Medina at His Worst Time
There is little doubt that Danilo Medina and his government are at their worst moment. The charm surrounding the figure of the President has been fading, and although no recent data is available from credible polls, it is very likely that his popularity has diminished.
A series of events have severely hurt the government's image. Troubles and bad news have been stacking up. These began with what has been widely perceived as an illegitimate way to amend the Constitution to allow Medina to run again for the presidency. Following that, a number of scandals have battered the image of the administration. The most conspicuous was unveiled by the suicide of a government contractor that uncovered a scheme of corruption and extortion in one of the most important programs of the Administration. Also, the number of deaths from dengue fever has negatively affected the image of the government. In this context, President Medina has significantly reduced his exposure to the media, for which he has also been criticized.
Along with the above, the Partido Revolucionario Moderno (PRM) and its presidential candidate, Luis Abinader, has managed to strike some blows by questioning some of the high profile programs of the government. It is thus quite clear that President Medina is no longer alone in the arena.
Despite all this, in our view Danilo Medina is still leading the electoral preferences by a significant margin over Abinader, although this margin is probably lower than observed in previous months.
In Q3 2015, GDP growth reached 6.7%. Projections indicate that growth for Q4 2015 would be in the vicinity of 6.5%. In spite of that, the unemployment rate has remained stable at 14% over the past year. Accumulated inflation from Q1 through Q3 was only 1.33%. For the end of Q4 2015, we expect an accumulated inflation rate of 2.5%, significantly below the target range of 4.0% ± 1.0%.
External accounts also show favorable results due to lower international oil prices and higher revenues from tourism and remittances. It is expected that the CAD will remain stable at 2.3%-2.5% of GDP into year-end. We also expect the exchange rate to continue its stable performance for the remainder of the final quarter, standing at DOP 45.7 per USD at the end of December. As usual, International Net Reserves will recover by the end of the year, while during Q1 they will decline moderately.
As of the end of September, the deficit of the Non-Financial Public Sector (NFPS) registered a deficit equivalent to 1.2% of GDP, but when current and capital transfers to the electricity sector are accounted for, the deficit reaches 1.8% of GDP. Recently, the government announced that tax revenues were below projections for September and October. In response, the budget office will reduce budget allocations to public institutions in order to remain on track to reach the target deficit. In spite of that, we expect a 0.2%-0.4% of GDP increase in the deficit of the NFPS, putting the total deficit for the year in the vicinity of 2.7% of GDP compared to the target of 2.4%. Although the target for 2016 is 2.3% of GDP, we expect it to close near 3.0% because elections will put pressure on public expenditure.
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