Puerto Rico Economic Pulse ©
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • • • • • • • 0 Comments

January 2016: China’s Foothold in Latin America & Caribbean

Where and what are China’s investments

Since 1980, China’s economic policy was to become one of the top three economies in the world. As of 2015, China ranked second in GDP with an $11.4 trillion economy, behind the $18 trillion US GDP. Although the Chinese economy currently faces the onset of a permanent slowdown (5% today compared with its past double-digit real economic growth), that still represents more economic output than in 2007. And because the Chinese economy is so much larger now, we have seen growing amounts of investment flowing from China into Latin America and the Caribbean (LAC). Most of these investments have been in infrastructure and undertaken by Chinese state-owned firms. How much have they invested in LAC? Is the Caribbean soon to become a beachhead for China? China is now moving its economy from export and investment-led growth to domestic consumption and service-led sectors. Will this change represent positive or negative effects for the global economy, and for LAC in particular? Jamaica, Trinidad, Nicaragua, and Peru, among others, have benefitted from Chinese investments, then why not Puerto Rico?

Puerto Rico Economic Pulse ©
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December 2015: What if Questions for the PR Economy

Great expectations amidst irreconcilable conflicts

As 2015 nears its end and a new year is about to start, it is time for reflection. The fundamental structure of the PR economy is changing. While the contribution of services to output is on the rise, investment and productivity remain flat or even declining, wealth is not accumulating, and growth and inflation continue declining. Meanwhile, globalization has increased co-dependence in the global economy: a rising number of countries can influence the world’s economic performance and its financial stability. With no investment nor prevention of outward migration, the PR economy is in the middle of a “lost decade”. Puerto Rico struggles with slow to negative growth, a sizeable external debt, capital outflows and lack of badly needed investment. Unfavorable demographics, inflexible labor markets, and a rising outward migration pose the biggest threats to our economy. The shortcut to recovery requires orderly debt restructuring and investments faster than expected. The PR economy is weak with a continued trade-off between sustained growth and debt deflation spiral. What will it take for PR to regain economic growth? What if…?

Puerto Rico Compass ©
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Q4 2015: No End Yet for PR’s Fiscal Crisis

How this impacts 4Q-2015 economic indicators

Several bold events occurred this quarter in Puerto Rico and the US. In October, the US Department of Treasury presented a Roadmap for Congressional Action, suggesting key measures to deal with PR’s fiscal crisis. At the end of the year and after several public hearings, Congress could not reach an agreement regarding Chapter 9, a federal fiscal control board, Medicaid funds parity for PR or other lifesavers such as the Earned Income Tax Credit or a Child Tax Credit for Puerto Rican households. Locally, the administration was dealing with liquidity strains and submitted several proposals to solve the problem. However, it appears that without federal assistance, the internal actions will fall short. The net effect of this situation is widespread pessimism and uncertainty. This current issue analyzes how these events have impacted economic indicators during 4Q 2015 and what to expect in the near future.

Puerto Rico Economic Pulse ©
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November 2015: Of Sun & Sand – Is it Enough?

Challenges facing the tourism sector in Puerto Rico

November 13th terrorist attacks in Paris had a negative impact on tourism. French hotels and restaurants reported a major impact. These events highlight the need for protection from disruption to business and leisure travellers. The 2015 Global Summit in Madrid looked at how companies and destinations go on to reinvent their products, businesses and ways of working, to emerge stronger and more resilient to meet future challenges head on. Realizing these opportunities will require businesses and governments to adopt deeper levels of connectivity, openness, and trust in years to come. Today, travellers are more demanding and make their voice heard around the world, positively or negatively in minutes; and millions of new jobs in the industry will demand people skills and talent. What can PR learn from these new challenges? How do we compare with our Caribbean neighbors? Is PR ready?

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October 2015: Quo Vadis Puerto Rico – Part II

PR’s proposal for a fiscal & economic growth plan

On October 15, 2015, the PR House of Representatives and the Senate presented bills for the fiscal and economic recovery of PR. This call to action responds to a plan for FY2016-2022 submitted by a Working Group (WG), designated by Governor Alejandro García Padilla. The plan includes several measures and calls for a Fiscal Control Board (FCB) to be appointed by Governor Padilla but all this has not yet been approved by the PR Legislature. The task of the FCB is to approve a final detailed fiscal and economic plan by December 2015. This issue focuses on analyzing the WG’s plan and its FCB. Several questions remain unanswered throughout this process. For instance, is the underlying assumption that fixing the fiscal crisis will promote economic growth? What has been the experience of fiscal control boards in the US, such as, NYC, DC, and Detroit? Where do we stand now.

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Q3 2015: Recession’s Sharp Bite Continues

Puerto Rico’s sagging economy, 3Q-2015

It will take more than patience to free the PR economy from nine years of negative real growth. Failure to design and execute earlier in 2013 an effective economic plan explains in part our current situation and doing nothing is no option. It is important to understand if the continued declines in the 6 quarterly indices of HCCG for the PR economy are a cyclical phenomenon or a longer-lasting transition to a new, slower state. During Q3-2015, PR continued facing fiscal challenges with a shortfall of liquidity for payment of public debt service; a continued challenge with restructuring of the PR Electric Power Authority and other public debt; hearings before US Congress in an effort to present PR’s dire fiscal and economic situation to obtain some relief; a move to avert an upcoming cut in Medicaid and Medicare Advantage funds; and last minute amendments to a legislated 4% B2B service tax, among others. The prospect of a government shutdown is madness. All quarterly indices indicate nothing seems right. What is the right response?

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September 2015: Quo Vadis Puerto Rico – Part I

Past, present, and future with PR’s proposed fiscal plan

On September 10, 2015, S&P downgraded PR’s GO bonds to ‘CC’ from ‘CCC-‘, signaling an imminent default. This occurred the day after the Governor’s Working Group for the Fiscal and Economic Recovery of Puerto Rico submitted its Fiscal Restructuring Plan. It called for public debt restructurings and a Financial Control Board to close the huge $28bn financing gap forecasted thru 2020. With Puerto Rico already classified as a pariah in the municipal bond market, the financial alternatives for the government to grow the economy and address the fiscal crisis have become ever more difficult. Part I of this issue analyzes how PR arrived at this situation. Why public debt and fiscal restructuring are essential to a process of economic growth. Part II will analyze the government’s proposed fiscal Plan, measures and recommendations. We will review the experience of Financing Control Boards in other US jurisdictions and the fate of Puerto Rico if the Plan does not work. How we arrived at this point warrants a historical background.

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Q2 2015: Casualties of PR’s Economic Recession

A snapshot in Q2-2015

The six quarterly indices for the Puerto Rico economy have one thing in common: they are all in negative territory. The Construction index in particular continues to pull down economic recovery in the near future. Other indicators reflect consumer’s lack of confidence in a labor market that continues struggling, a suspect deflationary environment awaiting the impact of a higher SUT tax effective July 1, 2015, and a financial sector that continues downsizing. Thus the island is “not poised for a growth spurt once the fiscal cliff and payment of public debt are normalized.” Some moves in the leading index may be promising, particularly as oil prices continue to tumble and interest rates remain low. The private sector jobs have not been able to neutralize the reduction and attrition in government jobs. Housing sales are flat and do not spur new construction in the near term. Compared to the US and some of its regions, Puerto Rico’s economy continues to struggle and international financial markets are not inclined to lend to the once frequent and desirable municipal bond issuer.

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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.

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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.