Post-COVID macro risks

What it is about

Magín Díaz presented at the First Breakfast Conference (May 2023) how the response to the pandemic, with expansionary monetary and fiscal policies and a sharp rise in debt, is being reversed to contain inflation, and what macroeconomic risks that transition leaves behind.

The presentation first covers the United States (fiscal deficit, Federal Reserve policy, core inflation and banking stress) and then the risks for the Dominican Republic: growth, inflation, exchange rate and competitiveness, interest rates, and fiscal deficit and debt. It has 28 slides with many charts.

Objectives

• Explain how policy moved from the expansionary COVID measures to restrictive ones to contain inflation and debt.
• Assess the United States outlook: fiscal deficit, Fed decisions, core inflation and the banking crisis.
• Identify local macroeconomic risks and their effect on the Dominican financial system.

Key takeaways

1. Global public debt reached 100% of GDP in 2020, its largest annual increase, and rose in 90% of countries; fiscal stimulus was 12% of GDP in advanced economies and 6% in emerging ones.
2. The Fed faces a trilemma: price stability, full employment and financial system stress. The speaker estimates that rates will not fall that year and that the era of near-zero rates is over, at least for now.
3. The Dominican economy is resilient (trend growth close to 5%, versus 2% in the United States and 3% worldwide), but a global slowdown would affect it.
4. The gap between the Central Bank rate and the Fed rate is approaching historic lows, which reduces the room for maneuver of local monetary policy.
5. The fiscal situation has not improved: the electricity sector received transfers of about US$1.8 billion in 2022. The Government is expected to avoid a large deviation so as not to lose credibility.
6. For the financial system, the problem is not credit risk but market risk, because of interest rates.