Dominican Republic: Economic expansion remains robust thanks to resilient private consumption and exports
April 10, 2017
The Dominican Republic’s economy maintained its robust pace of growth in the final quarter of 2016, as the country continued to benefit from several tailwinds and strong macroeconomic fundamentals. GDP growth picked up marginally from 5.8% in the third quarter of 2016 to 5.9% in Q4. The Dominican Republic has benefitted both from the recovery in the U.S. labor market and subdued inflation, which supported both domestic consumption and exports.
Q4’s slight acceleration was driven by resilient private consumption and accelerating export growth, while public consumption registered a decline. Private consumption expanded a strong 4.7%, virtually matching Q3’s 4.9% growth, thanks to a bunch of favorable factors: low inflation, a strong labor market, rising remittances from the United States, still-low oil prices and a robust expansion in consumer lending. Public consumption swung from 1.2% growth in the third quarter to a 3.4% contraction in Q4. This was likely due to the government’s attempt to rein in its bulky fiscal deficit, especially after the Central Bank raised the Overnight Interest Rate from 5.00% to 5.50% in October in order to protect the currency and avoid massive capital outflows following the Fed’s tightening cycle. As the Central Bank’s decision is likely to translate into higher borrowing costs for the government, public spending was consequently lowered so as to create some fiscal room going forward. In addition, higher borrowing costs are probably to blame for the slowdown in fixed investment, which expanded 2.0% in Q4, less than half of Q3’s increase.
As for the external sector, exports jumped 10.4% in Q4, up from an already-robust 7.3% in Q3 and higher than the 5.7% expansion registered for imports (Q3: 3.7% year-on-year). A buoyant tourism sector and surging mineral exports—especially gold, silver and ferronickel—underpinned the expansion, which resulted in the external sector contributing positively to growth.
The good health of the Dominican economy is likely to persist, due to its strong macro fundamentals. Growth will nevertheless moderate somewhat, as tailwinds in the form of low oil prices and interest rates which supported the economy in 2016 have partially faded away.