Q4 2012: Banking Sector Plays Key Role in Growth

In the past decades, the industrial decline of many western economies has forced them to turn towards the tertiary sector (services) in order to diversify their infrastructure and find new sources of income. The city of Bilbao, Spain has a history of both boom times with steel production and hard times with industrial decline starting in the 1970s. The city proceeded to reinvent itself through project-led regeneration programs, of which the Guggenheim Museum became iconic. Cultural policy was accompanied by a series of other urban regeneration strategies, dealing with economic and social aspects. Bilbao is a success story with this strategy. Despite the differences, Puerto Rico also had its manufacturing boom in the 80’s, followed by a decline in the 2000’s. Several strategies have been implemented to reboot the PR economy, but there is no success yet. PR can use entrepreneurial practices implemented in Bilbao. The question is: could a cultural-led approach be the recipe to restore growth in Puerto Rico?

Public private partnerships (PPPs) have become a worldwide modality of cooperation between the private and public sectors.  In a world full of economic superpowers afflicted by fiscal shortages, PPPs have provided a practical and efficient way to energize their battered economies.  A formula pioneered by the United Kingdom in the 80`s has spread across Europe and many other countries.  In Puerto Rico, PPPs have been considered the current administration to undertake and maintain badly needed investments in infrastructure. Puerto Rico is now a leader in the development of PPP`s in the United States, a country that has not quite embraced this formula yet. In this issue, we examine the development of PPP`s in Puerto Rico with emphasis on the controversial agreement involving the Luis Muñoz Marín international airport.

The Puerto Rican economy is at a standstill. Recovery in the US economy is sub-par at best and a rebound in the global economy is looking less and less likely. After five years of negative growth, the PR Government estimates the real rate of growth of the island’s GNP barely grew 0.9% in FY 2012. The island faces a challenging environment as never seen before. The economic situation and its social implications represent a tough challenge for whoever wins next month’s election. The incumbent Luis Fortuño for the New Progressive Party (NPP) and challenger Alejandro García Padilla for the Popular Democratic Party (PDP) are the principal contenders whereas the Puerto Rican Independence Party (PIP) and the other three new parties are far behind. The incumbent claims for continuity in his reforms while the challenger suggests other proposals. This issue analyzes the highlights of the two principal political parties’ economic platforms. It is up to you to judge whether these plans are economically feasible?

“We the people” in Puerto Rico face daunting economic challenges now and in coming years. These challenges include a stagnant economy; a declining manufacturing sector, once the main driver of economic growth; ever higher dependence on federal funds; unhealthy level of public debt; a labor market that feeds on unemployment and few job opportunities; an ageing population that is insatiable in its health demands; an oil dependence that generates imbalances in all sectors; and mounting government deficits that threaten the use of scarce government revenues. Yes, there is always plenty to do, and now is no exception. It is important to maintain a perspective about this, particularly in light of upcoming elections in the Island. The key question is whether the economy is well poised for positive and innovative growth or if Puerto Rico doesn`t soon get its act together a long decline looms ahead.

Health in Puerto Rico faces several challenges. These come from social and economic factors, such as, an ageing population, a growing number of uninsured persons, soaring health expenses, high healthcare inflation, dependence on federal transfers, a growing shortage of health practitioners exiting the Island, and alarming health indicators and high behavioral risk factors. To complicate matters, the Island’s economy is just not growing and not generating the badly needed jobs to pay for health and other expenses. Programs such as Medicare and Medicaid that started in 1965 have experienced rising growth of spending to the point of threatening their sustainability. Despite billions, health in PR needs improvement. Will benefits have to be curtailed or Medicare providers will have to innovate to reduce costs. This is the question that Obamacare attempts to address.

We are seeing a secular change in consumption patterns in Puerto Rico.  This will have grave implications for a retail sector used to having overly indebted consumers. Real retail sales in PR have fallen 19% since peaking in FY 2005, just before the economic downturn started. Could it be that the declining trend in retail sales is a longer-term change and not just a cyclical one? We know recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. High debt and prospects of higher inflation mean lower consumption growth. Commercial real estate will feel the pain too and the new normal may be lower growth locally and globally. Consumers have grown weary in regard to their own near-term employment and income prospects. Yet, even during this recessionary period, we have seen the entrance of new restaurant franchises and stores. Find out what are some of the factors behind these trends.

Six years ago, in the peak of an unseen frenzy, it was hard to imagine the current crisis in which the Puerto Rico housing sector is now trapped. What began as a disturbing mess in 2007 has turned into a nightmare for developers, bankers, brokers, and the economy as a whole? Past and current administrations have not remained indifferent to housing woes and have squeezed public coffers to get this sector back on track. Public money might have stopped the bleeding, but the housing boat is wrecked and a long awaited rebound does not loom ahead soon. The golden years of housing are gone. An unfortunate combination of demographic and economic factors is standing against housing, and the public and private sectors will have to team up to rescue housing in Puerto Rico. Don’t miss this interesting issue.