Tag: Newsletter

“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.

The greatest difficulty in assessing the current economic situation is that this cycle is not the traditional boom-bust cycle, as anyone following economic news lately can attest. The ongoing situation is better described as a structural social and economic adjustment driven by both demographics and a reshaping of PR’s productive base that will, undoubtedly, redefine what “normal” means in PR.  Both are partly dependent on each other but also respond to different contexts. Demographics, in particular, is a formidable analytical challenge as the economic consequences of changes in the Island’s resident population are hard to even imagine. The “allocation of resources” question, the second issue at hand, will determine the Island’s economic landscape in coming decades.  This issue of the Pulse examines the signs that can we expect as the economy begins to re-write what normalcy is. These might surprise you.

We examine Puerto Rico’s experience with budget cutting since fiscal 2009. The goal of said “fiscal discipline”, i.e. spending cuts and tax increases, was to preserve the investment grade or credit rating of PR’s public debt by Moody’s and S&P’s rating agencies. This tighter fiscal policy reinforced the contraction of PR’s economy, which started in fiscal 2007 and continued thru fiscal 2011. Cuts in government outlays increased unemployment and were not offset by strength in consumer spending, nor in residential and non-residential investment nor in export growth. Despite lower interest rates, the private sector did not invest given the glut of residential housing, bank consolidation, and a global financial crisis that caused a recession in the US and Europe. Find out how the government deficit was financed? You cannot hike taxes and cut spending without impacting growth. Has PR protected the investment rating of its public debt? What will it take to recover a growth path in the island?

As fiscal 2011 ended last June 2011, official data is estimated to once again post a contraction in real GNP growth for the PR economy. The island has had five years of recession, defined as negative real annual growth of its GNP. The crisis has exerted negative pressure on all sectors of the economy. The Government has continued to raise PR’s heavy public debt, a challenge that will adversely impact the fiscal outlook of the central government and its public corporations. Construction has been hardest hit with repeated declines in public and private investment, which continue to hamper future economic growth. Consumer sentiment seems to be less negative given the modest increase in car and other retail sales. Unemployment is high and inflation is inching higher with increased oil prices. This issue offers subscribers the opportunity to review the economic outlook and weave the internal and external economic threats present in this election year and in the near term future.