Plunge in liquidity growth and weaker growth prospects for 2024

DOMINICAN REPUBLIC - Forecast 17 Jul 2024 by Magdalena Lizardo

Economic activity in May 2024 grew at 4.3% y/y, and although the cumulative expansion in January-May 2024 (4.9% y/y) remained close to the potential growth rate of 5%, questions remain about whether this pace of growth can be maintained, if the plunge in the economy's liquidity seen in June 2024 persists.

Monthly inflation returned to positive growth territory (0.48%) in June, after two months of contraction. Headline and core inflation in June stood at 3.46% and 3.98%, respectively. The exchange rate also saw a significant rebound, with a monthly depreciation of 1.05%, after appreciating in the previous two months. The average exchange rate stood at DOP59.3477 per dollar in June, for a y/y depreciation of 7.67%.

Although the monetary policy interest rate remains unchanged at 7% per year, the economy's liquidity slowed sharply in June, with M1 growth of 3% y/y, below the nominal growth of the economy. Already in May, a slow growth of the availabilities of the entire financial system was also observed (2.5% y/y). Meanwhile, the interbank interest rate has been rising since February, and loans to the private sector slowed to 16.9% y/y in June.

Net international reserves managed to recover in the first week of July, to $15.2 billion, after falling by $0.5 billion in June.

We’ve adjusted our 2024 growth projection downward, to 4.3%. The possibility of further monetary easing by the Central Bank is conditional on the Fed's decision to cut the Federal Funds rate.

Similarly, we project that inflation will remain within the inflation target range in both 2024 and 2025. The average exchange rate for 2024 is expected to rise to DOP 60 per dollar, assuming that the Central Bank would inject part of its reserves into the market if situations similar to those observed in H1 2024 prevail in the FX market. It is worth noting that in Q1 2024, balance of payments errors and omissions were $ -1.57 billion, 2.5 times higher than the average observed in the same period in 2020-2023.

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