchange rate to reach 62 toward yearend. The CAD will expand, to at least 5% of GDP (vs. 1.4% in 2019). The government estimates that the fiscal gap will double, and announced that it is preparing a bill to amend the budget law. But the next government will be forced to seek additional external financing to pay for a recovery program.
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