Medina’s Next Term: Continuity Over Innovation
President Danilo Medina’s mandatory speech before Congress on the inauguration day of his second four-year term sent a message of continuity, rather than innovation. His words conveyed hope and optimism, as he highlighted the achievements of his first term, and announced goals for the second. No mention was made of macroeconomic issues, while references to fiscal issues were scarce. All of this suggests that there won’t be significant changes to macroeconomic policies. For now, abrupt changes to taxation or spending are not envisioned. The president did not even propose dates to start talks on the so-called Fiscal Pact.
As before, the emphasis was on social policy: the president highlighted his administration’s successes, and outlined the path to come, with special focus on poverty reduction, job creation, housing, support for small agriculture and SMEs, and promotion of quality public education. Innovation discussion was limited to the reform of the health sector, where there appears to be a clear intention to move forward, after more than a decade of stagnation: reforms were proposed in urban transportation, which raises many questions of political and financial viability; and water provision, which also would require large investment, amid significant fiscal constraints.
Medina reappointed quite a few ministers to their posts, and most of the changes were mere reshufflings, underscoring the continuity of macroeconomic policy. Donald Guerrero, an economist without significant academic credentials, but who is a trusted Medina lieutenant, was appointed finance minister. Isidoro Santana, a renowned economist, was appointed minister of Economy, Planning and Development.
New data show impressive GDP growth for H1, at 7.4% -- above all expectations. Although prospects were for an increase, public investment adjustment downward for May and June should have moderated growth in Q2. But the Central Bank claims that activity grew at a remarkable 8.7%, from the same period of 2014.This looks too good to be completely true. Accumulated inflation January through June was 0.36%, and 1.85% y/y. Monetary policy has been neutral.
Economic prospects look positive for the rest of the year and for 2017, although fiscal constraints are a concern for the medium term. We expect GDP growth to reach 5.6% for H2, with rising inflationary pressures. But the outlook remains positive. We expect both the CAD and the exchange rate to remain stable. Fiscal results for early 2016 look misaligned with annual targets, and the NFPS deficit came in over the 2.3% target set by the budget law; a figure above 2.5% of GDP would not be surprising.
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