Puerto Rico Economic Pulse ©

April 2015: An Economy Under Siege

Review of Global, US & PR economies in FY 2014 and forecasts from 2015 to 2017

Now, more than ever, business, households, and financial institutions, among others, require an assessment of the current state of the Puerto Rico economy. Our economy must measure its performance and the risks it faces now and in the immediate future within the context of global and US economies. Going into the 8th year of negative economic growth and fiscal distress, we face the greatest challenge yet: being accountable for the sad state of our internal affairs. Public debt is 104% of GNP, the liquidity of the Government Development Bank (GDB), PR’s fiscal agent is dangerously low, credit ratings of General Obligation Bonds (GO’s) and of key public corporations in charge of main utility services, such as electricity, water, ports, highways, and health are now at “junk” investment grade. Investment for growth is very low. The Governor has proposed a major overhaul of the tax system with lower income tax rates and a new VAT consumption tax. This Pulse provides a snapshot of main sectors, forecast, risks, and challenges ahead thru 2017.

Puerto Rico Compass ©

Q1 2015: Is Consumption Puerto Rico’s Lifeline?

A review of economic indices Q1-2015

Recently released data showed that real GNP in Puerto Rico fell -0.9% in fiscal year 2014. This result was more or less in line with the consensus forecast, and it represents a continuation of a recession, which started in 2007 and has lasted now 8 years. The underlying details of the six quarterly economic indices for Q1-2015 were mixed, however. The good news is that growth in the leading index reflects the impact of cheap oil prices with lower gasoline and electricity prices expected to continue in coming months. In addition, consumption of goods and services was less negative than the previous quarter. On the other hand, construction continued in negative territory with -7.6 percent on a year-ago basis. Banking and manufacturing have not improved and continue in negative territory. Overall, the economic indices for Q1 this year reflect the poor performance of the economy and the uncertainty generated by an upcoming overhaul of PR’s tax system with a proposed VAT tax of 16%. At time of publishing this issue, the Legislature had defeated this bill.

Puerto Rico Economic Pulse ©

March 2015: Oil & PR Liquidity: A Dangerous Strategy

The risks to pull out from the near term abyss are huge

The Government’s delicate financial position has deteriorated significantly since January 2015. Delays in approving a tax increase on oil imports—against which the PR Highway and Transportation Authority (PRHTA) would issue bonds to service its debt with the Government Development Bank (GDB)—have led to onerous terms for the Commonwealth. Furthermore, the storm set-off by the proposed tax reform, unrelated to the tax hike on oil-related products, has increased uncertainty across the board and possibly tilted the Island’s fragile socioeconomic balance in the wrong direction. Unfortunately, the problem is even more delicate. Recent revisions to employment data meant that economic activity has been even slower than initially thought, perhaps resulting in yet another contraction in GNP. Inflation entered negative territory with the General Fund having at one point only $10 million in its coffers. This issue analyzes the economic and financial risks this is creating.

Puerto Rico Economic Pulse ©

February 2015: Proposed Tax Reform: A Swinging Pendulum

Highlights and potential impacts on the PR economy

Why the need to overhaul PR’s tax system now? Is there a convincing case for this tax policy reform to support a recovery in PR’s economic growth? The current tax reform calls for a Value Added Tax (VAT) to replace the current Sales and Use Tax (SUT) while overhauling the current income tax system and generating “adequate” revenues. The proposed VAT to be implemented effective January 2016 calls for a temporary increase in SUT from 7% to 16% on April 2015. A new source of revenues would enable other taxes, such as income taxes for certain brackets, to be abolished. Businesses would be subject to a higher yet flat corporate income tax rate as well as capital and dividend gains. Consumption patterns between income brackets can differ and a complex regressivity mechanism for lower income groups is not yet clear. Employment effects could be larger since smaller firms may have layoffs, ultimately worsening the situation on the island.

Puerto Rico Economic Pulse ©

January 2015: Does PR Need a Different Consumption Tax?

