Wednesday, February 8, 2023

Does the Dominican Republic have the mechanisms to respond to a recession in the US?

The fashionable economic topic during 2023, without a doubt, will be a possible recession in the United States and its effects on the rest of the world. That after inflation has been the “big” concern in 2022.

According to various projections, the Dominican Republic is ahead in Latin America and would be one of the strongest economies. In other words, although they do not mention “how”, they predict that it will come out ahead despite the challenges.

However, the economic analyst Henri Hebrard goes further and specifies some of the advantages that the Caribbean nation has over some countries in the area such as El Salvador, Panama or Ecuador. This is “a very important tool”, in his words: monetary policy. He points out that the aforementioned are dollarized economies.

Formula

As he explains, monetary policy allows you to “play”, either with the interest rate or with the exchange rate. Likewise, he maintains that it is a decision that the Dominican Republic makes sovereignly, because it has a Central Bank (BC) and its own currency. “It doesn’t just depend on what the Federal Reserve decides in the United States, which is the case in dollarized countries,” he said.

Given the “symptoms” of a possible recession in the United States, which began to be perceived in the last quarter of 2022, Hebrard points out that the country could begin to lower interest rates as of the second half of this year.

Another measure that the Dominican Republic ensures to mitigate the blow of this slowdown and encourage the recovery of the economy is of a monetary nature, such as the release of the legal reserve to encourage the construction sector.

The BC released legal reserves for an additional RD$21,424.4 to finance interim loans. In its statement, the BC stated that it will contribute to the creation of jobs and boost the commercial activities of the related sectors, promoting access to decent housing.

The construction sector alone represents “practically” 20% of the economy. In this sense, he said that the country needs to have a growth between 5% or 10% this year “in order to have a chance of reaching the growth goals.” Then there is the tourism sector, “which has its own dynamics”, where growth of at least 10% is expected.

The other card in favor of the state is fiscal policy. “The Dominican Republic has the possibility, through subsidies, of curbing inflation and not reducing the purchasing power gap so much,” he said, to which he added public spending.

Regarding the latter, during the Council of Ministers of the Presidency, the president instructed the main government entities, mainly those dedicated to public works and buildings, to intensify capital investment in items related to the first quarter of 2023. the construction.

“He urged all the ministers to begin executing the capital spending plans that are in the 2023 budget in a very agile, very fast way, from the same month of January. It is also a way from the State, through of a public spending policy, of being able to respond to what is the slowdown that comes from outside”, he said.

Measures

For Hebrard, the policy of public spending on construction is going to be essential for economic growth. Likewise, he understands that it should be accompanied by monetary measures to support private construction, “because the construction and investment sector, more than consumption”, is the key.

Remember that the economy has slowed down due to the rise in interest rates, combined with high street prices. To conclude, he said that, although it is correct to give priority to funds for the construction sector, he understands that it should not be so restrictive and allow others such as manufacturing, the Free Trade Zone and agriculture to also benefit from these funds.

Still, he stresses that the problem is that production capacity needs to be expanded. “There are many additional ships to be built. For this, I believe that it would not be a bad idea to allow part of the funds from the legal reserve to also be allocated to those items that have had such a positive response to the economy, ”he concluded.

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