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04/19 & 05/19: It’s—Again—the Economy!!! A forecast that defies imagination

The story of the PR economy is a “gripping whodunit”. Real economic growth for FY2018 reflects a record low -4.7% and a much worse revised growth of -3.0% for FY2017. Since 1948, the Island had never experienced such negative growth. Can we revert this course and reignite growth? Is there a political will to do so? How likely is engaging in aggressive fiscal policy when the bulk of public debt has not been renegotiated and financial markets are not too keen on lending bankrupt PR? Will growth take place without a plan and with austerity measures imposed by a US Congress-mandated fiscal board, which views its role as steward of fiscal discipline and not growth? The biggest threat to the Island’s recovery after Hurricane Maria is not only economic reconstruction and vision, but the acceleration of a declining, yet aging population. This issue of PR Economic Pulse analyzes the historical performance of our economy plus forecasts and risks for 2019 thru 2022.

A Race to Economic Recovery? What Q1-2019 economic indices tell us Strong business activity is not yet evident in Puerto Rico. Although all Q1-2019 quarterly indices are in positive territory, the path forward is still unclear. Construction, fueled by some federal disaster recovery funds, continues to have some wind under its wing. However, the consumer remains cautious as evidenced by continued decline in retail sales. Manufacturing is not a growth rod, although it is a stabilizing force. Banking continues profitable and reacting, rather than, providing stimulus with industrial and commercial loans. Where are we heading in the next 3 to 4 months? Are there signs of positive growth or not enough to pull the PR economy from its current depression? Will President Trump’s incorrect perception of a $91 billion package of inflated relief assistance change the outlook? This Compass attempts to provide answers to these questions. Q1/19
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Q1 2019: A Race to Economic Recovery?

What Q1-2019 economic indices tell us

Strong business activity is not yet evident in Puerto Rico. Although all Q1-2019 quarterly indices are in positive territory, the path forward is still unclear. Construction, fueled by some federal disaster recovery funds, continues to have some wind under its wing. However, the consumer remains cautious as evidenced by continued decline in retail sales. Manufacturing is not a growth rod, although it is a stabilizing force. Banking continues profitable and reacting, rather than, providing stimulus with industrial and commercial loans. Where are we heading in the next 3 to 4 months? Are there signs of positive growth or not enough to pull the PR economy from its current depression? Will President Trump’s incorrect perception of a $91 billion package of inflated relief assistance change the outlook? This Compass attempts to provide answers to these questions.

Puerto Rico Electricity
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03/2019: The Unfinished Business of Redoing PREPA – Above all, it needs to figure out how it can operate in PR´s future

The privatization of the PR Electricity Power Authority (PREPA) has become a rallying cry for many over the last few years. With it, a consensus has slowly emerged that the company’s shortfalls can only be addressed by the private sector and this will generate much-needed liquidity for the Commonwealth. A closer look, however, reveals that the situation is more complex than meets the eye. Chief amongst the unresolved challenges are PREPA’s future operating model and the lack of an optimization process to determine the company’s investment priorities. Whether we like it not, PR’s systemic risks will remain elevated for some time, most of which will be impossible to mitigate. In consequence, PREPA will have to adapt constantly to changing conditions on the ground, making the need for operational flexibility and the ability to quickly change priorities all the more pressing. Final success—or failure—will largely depend on this and not simply on a change of ownership.

Rebuild Electricity
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02/2019: The Uphill Fight to Rebuild Electricity – Overhaul and proposed reforms for PR’s energy sector

Puerto Rico urgently needs an overhaul of its energy sector. For decades, the Puerto Rico Electricity Authority (PREPA), an inefficient and obsolete behemoth, has piled up debt, fueled fiscal woes, and become a hindrance to economic development. Most stakeholders, public and private, advocate privatization as the best choice to put PREPA to rest. However, a year and a half after hurricane María, we still have a myriad of conflicting policies, fragmented efforts, and some proposals butting heads, instead of a clear path forward. Sweet promises abound, driven by wishful thinking, instead of rationality. Privatization is already in motion, but it still lacks the appropriate regulatory framework. This issue analyzes the local energy sector and reviews proposed reform options.

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01/2019: The Banking Sector’s Current Impasse

Remaking Puerto Rico's Banking SectorThe remaking of PR’s economic landscape will reshape banks
The last fifteen years witnessed a remaking of PR’s banking sector that continues to unfold. The process has been largely uneven as consolidations, the bursting of a real estate bubble, an economic depression, population decline, and the default of public debt have all had a direct impact on the sector’s core capabilities and operations. In response to this, banks were forced to retrench their activities, mitigate risk, and become risk-averse. This, understandably, has resulted in a more passive sector, one that, in the future, stands to react rather than lead the creation of new economic opportunities. In this sense, unless the recovery funds are managed to create the right incentives for them to remain on the Island, the banks will simply not leverage capital to jumpstart much needed economic growth, or support development, regardless of continued interest rate hikes. The stakes at the moment could not be higher. PR must get it right this time.

