Stable economy, but with turbulence in sight
The Dominican economy is advancing at cruising speed, with accumulated growth of 4.5% in the first eight months of the year, while facing an increasingly challenging external and internal environment.
The turbulence has not altered macroeconomic stability so far, but it forces the economic team to maneuver with precision to prevent external factors from affecting the internal trajectory.
The sources of turbulence are multiple. The conflict in the Middle East keeps fuel prices high. Added to this are the high yields on 10- and 30-year US Treasury bonds, the depletion of a good portion of the budgeted resources to subsidize fuels, and the structural rigidity of public spending.
Year-on-year inflation reached 5.13% in August, slightly above the upper limit of the Central Bank's target range, set at 4% ± 1%, despite subsidies and the appreciation of the peso which dampens inflationary pressures.
The Central Bank's decision to increase the Monetary Policy Rate by 25 basis points was correct and was accompanied by an increase of the same magnitude in the Federal Reserve's benchmark rate. The objective is to prevent external price shocks from generating second-round effects on domestic inflation.
The problem is that the external shock arrives at a time when fiscal space is limited.
Fuel prices are a good example. The Government has already used a considerable portion of the resources budgeted to subsidize them. The Minister of Finance reported that the accumulated subsidy reaches RD$38 billion of the RD$40 billion budgeted for the year and could exceed RD$50 billion.
Here appears a second front of pressure: the fiscal policy of the United States and its impact on international rates.
The high yields on long-term US Treasury bonds reflect the enormous financing needs of the US Government, a federal debt that already exceeds US$40 trillion and a growing interest bill.
When a Government needs to finance high deficits and refinance a growing debt, it must offer higher yields to attract resources. And when the main issuer of safe financial assets in the world pays more to finance itself, the effect ends up being transmitted to the rest of the markets.
This is what some economists call fiscal dominance: a situation in which the Government's financing needs and debt dynamics increasingly affect monetary and financial conditions.
For the Dominican Republic, an international environment of higher rates makes external financing more expensive and increases the cost of refinancing debt. Hence the importance of the operation recently carried out by the Ministry of Finance, through which US$1,385.2 million in bonds maturing in January 2027 were repurchased and simultaneously US$1,600 million were placed in a new global bond maturing in March 2039.
This year's budget contemplates a fiscal deficit of 3.2% of GDP and interest payments equivalent to 3.6% of GDP. When debt interest absorbs more resources than the fiscal deficit itself, there is little room to respond to new shocks without increasing borrowing or making adjustments in other components of spending.
The country does not control the international price of oil, geopolitical conflicts, or US interest rates. It can, however, strengthen what is under its control: fiscal discipline, spending efficiency, and a debt strategy that reduces refinancing risks.
