JULIO ANDÚJAR SCHEKER and JOEL GONZÁLEZ PANTALEÓN
Over the ten years that the international financial crisis has reached the height of the fall of Lehman Brothers, the monetary policy of the industrialized countries has created a surplus of liquidity unprecedented in the world economy. This availability of money on international markets has facilitated the flow of capital to emerging economies in search of higher profitability, opening new opportunities for investment and growth.
Recently, however, global liquidity has begun to be curtailed as a result of the gradual withdrawal of monetary stimuli in the United States, appreciation of the dollar, resonance of the world trade war and international geopolitical problems. This process should continue in the coming years and encourage international investors to be more cautious when deciding on which countries will direct their funds.
According to Madame Lagarde, Executive Director of the International Monetary Fund (IMF) , "There will be a difference between countries that carry a mix of appropriate policies and show discipline in managing their economies and others who have not either done this task or are just starting out",
This changing international scenario presents new challenges for the Dominican economy. Preparedness to face is a prerequisite for maintaining economic stability and maintaining lasting growth over the medium term. In order to inform economic operators and the general public of the tools available to the Dominican economy to face an uncertain environment, an analysis of the possible impacts of the global economic panorama on emerging economies, in particular in the Dominican Republic, as part of Latin America (AL) .
- Emerging economies in a changing and complex international environment
A sustained recovery in the global economy after the international financial crisis began in 2012, almost four years after the collapse of Lehman Brothers. Although the US has started to grow since 2010, the recession in the eurozone (ZE) has been prolonged due to the debt crisis of countries in peripheral countries. As soon as Europe is able to get in, the world economy will start to revive constantly, driven by the growth of industrialized countries.
In the period 2012-2017, the average growth of the world economy was 3.5% yoy. According to the IMF, world expansion would remain in 2018, reaching 3.7% at the end of the year. Within a few months, however, growth trends have been evident in industrialized countries. On the one hand, the US has continued to accelerate and in the third quarter recorded year-on-year growth of 3.0%, while inflation in October reached 2.3% and the labor market in full employment. On the other hand, it is certain moderation in ZE and Japan, which led the IMF to review growth and inflation forecasts for these economies in 2018.
Given the dynamics of US economic activity, the Federal Reserve Bank (FED) has increased its benchmark federal fund rate by 200 basis points since the beginning of its monetary policy standardization process at the end of 2015. In fact, only the Fed has increased its benchmark rate four times in the past twelve months a total increase of 100 basis points. On the other hand, ZE postponed the decision to adjust its reference rate upwards by the end of 2019, while Japan decided to keep its monetary policy rate on the negative territory.
The main consequence of this capital influx into the US was the appreciation of the dollar against the major currencies. So with more severe financial conditions, geopolitical conflicts and escalations commercial wars Most of the financial markets were worsened among the world's main countries, while uncertainty grew above commodity prices. These differences in the monetary policy positions of advanced economies have increased interest rate differences between the US and other industrialized countries, making investments in financial assets more profitable in the world's largest economy. The capital flow in North America has also taken advantage of the incentives contained in President Trump's Trump tax reform and the recent increase in US Treasury bond yields as a result of a larger fiscal deficit.
This fragile international scenario has influenced risk perceptions in some emerging economies, especially those with weak macroeconomic fundamentals. Even in some countries, the external effect was increased by a vague domestic social-political environment. As a result, capital outflows and significant depressing pressures have been recorded in countries such as Turkey, South Africa, Russia and Argentina.
It should be noted that Latin America (LA) failed to escape the difficult situation represented by the international panorama and faces important challenges for maintaining macroeconomic stability. During this year, the IMF systematically lowered its growth forecasts in the region by 2018. At the beginning of the year, the multilateral agency revised its forecast at 1.2% at the end of October, projected a year-on-year increase of 2.6%.
However, the dramatic change in the AL growth scenario hides the heterogeneous economic behavior in individual countries, indicating how the region's economies are prepared to face a new external scenario. In this sense, the Latin American economies could be grouped into three large groups according to their current dynamics and the strength of their macroeconomic fundamentals.
The first group, composed of Venezuela, Argentina and Nicaragua, consists of the most vulnerable economies. These are countries that are in recession and face major macroeconomic imbalances, social conflicts and loss of confidence in their economic policy. The second group of economies that grows, but is far below their potential capacities, and which also has limited scope for expansion policies, would include large economies such as Brazil and Mexico, Andean countries export commodities such as Ecuador, and small economies with distinct fiscal constraints such as Costa Rica and Uruguay.
The third group of countries includes those Latin American economies where productive activity has increased, supported by appropriate policies and strong macroeconomic fundamentals. Countries that report the proper management of their public finances and their external accounts and which, according to the IMF, have led to economic growth in the region this year, are: Dominican Republic (6.4%), Panama (4.6%), Paraguay 4.4 Peru), Chile (4.0%) and Colombia (4.0%).
Macroeconomic foundations of the Dominican economy and the new international environmentIt is no coincidence that most countries in this latter group perceive international investors as low or medium-risk economies. In fact, if we take as a reference indicator the country risk perception produced by J.P. Morgan Chase, four of the five countries that have reached investment grade in Latin America, namely Chile, Panama, Peru and Colombia, are part of this selected group. It should be noted that although the Dominican Republic has not yet reached the investment grade, its country's risk is now below the LA average of about 100 basis points, which is its best relative position in ten years.
