What the Fed’s rate hike means for the Dominican economy

Santo Domingo.- The US Federal Reserve’s rise in interest rates is seen with optimism as it heralds the definitive end o the 2008 crisis, but poses a financial dilemma for the Dominican Republic.

Two economists told diariolibre.com of the fiscal implications from the Fed’s decision to raise rates in the US by a quarter point to between 1.75% and 2%, and also its influence on the Dominican Central Bank, which will now have to adjust the monetary policy rate.

Santo Domingo Technological Institute (Intec) economist Pavel Isa said the Central Bank will end up raising its rate to avert a flight of capital toward better yields in the US. “The problem is that this will have implications for the pace of economic growth in the Dominican Republic, which will be slower.”

“In the future it will have fiscal implications,” said Isa, referring to an issue that also worries others: collection.

The economist Henri Hebrard also expects a rise of the monetary policy rate soon, given the Fed’s upward step, while agreeing that the Dominican economy’s growth would slump. “This will bring precisely that lower tax collection, at a time when the Government is making efforts to improve taxation in the country, which is one of the lowest in Latin America and the Caribbean.”

The situation, said both economists, is that raising less money makes public spending even less flexible than it already is. And the problem, they say, is that financing that deficit will be more expensive.

With the rise of interest rates in the United States, the rates of return on the next issues of Dominican public debt will be higher and, therefore, costs the State more. “The rise in interest rates of the Fed will have implications in the future,” Isa said.

Nonetheless he doesn’t believe that the impact on the service of the public debt is immediate because a large part is at a fixed rate.