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Q4-2018: Less Than the Sum of Its Parts

Less Than the Sum of Its Parts How Puerto Rico´s Q4-2018 Economic Indices Performed

How Puerto Rico´s Q4-2018 Economic Indices Performed

The end of 2018 left a rather enigmatic picture of PR’s economy as most indices performed well in Q4 with the notable exception of the key leading indicator. It looks as if the accumulation of delays in the disbursements of reconstruction funds coupled with continuous decline in the resident population and the pending consequences of the federal government shutdown started in December—including the possibility that funds initially appropriated to PR could be reallocated to finance the President’s wall—simply worsened expectations Island-wide. At the sector level, manufacturing continued to pull its weight on the back of US demand in spite of changes to the tax code whilst banking slowed down slightly. The first $1.5 bn recently disbursed CDBG-DR funds surely bode well for economic activity over the next few quarters. It remains to be seen, however, whether these will be enough to sustain economic growth in the long-term.

Puerto Rico Economic Pulse ©
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11/2018: A Plan with More Questions Than Answers

Opportunity Zones may just provide a much-needed response
Puerto Rico Opportunity Zones MapThe latest Federal Oversight Board’s (FOB) certified fiscal plan (October 2018) reveals a coherent, but dangerously limited understanding of PR’s present economic situation. In effect, it provides a one track-logic, based on reform and austerity measures, expected to yield the necessary cash flows to both repay the renegotiated public debt and achieve economic self-sustainability. Unfortunately, the problem is not so simple. Sustainable debt repayment requires a viable expansion of the Island’s tax base, which, in turn, requires long-term sustainability of economic activity. On a more fundamental level, the attainment of these goals requires economic development and growth. In this sense, the Opportunity Zones (OZ) initiative is a definite step in the right direction that could provide what the plan lacks. It remains to be seen however, particularly given PR’s dismal record of execution and operationalizing such initiatives, whether OZ can channel the investment capital that PR badly needs now.

Puerto Rico Economic Pulse ©
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08/18: Code of Conduct – Fiscal Oversight Board

Insights into the fiscal discipline of PROMESA staff in Puerto Rico

Code of Conduct – Fiscal Oversight Board Puerto RicoPuerto Rico’s fiscal and economic crisis has thrust people into unlikely roles. On June 2016, President Barack Obama signed the legislation Puerto Rico Oversight Management, & Economic Stability Act to address Puerto Rico’s economic crisis. The Act established a 7-member oversight board with an Executive Director and staff to, among other things, provide Puerto Rico with tools to impose discipline over its finances, meet is obligations, and restore confidence in its institutions. The Board has sweeping powers over the Island and its staff has a significant and increasing budget, paid by PR taxpayers, to execute those powers. After the devastation of Hurricane Maria on September 2017, the economic reconstruction of the Island becomes even more important for PR to meet its fiscal and debt obligations. Is the entity in charge of balancing fiscal budgets and controlling expenses in PR applying these same principles to its expenses? It is in this context that this issue analyzes how the administrative staff of the Fiscal Board stacks against results.

Puerto Rico Compass ©
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Q2-2018: Impact of Millions in Puerto Rico

Analysis of Puerto Rico’s Q2-2018 Economic Indices
Economic recoveryAlmost 11 months have gone by since hurricanes Irma and Maria struck the Island in September 2017. The unconvincing and uneven economic recovery is a deterrence for attracting new investments to the Island. Construction and consumption are the biggest winners in this quarter and the other quarterly indices have also improved, but will this trend continue? What is the real amount of federal disaster funds allocated for Puerto Rico? Given the impact of the recent hurricanes, have all relevant federal agencies seen an increase in their budgets for Puerto Rico? Has the job market shown clear signs of recovery in 2Q-2018? This issue answers some of these questions and analyzes the post hurricane economic situation by sector.

Puerto Rico Economic Pulse ©
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07/18: A New Incentives Code: Problem or Solution?

Proposed incentives may hurt or benefit PR’s economic sectors
A New Incentives Code: Problem or Solution?PR is once again at a crossroads. This time, however, with a much more critical end-game. The combination of continued public-debt negotiations—with no easy-fix in sight—and an uneven reconstruction effort have transformed what otherwise would be normal processes into make-or-break events. Nearly everything—from fiscal budgets to public officials’ salaries—has become contentious. The recently proposed incentives code adds yet another layer of complexity to this conundrum. Long gone are the days where public policy “only” had to ensure that the Island remained attractive to Foreign Direct Investment (FDI) vis-à-vis other jurisdictions. Now, incentives need to balance the Island’s multi-level economic reconstruction needs with its changing sociodemographic fundamentals. This issue examines the impact of the proposed incentives measures on key economic sectors and its desirability in its drafted form.