Fiscal accounts off target
GDP is likely to close 2016 with a 6.7% increase with respect to 2015. From January thru September, GDP growth reached a remarkable 6.9%. We estimate that in Q4 it will clinch at 6.5%.
Inflation remains very low and the annual rate is likely to close below a third of the lower range of the target. In November, it reached 0.13%. Along the year, growth in monetary aggregates has maintained a sustained path, contributing decisively, together with very low external pressures and also on the exchange rate, to such low inflation rate. Leading instrument in containing both monetary aggregates and exchange rate has been the Open Market Operations of the Central Bank. Higher credit demand reflected in the market by an increase in weighted average lending rate, which in November swelled 51 basis points.
In November, DOP registered a nominal depreciation of 0.26% with respect to USD, very close to that of October. Both rates are near a third of what they were in September (0.73%) but more than twice of that registered on average between April and August (below 0.1% and stable). If the depreciation rate observed in October and November consolidates for the upcoming months this could mean that, after a significant hike in September, nominal depreciation rate is reaching a “new normal” at a level above the one observed in previous months. By the end of the year, exchange rate will end up registering a real depreciation above 3%.
External accounts continue to improve although very moderately in recent months. Between January and October, exports of goods totaled USD 7.33 bn, up 3.2% compared to the same period last year. Imports increased 1.1%, reaching USD 14.54 bn. Thus, trade deficit declined by USD 65.2 million (from USD 7.28 bn 2015 to USD 7.21 bn in 2016). Main factors explaining this were decline in oil prices earlier in the year and increases in gold prices in the international markets.
On Friday, December 9, President Danilo Medina submitted a bill to Congress that amends the Budget Law for 2016. The proposal also seeks to increase total financing above the level considered in the original budget. In this way the government recognizes that the fiscal deficit target for the year will not be met and that it will close even higher than expected. This is in line with what we had projected earlier in the year. The bill proposes to increase financing by more than DOP 11.8 billion (USD 256 million). This means: a) increase financial sources by 7% to reach DOP 185.1 bn (slightly over USD 4.0 bn); and b) increase the deficit from DOP 75.9 billion (USD 1.65 bn) or 2.3% of GDP estimated for 2016, to DOP 87.7 billion (USD 1.9 bn), bringing it to 2.7% of GDP, for a 15.5% increase.
Although the proposed increase in deficits and financing are moderate, it raises some concerns. On the one hand, the Medina Administration fails to meet the deficit and financing target, and the aggregate fiscal performance verifies a setback. On the other hand, it does so in a situation where the burden of debt service has reached very high levels.
In the bill, President Medina argued that one of the reasons for the proposal is the fact that tax revenues have been below budget provisions in 2016. However, the available evidence rejects this argument and supports that what motivates the request was really over expending. As we warned earlier, after elections fiscal authorities did not contract expenditure sufficiently as to counteract increase investment right before elections.
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