SANTO DOMINGO- Economist Alejandro Arredondo defines the measure adopted by the Monetary Board that releases 21 billion 424 million pesos from the Legal Reserve for the construction and acquisition of low-cost housing as correct and appropriate, although he understands that to revitalize that sector attention must be paid to construction materials and determine the reality of their prices.
In an analysis for El inmobiliario Digital, the professional states that the measure will have a multiplier effect that will positively impact employment and related commercial activities in the construction sector, which will translate into and contribute to economic growth (Monthly Index of Economic Activity - IMAE).
However, he believes that to revitalize the construction sector, attention must be paid to the prices of materials, "for example, cement, a bag costs about RD$500, in that case the ProCompetencia entity will have to do a job to determine how real or artificial that price is," he explained in additional paragraphs to the analysis that we reproduce below.
“In summary, the monitoring of the Dominican economy by the monetary authorities is evident, which is expected to have a very positive impact in the first quarter of this year, a correct and appropriate measure,” he maintains.
We share with our readers the full text of Arredondo's analysis:
1-Preliminary note
Before going into explanations and assessments about the measure adopted by the JM, it is good to define what the Legal Reserve is: it is one of the monetary policy instruments used by the central banks of the world, which serves to inject money into the economy, as circulating medium (M1) when it is expansionary monetary policy or when the Monetary Authority requires withdrawing money from the economy - circulating medium (Mi), this is called restrictive monetary policy.
How do central banks do it?
This is done through financial intermediation entities (FIEs), that is, commercial banks, savings and loan associations and others, through resolutions issued by the Monetary Board, in the case of the Dominican Republic, which is empowered by the Monetary and Financial Law 183-02, which obliges the FIEs to deposit/maintain a reserve of the funds collected from the public, which constitutes a resource that allows to deal with liquidity situations due to extraordinary withdrawals of money - out of the norm by bank customers.
What is the coefficient (amount) of the Legal Reserve in the Dominican Republic?
Currently, the legal reserve requirement for multiple banks is 10.6% in RD$ and 20.0% in US$.
2. Macroeconomic context
In 2021, the construction sector was one of the main sectors responsible (engines) for the economic reactivation of the Dominican Republic post-pandemic with a growth of 23.4%, but in 2022 it had to make a forced landing, falling its growth rate to 0.6% (January-November), the worst performance of the economy, followed by the mining and quarrying subsectors (-12%).
This collapse in the growth of the construction sector was due to increases of approximately 12% in the cost of housing and the increases since November 2021 of the Monetary Policy Rates (active interest rates), which are now at 8.5%, by the Central Bank to contain inflation, within a restrictive policy stance of the circulating medium (M1) of the Monetary Authority.
Given the economic forecasts by the Dominican Government as well as national entities, and by international organizations (IMF, World Bank, ECLAC) on the growth of the Dominican economy for this year 2023, it would be between 4.8 and 4.9%, in 2022 it closed with a growth rate of 5% which is the potential value of our economy, despite the uncertainty and risks that exist in the global environment.
The Central Bank, responsible for economic growth and containing the inflation rate, which is estimated to be close to the upper limit of the Target Range between 3 and 5% at the beginning of this year, has decided to release RD$21,424.4 million to the construction sector. This amount is divided into 80.0% for the acquisition of low-cost housing and 20.0% for interim loans for its construction, for those contractors - promoters of housing solutions, at interest rates not exceeding 9.0% annually, for 5 years and 2 years, respectively.
The next question would then come up:
Is this measure recently adopted (expansionary policy) by the Monetary Board contradictory or is it a change in the stance on monetary policy taken since November 2021 of interest rate increases (restrictive policy)?
The aim is to make monetary policy more flexible by the Monetary Board to the point that the recent measure will not have a side effect that stimulates increases in inflation.
3. Possible effects on the construction sector
This recent measure will revitalize the low-cost housing construction sector, increasing supply and helping to reduce the housing deficit.
Furthermore, generating a multiplier effect that will positively impact employment and related commercial activities in the construction sector, which will translate into, and contribute to, economic growth (Monthly Index of Economic Activity - IMAE).
In summary, the monitoring of the Dominican economy by monetary authorities is evident, which is expected to have a very positive impact in the first quarter of this year; a correct and appropriate measure.
