The IMF is worried about the debt path and insists on fiscal adjustment
In January, the inflation rate reached 0.29% while accumulated inflation declined moderately, reaching 3.86%, slightly below the inflation target (4%) set in the Monetary Program.
After months of loose monetary policy, the Central Bank´s position has become a little more restrictive. There is a slightly more intensified increase in the issuance of Central Bank securities. As a result, interest rates recovered moderately in January.
The Central Bank's international reserves increased noticeably in February, rising from USD 6.229 bn to USD 8.061 bn. The hike was the result of placing more than USD 1.8 bn in global bonds. It is expected that this increase will be temporary, and that reserves will decline as the Ministry of Finance demands resources to support public spending.
A recent IMF mission indicated that although the Dominican economy continues to perform well, the implementation of a fiscal adjustment is required to ensure sustainability of the debt. The mission pointed out that although recent measures to strengthen the tax and customs administration are helping to increase tax revenues, these will be insufficient to reverse the upward dynamics of the debt in light of tightening global financial conditions, oil price increases, and a greater debt service burden.
The mission recommended greater efforts to rebuild the capacity of public finances to cushion shocks, considering their impact on the poor and vulnerable as well as on growth. Specifically, it advised focusing the adjustment on the expansion of the tax base, including the targeting of tax exemptions and incentives, and the simplification of the tax system while protecting the most vulnerable population.
As mentioned, in mid-February, the Dominican Republic issued global bonds for a total of USD 1.822 bn, which is almost the total amount authorized by the budget law for this type external financing. The placement of sovereign debt consisted this time of USD 1 bn and DOP 40 bn, equivalent to USD 822 million. For the first time in history, the DR placed sovereign debt denominated in DOP, indicating that investors have confidence in monetary stability. This opens the door for the government to begin reducing the rate of growth of foreign currency liabilities as well as exchange rate risk.
On February 27, President Danilo Medina delivered the annual mandatory address to the National Assembly (a joint meeting of the Senate and the House). In our view, public opinion of the speech was, on balance, more negative than positive, for two main reasons. First, Medina presented an exaggeratedly positive and optimistic perspective of the administration and the state of the country. This contrasts with the perception of ordinary people and served to distance him from them. Second, he ignored topics of great concern to the public such as corruption, the increasing public indebtedness, and the environmental impact of mining activities.
The PLD continues paralyzed with respect to the new laws for parties and the electoral system. Its powerful Political Committee has not been able to make decisions, and what at first seemed like a battle that Medina was going to win easily against former President Leonel Fernández has now turned into a frozen situation. Since the party controls the Congress, what the PLD decides is what will be approved with respect to these two laws. These could be key pieces to renew and restore the legitimacy of the party system. However, the main conflict between these two factions of the PLD has nothing to do with aspects that are fundamental for democracy, but rather on the system that would regulate the internal elections of political parties. While Medina is betting on an open primary system, Fernandez is all for a system of closed primaries. The first would benefit Medina, and the second would benefit Fernández.
This paralysis, however, could be coming to an end since Medina could be moving in the direction of giving the final blow to Fernandez. A victory by Medina on this issue would place him in an advantageous position in the race for the presidential nomination, either for him to become the nominee (for which he would have to overcome a constitutional prohibition) or to decide who else would be nominated.
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