Tag: Compass

Without a doubt, 2014 was another turbulent year for the PR economy. Businesses and households sadly miss the stable growing years of the late 80s and 90s. This continued state of crisis impacts householders’ and business owners’ peace of mind. Many households have lost confidence in the PR recovery and consequently, they are migrating to the US. Some businesses also are leaving the island given the uncertainty caused by proposed legislation, such as the tax reform or other laws, such as the “patente nacional” that have been approved in light of the ongoing fiscal crisis in PR. Of course it is easier for a US based firm to leave PR than for a “criollo” firm. This migration has the effect of reducing the tax base, and reinforces the continuation of the fiscal crisis. Yes, 2014 was another turbulent year with more bad than good economic news. Find out what happened to the economy in 2014 and what 2015 may entail.

Compared with other states in the US mainland, Puerto Rico ranks 38th in terms of GDP. This economy is facing yet another crisis, a demographic time bomb. In 2013 official statistics indicated that the population declined by a record 40,000 people—roughly the population of the Municipality of Vega Alta. PR’s population started falling in fiscal 2005 and is now ageing even faster. More than 17% of Puerto Ricans are already 65 or older. According to projections by the PR Planning Board, the number of PR residents will fall from 3.6m to about 3.3m by 2020. Besides an ageing population, the major cause for population shrinkage is migration. About 97% of PR emigrants go to the US. This demographic outlook presents great challenges for various economic sectors, such as, labor, real estate, retail, banking, pension retirement systems, tax revenues, and the whole economy. Find out how a declining population in Puerto Rico impacts the island’s key economic indicators.

During the first quarter of 2014, the government remained in the eye of the fiscal storm. Despite the adverse impact of junk status of PR GO’s and other public corporations’ bonds, the PR Treasury Department and the Government Development Bank successfully sold a $3.5 billion GO bond issue. Of course, the interest paid was high but necessary, in order to fund the daily government operations and debt obligations. The current administration has also worked hard on several initiatives geared to restore growth and create jobs. Among these initiatives is the “Star Isle” tourism campaign, the Jobs Now Act, a new aeronautic cluster, and the proposed energy reform, among others. However, these valuable efforts appear to have been diluted due to a lack of coordination and difficulties to deliver a clear message. Individuals have been hard hit by utility prices and businesses face uncertainty regarding tax reform. In short, Puerto Rico still moves sideways with expansionary and recessionary policies, which cause a near zero net effect.

Puerto Rico’s economy continues immersed in a recession that began in 2006 and continues today with high unemployment, low workforce participation, a declining population, and challenges facing its key pharmaceutical sector. At the start of 2013, Puerto Rico had a new Governor with hopes of a long-awaited change in all branches of the PR Government and the Island economy. As of 4Q 2013 and despite great efforts to spur the economy and reduce the central government’s fiscal deficit, the situation remains challenging and requires a commitment to action both from the public as well as the private sector. As the year ended, Moody’s announced it had a negative outlook on PR’s GO bonds and its decision to downgrade to speculative (junk) status would be revisited within 90 days. As of February 2014, all three rating agencies had downgraded PR”s GOs. An analysis of 4Q 2013 quarterly indices signals it is time to be creative regarding solutions to the economic and fiscal crisis.

Even if the PR economy is only going through a transition, it is an extremely painful one for many. Employment trends have polarized the workforce and hollowed out the middle class. Poor job growth is still the result of a sluggish economy. Will the pressure on employment and the resulting inequality only get worse? As this issue of Compass reveals, economic fundamentals still continue to underperform after 7 years of economic recession. Many worry that even with robust demand, the construction sector will continue to struggle with underutilized capacity. Manufacturing is barely holding. We continue to expect a weak economy, burdened by the collection of new taxes. Consumer confidence is weak as rising gasoline, electricity, and water prices pull future spending to lower levels. While the banking index is not back to pre-recession levels, the recent gain is positive. Growth is likely to still lag behind most previous recoveries.

Puerto Rico has a long way to go before it can truly be considered a post recession economy. This Compass analyzes PR’s current economic conditions compared to precession levels in Q1 2006. The island economy is still fragile. The new administration in “La Fortaleza” faces daunting challenges and tough decisions to walk the fine line between fiscal discipline and economic growth. Credit rating agencies, bondholders, and the general public want to see quick results but that is not possible when the problems have remained unsolved for many years. The local fiscal year budget is due on June 30 and the current government has to choose between restrictive fiscal policies (more taxes, less spending) or try to restore growth thru expansive measures (fewer taxes, more spending) or a reasonable combination of both.

Government, both federal and local, recognized the importance of the financial system. Trillions of federal funds have been directed to financial bailout programs. Since the onset of the Great Recession in the US, we have increasingly heard that the financial system was one of the main causes of the crisis. Indeed, the financial sector plays a determinant role in economic growth. This also applies in Puerto Rico, which currently has 11 commercial banks. How do these banks impact the island economy? What has been their response to the ongoing 6-year recession? What are the main drivers of bank behavior? In response, what does the economy need from banks? After all, their lending activity impacts both consumer as well as business sectors. This Compass discusses some of these questions.

With elections just around the corner, contenders are doing their best to convince voters that they have the solution for all economic issues. Promises of job creation, economic growth, and fiscal balance are everyday fare. However, economic reality is different from these political ads. None of our 6 quarterly economic indices has returned to pre-recession levels. Real GNP is 11% below FY 2006. Unemployment in September 2012 was 3.4% higher than in 2005 and the employment rate was at its lowest in three decades. Whoever wins the election will face a Herculean task of first, returning to pre-recession levels and then, recover the path to growth. Q3 results in 2012 still reveal that Puerto Rico continues to strive for growth but has yet to go some distance in order to regain even pre-recession levels of 2006. The road back to normality will require some structural changes and a vision of growth for the Island.