Pros and cons of the proposed Value-Added Tax

Much has been said and speculated about the proposal to replace the current sales tax with a new value-added tax. The arguments for and against it have so far filled media outlets, sometimes with contradictory facts and figures. Moreover, the very nature of the VAT makes it a more complicated and technically involved scheme than the current sales tax. As a result, much of the public conversation so far has been clouded with commentaries that contribute very little analysis regarding the practical consequences that the proposed VAT would bring to businesses, individuals, and municipalities. In addition, there are a number of technical issues regarding the implementation of the proposed tax structure that have not been properly addressed yet either. To help bridge this gap, this issue of the Pulse takes an in-depth look at some of the consequences of implementing a VAT in PR. Anticipated consequences range from uncertainty to high inflation to lower than expected fiscal revenues.

Puerto Rico Compass ©

Q4 2014: Another Turbulent Year

A year in review of 2014 quarterly economic indices in PR

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.

Puerto Rico Economic Pulse ©

December 2014: A Mixed Bag of Gifts from Santa

How lower oil prices cushion the impact of a new tax in PR

Weaker demand for oil and large increases in US oil production have pushed oil prices to their lowest since the 2008 financial crisis. Oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now below $60. As oil price continues to fall, consumers can expect more money in their pockets to pay for gasoline, electricity, and other goods. The Puerto Rican government proposed a new increase in the excise tax on crude oil and its products to provide liquidity to the Government Development Bank (GDB), which is the fiscal agent of the Commonwealth Government. These additional revenues would service $2.9 billion in bonds to be issued through the Infrastructure Finance Authority (AFI in Spanish). The tax hike is expected to increase gasoline prices but, short term, the impact will be lower due to falling gasoline prices. Energy costs, exempt from the new tax, are expected to drop to pre-2008 levels. Now PR needs to undertake significant reforms before prices begin to rise again. Find out whether cheap oil and a growing US economy will promote growth in PR.

Puerto Rico Economic Pulse ©

November 2014: Myths and Truths on PR’s Current Cycle

A close look at economic fundamentals

Puerto Rico’s Great Recession, as is the case with any complex phenomena, is not without its own myths. For example, the prevailing wisdom is that those with college degrees have driven the recent loss of population in PR or that US economic growth will somehow induce growth at home. Moreover, a careful look at the evidence shows that our traditional economic thinking is simply no longer applicable to the Island’s current economic reality. This issue of PR Economic Pulse aims to counter several of the myths regarding PR’s present cycle, many of which have even created media headlines. We also provide a fresh look into once firmly rooted economic orthodoxy and offer some insight as to the relevance of such rationale for our present troubles. Now, more than ever, an honest and careful examination of our economy’s current economic fundamentals is needed if we want to permanently reverse our current course.

Puerto Rico Economic Pulse ©

October 2014: Game Changers in Puerto Rico

Analysis of key strategies to resume economic activity

According to the Merriam Webster Dictionary, a game changer is a newly introduced element or factor that changes an existing situation or activity in a significant way. Over the past eight years, the Puerto Rico economy has been in a terrible slump. Fiscal priorities have taken precedence over economic policies and time is running out. We have eroded our tax base and maximized the limits of public debt of the Central Government as well as its public corporations. Our objective is to provide a concise but compelling look at some key elements that will change the course of the PR economy and lead us to the path of recovery and growth, if only there is the leadership to execute and implement tough choices. This issue focuses on drivers and strategies that we know can work yet nothing happens.

Puerto Rico Compass ©

Q3 2014: Puerto Rico, The Sum of its Parts

An analysis of 3rd Quarter 2014 economic indices in PR

Puerto Rico’s economic situation raises serious questions about the capacity of policymakers to get the situation under control. Third quarter indices reveal a mixed picture. The economy continues to be stagnant. Full recovery will depend not only on internal but also on external factors originating in the US and other global economies. There is increasing dissatisfaction with local economic policies, escalating electricity prices, and persistently high unemployment. These factors, together with safety concerns and pessimism about the economic future have motivated mass migration to the US. Government has focused principally on the island’s fiscal issues, including liquidity concerns regarding the Government Development Bank (GDB). However, a perfectly balanced budget will mean nothing amidst a devastated economy. This issue addresses the urgent v. important economic issues and tracks the 3Q of the PR economy.