As we all know the economy in USA is in the doors of recession, and the question has been if and when its effects is going to be felt in this half-island and how it will affect it.
Let?s go back to March and April, when the local election campaigns was on its peak, due to the huge amount of money circulating on the streets as a cause of the campaigns spending and government spending, the Central Bank saw how the dollar rate was going up against the peso slowly from 33 per 1 to 35 per 1 and therefore inflation numbers and it had to take measures to slow that inflationary trend taking into account that the majority of products Dominicans consume are imported included rising oil, therefore tied to the dollar exchange rate. The biggest measure was to raise interest rates in an attempt to lower the amount of money circulating on the streets.
Interest rates in March was at 13% annual and by the end of September was up to 24%, an almost 100% raise in an span of 6 months inducing to the effects desired: People started to took Savings out of commercial banks and invested in the CB buying Certificado de Inversion lured by the newly increased interest rates, and demand of real estate and vehicles started to go down due to buyers running away from higher IR; the mission was accomplished, the CB gathered most of circulating money and were able to control the Dollar Exchange Rate in a stable 35 for 1.
After the elections the government was urged to cut back in its fiscal spending so the Central Bank could lower the interest rates again without hurting the exchange rate, but it was like talking to a wall, they even raised the spending in June and July almost to levels of pre-election times, even though the revenues after the elections was lowering due to the economics measures implemented by the Central Bank.
Returning to my first question, we are seeing and experimenting the answer right now, by August to September government fiscal revenues was dropping in a record rate with several factors to blame for it:
1- The recession in USA was not being felt until now; incoming ?remesas? were lowering monthly as Dominican residents in USA are struggling to survive the crisis; Investments into turistical properties were also dropping due to the credit freeze existent in USA. A prove of that is that Cap Cana Complex is laying off more than 500 employees and also liquidating fixed assets.
2- Central Bank regulations and high interest rates caused by the reckless fiscal spending of the government in order to maintain the dollar and inflation in check.
Here is a graphic that illustrate how the fiscal revenues had a drastic drop of more than 50% in the August ? September lapse.
We are facing a very quick deceleration in the economy right now and what is worse the dollar exchange rate which was supposed to go down by these events stayed put at 35 per 1. This could blame this to the 250 million dollars payment that the government had to do in this last month to electricity companies and credit institutions abroad, adding to less remittances being received and less foreign investments in the country due to the US and Europe crisis.
The short term solution that I could see is the CB loosening their regulations, specially lowering the interest rates to stimulate consumers to buy more and get the local economy going again. That of course could bring a destabilization in the exchange rate, but having in mind that December is around the corner and in that month historically there is lot of dollars being infused to the Dominican economy balancing the payments balance a little.
In the long term the solution would be to just wait and let the US and Europe crisis to solve out so investors can again invest in the country and remittances take their normal course.
I am no economist but just was amazed at how hard tax revenues lowered from one month to another meaning a bad state in the actual local economy and thought of writing my point of view here. As I am no expert please feel free to correct me if I had something wrong.
Your thoughts?
Let?s go back to March and April, when the local election campaigns was on its peak, due to the huge amount of money circulating on the streets as a cause of the campaigns spending and government spending, the Central Bank saw how the dollar rate was going up against the peso slowly from 33 per 1 to 35 per 1 and therefore inflation numbers and it had to take measures to slow that inflationary trend taking into account that the majority of products Dominicans consume are imported included rising oil, therefore tied to the dollar exchange rate. The biggest measure was to raise interest rates in an attempt to lower the amount of money circulating on the streets.
Interest rates in March was at 13% annual and by the end of September was up to 24%, an almost 100% raise in an span of 6 months inducing to the effects desired: People started to took Savings out of commercial banks and invested in the CB buying Certificado de Inversion lured by the newly increased interest rates, and demand of real estate and vehicles started to go down due to buyers running away from higher IR; the mission was accomplished, the CB gathered most of circulating money and were able to control the Dollar Exchange Rate in a stable 35 for 1.
After the elections the government was urged to cut back in its fiscal spending so the Central Bank could lower the interest rates again without hurting the exchange rate, but it was like talking to a wall, they even raised the spending in June and July almost to levels of pre-election times, even though the revenues after the elections was lowering due to the economics measures implemented by the Central Bank.
Returning to my first question, we are seeing and experimenting the answer right now, by August to September government fiscal revenues was dropping in a record rate with several factors to blame for it:
1- The recession in USA was not being felt until now; incoming ?remesas? were lowering monthly as Dominican residents in USA are struggling to survive the crisis; Investments into turistical properties were also dropping due to the credit freeze existent in USA. A prove of that is that Cap Cana Complex is laying off more than 500 employees and also liquidating fixed assets.
2- Central Bank regulations and high interest rates caused by the reckless fiscal spending of the government in order to maintain the dollar and inflation in check.
Here is a graphic that illustrate how the fiscal revenues had a drastic drop of more than 50% in the August ? September lapse.
We are facing a very quick deceleration in the economy right now and what is worse the dollar exchange rate which was supposed to go down by these events stayed put at 35 per 1. This could blame this to the 250 million dollars payment that the government had to do in this last month to electricity companies and credit institutions abroad, adding to less remittances being received and less foreign investments in the country due to the US and Europe crisis.
The short term solution that I could see is the CB loosening their regulations, specially lowering the interest rates to stimulate consumers to buy more and get the local economy going again. That of course could bring a destabilization in the exchange rate, but having in mind that December is around the corner and in that month historically there is lot of dollars being infused to the Dominican economy balancing the payments balance a little.
In the long term the solution would be to just wait and let the US and Europe crisis to solve out so investors can again invest in the country and remittances take their normal course.
I am no economist but just was amazed at how hard tax revenues lowered from one month to another meaning a bad state in the actual local economy and thought of writing my point of view here. As I am no expert please feel free to correct me if I had something wrong.
Your thoughts?