The main reason Dominican Republic (DR) is among the economies best prepared to face the harsh international scenario is that for many years it has become a gradual but permanent task to strengthen its macroeconomic fundamentals. With a combination of policies that include the adoption by the Central Bank of inflation targets in 2012 and the introduction of fiscal consolidation by the government since 2013, the RD has managed to solve the serious problem of double deficits, high deficits in current and fiscal accounts that have limited political space to adapt to external shocks.
Specifically, in the case of external accounts, the monetary measures adopted under the new Central Bank Policy (BCRD) policy have contributed to reducing inflation disparities with the United States and creating conditions for a more competitive real exchange rate. The real weakening, along with lower oil prices, was one of the factors that allowed the current account deficit of 7.5% of GDP to fall to -0.2% of GDP in 2017 at the beginning of this decade.
On the public finance side, the government launched a fiscal consolidation process aimed at reducing the deficit of the non-financial public sector (SPNF), which at the end of 2012 reached 6.9% of GDP. In this sense, it has adopted a number of measures to rationalize spending, combined with the approval of the tax reform in 2013, to bring the deficit down to around 3.0% of GDP in 2017, a financial effort of almost four percentage points of GDP, in an environment of economic recovery. It should be recalled that the economic recovery was achieved in a climate of price stability. Average inflation over the decade was at 3.95%, consistent with the midpoint of the target range defined by the Monetary Council. In addition, since the adoption of the inflation-targeting inflation system, the average inflation rate was almost 3.0%, while at the same time mitigating its volatility. In this environment of stability and growth, the Dominican economy has doubled its international reserves and increased its import coverage from 2.7 months in 2010 to more than 4 months by the end of 2017. As a result of the correction of the problem of double deficits and the implementation of policies in line with a favorable international environment, the average growth of the Dominican economy in this decade was 5.6%, representing an average expansion during the five-year period 2013-2017 of 6.1%, the highest AL value during this period.
Undoubtedly, with the disappearance of double deficits, the existence of an economy that is growing with low inflation and the availability of reserve levels in line with international metrics, the macroeconomic fundamentals of the Dominican Republic have been strengthened. This element, along with the economic policy strategy and proven resilience of the Dominican economy, provides the politician with a number of enviable tools to overcome the challenges and uncertainties that this new, more complex international scenario poses, stability and economic growth in the medium term.
- Current situation, challenges and prospects for the Dominican economy
One of the advantages of the Dominican Republic prior to the changes in the international economy is that the country is in an expansion phase of the economic cycle due to monetary and fiscal expansion measures introduced during the second half of 2017. These measures have increased consumption and private investment in low interest rates, which has boosted economic growth beyond its potential. In fact, the economy grew by 6.9% between January and September this year, the highest growth rate in all Latin American countries.
In order to prevent a rapid recovery in the economy, combined with normalization of monetary policy in the US and threatening the inflation target, BCRD to raise the monetary policy rate from 5.25% to 5.50% per year in July. This preventative movement also sought to curb the interest rate differential with the economy of our main trading partner in the US in the context of appreciating the dollar on the international forex market.
To complement the current state of the art, the current account deficit remained well below its historical average, although it faces higher oil prices in international markets. The truth is that Dominican foreign accounts benefited from good performance in foreign resource creation, especially exchange rates, tourism, foreign investment and exports. It is estimated that in 2018 the current account deficit will close slightly above 1.0% of GDP. Fiscal policy continues to consolidate. Fiscal revenue so far has risen by 12.0% year-on-year, in line with the targets set in the national budget. On the other hand, public spending increased by almost 4.0% compared to the previous year. As a result of this public finance behavior, the NFPS deficit was at 0.8% of GDP at the end of September, with a significant primary surplus expected at the end of the year.
With regard to the prospects of the Dominican economy for the next year, the BCRD forecasts suggest that The Dominican Republic would increase by 6.5% in 2018,, converging to its potential during 2019. Similarly, Projections show inflation around 3.0% in 2018 and 4.0% in 2019, ie the gradual convergence of inflation with the center of the target band in the medium term. Extending this situation to stability and sustainable growth in the medium term will require the right mix of policies.
In this respect, monetary policy should pay particular attention to the process of policy normalization in the US and make the necessary adjustments to avoid the adverse effects of the greater interest rate differential between the Dominican Republic and its trading partner. Similarly, the greater complexity of the external context, characterized by higher oil prices and commercial warfare, requires constant coordination between monetary policy and fiscal policy as a way to preserve macroeconomic stability and growth.As stated in this article, the strength of its macroeconomic fundamentals is the greatest asset that the Dominican Republic will retain as one of the region's leading economies in a changing international scenario. In this sense, the process of consolidation of public finances is expected to continue and a primary surplus of 1.7% of GDP should be achieved in 2019. By contrast, the current account would be close to a deficit of less than 2.0% of GDP, which is below the estimated long-term. PhD in Economics from the International University of Florida and Director of the Department of Monetary Programming and Economic Studies of the Central Bank of the Dominican Republic.  Economist with Master's Studies from Columbia University in New York and the Catholic University of Chile. He is an economic advisor to the central bank's monetary programming and economic studies department.  Words delivered at the opening of the International Monetary Fund and World Bank meetings in 2018, held in Bali, Indonesia.
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