Sharp economic slowdown; health insurance corruption case poses political test for Abinader government
The economy is experiencing a marked slowdown in activity, with y/y growth virtually stagnant in October (at 0.2%), and clear signs of labor market cooling. This is unfolding amid rising inflation, primarily explained by supply-side shocks associated with tropical storm Melissa, and concentrated in tradable goods and basic consumption items. With inflation approaching the upper boundary of the target range, the Central Bank has adopted a more cautious stance, leaving the policy interest rate unchanged in November and December, while monetary aggregates decelerated. Though the interest rate decline has begun reflecting stronger transmission of liquidity injected in previous months, private sector credit continues to resist expanding at rates above 10% y/y.
External accounts are more favorable. Export expansion, driven by high prices for gold and agricultural commodities, along with the decline in oil prices and weaker domestic demand, has led to a significant contraction in imports, and a substantial improvement in the trade deficit. This performance has been reinforced by the rebound in tourism and the continued growth of remittances, which help reduce the current account deficit. Yet the currency has remained volatile, depreciating by 5.92% y/y on average in November, and with an end-of-period depreciation of 5.05%, reflecting persistent external pressures and adjustments.
From a fiscal perspective, monthly execution for November shows containment of total expenditure, which grew less than total revenue, despite a rebound in capital spending. But the ytd analysis paints a less favorable picture, with expenditure expanding faster than revenues, maintaining pressure on the fiscal balance. Nevertheless, public expenditure execution remains broadly in line with the budget.
The political-institutional environment has been strained by the case at the National Health Insurance agency (SENASA), which involves an alleged embezzlement of approximately $240 million, and has moved beyond the administrative sphere to become a significant test of the government’s narrative regarding the fight against corruption and the independence of the office of the Public Prosecutor. The coexistence of a cooling macroeconomic environment and rising institutional uncertainty defines a particularly sensitive yearend for economic and political management.
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