On the road to normality? Growth nears potential and inflation is under control, but currency depreciation and interest rates are high
Q1 2024 ends with some signs that the Dominican economy is on its way to achieving trend values for key economic variables, such as growth and inflation. In January-February the average interannual growth of economic activity was 5.4%, close to potential growth, and inflation in Q1 was 3.33% y/y, within the target range.
But other variables, such as currency depreciation and lending rates, still show significant deviations from the trend. In Q1 y/y depreciation of the period-end exchange rate was 7.4%, the fifth largest depreciation since Q1 2007. The monthly bank lending rate in Q1 2024 has remained above the average in the period of monetary flexibility from June-December 2023. Its current level is the highest since April 2017, except briefly in February-May 2023.
In this context, net international reserves were reduced by $1.65 billion since December 2023, and stood at $13.8 billion in March 2024.
The NFPS deficit in Q1 2024 is 16.8% of the total deficit planned for 2024. Although in January-February y/y growth of fiscal revenues exceeded the growth of expenses, revenues in March 2024 were almost stagnant, while expenses grew 15.4%.
For 2024, we forecast GDP growth of 5.5%, an upward revision compared to the projection made in December 2023. Inflation remains within the target range in 2024. The current account deficit is around 3.8%, close to the level of 2023. The annual depreciation of the average exchange rate in 2024 should be 6.7%. Exports would increase mainly as a result of the expansion of tourist services, gold and free zones. We estimate that open unemployment will decrease slightly, to 5.2%.
In politics, presidential and congressional election campaigning is entering its final stretch. The probability that President Luis Abinader will be re-elected in the first round has risen, while the opposition's chances are weakening.
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