Fiscal Talks Likely to Take a Back Seat
Discussion of political reform is very likely to precede talks over electrical sector reform, and the so-called Fiscal Pact. Business leaders have stressed that good party and electoral laws are a priority, a view shared by almost all civic organizations. The government has been responsive, and has indicated that it will prioritize discussion of these issues in Congress. So we don’t expect tax reform discussions to start before Q4, or early next year. And the outcome is unclear.
Meanwhile, the multi-year National Public Sector Plan suggests a continuation toward gradual fiscal adjustment. The government expects interest payments on public debt to climb in 2017, as revenue falls slightly. To cope, primary spending is to contract by 0.8% of GDP, from 14.4% in 2016 to 13.6% in 2017, and to 13.5% in 2018, while the primary surplus could rise from 0.9% to 1.3%. Plans call for the fiscal deficit to fall from 2.3% of GDP in 2016 to 2.1% in 2017, and to 1.7% in 2018. Interest payments on public debt would nonetheless rise in 2017 to 22.8% of tax revenues, and in 2018 to 20.3%. It’s unclear whether these targets will be achieved, or whether they are sufficient to contain borrowing dynamics.
Economic activity slowed in m/m in May, probably due to reduced public investment, as the electoral campaign ended. In June, inflation peaked at 0.6%, its second highest monthly rate in a year. But y/y inflation at 1.9% was well below the 4% +/- 1% target range, while accumulated inflation has since reached only 0.17%.
Monetary aggregates are stable, as the Central Bank continues to be active in the market, though less aggressively so, amid loosening inflationary pressures and a relaxed external environment.
Importers have complained in recent weeks about FX purchasing restrictions, saying bank lines to buy funds can last for days. In our view, the rationing is due to “moral pressures” the Central Bank is putting on banks, to force the exchange rate to a suggested level.
Trade flows continue to be stable, according to preliminary January-May data. The trade deficit has declined since 2015, due to the fall in oil costs.
A recent study exploring the potential effects of the TPP on Dominican exports to the United States found that, increased competition notwithstanding, the effects could be limited, and concentrated mainly in the textile industry.
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