Tuesday, May 22, 2018

Economic future of Puerto Rico at mercy of 2 scenarios

By on January 16, 2018

SAN JUAN – Puerto Rico faces complicated developments in 2018 if a series of factors that could propitiate a scenario of stability do not converge in the economic environment amid the island’s recovery after Hurricane María.

That is the synopsis of the Puerto Rico Economy Report prepared by Prof. José Caraballo at the Census Information Center of University of Puerto Rico’s (UPR) Cayey campus. The report analyzes the months between October and December 2017, after hurricanes Irma and Maria hit the island.

The worst-case scenario for 2018 would arise if the following were to occur: “Congress allocating a very small amount [of money] for Puerto Rico’s reconstruction ($5 billion or less), the federal Internal Revenue Service eliminating the levied credit that CFCs [controlled foreign corporations] pay in Puerto Rico (representing more than 25 percent of the [island’s] general fund), exacerbated migration and a debt without restructuring. If that lethal combination of factors happens, the economic decline would be in the double digits,” reads the professor’s five-page report.

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On the contrary, in his analysis, Caraballo explains the best scenario for 2018 could be Congress approving the bill filed by U.S. Sens. Bernie Sanders and Elizabeth Warren, in which $146 billion is being requested for Puerto Rico’s reconstruction; that the federal tax reform has no impact on CFCs’ credits in Puerto Rico; that the annual outmigration remains at levels of previous years, which would require some residents to return [to maintain the population level], who had previously left the island in the wake of the hurricanes; and that the debt be cut almost entirely, as proposed by economists Martín Guzmán, Joseph E. Stiglitz and Antonio Weiss.

“If this [the best scenario] were to happen, Puerto Rico would see relatively high economic growth this year. However, economic outlooks for Puerto Rico are dominated by uncertainty and probably fluctuate between these extreme scenarios,” the report says.

The expert also warned that there are some crucial variables the local government can control and, if properly capitalized, would alter these described scenarios.

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Among these factors are a program to diversify the destinations of exports or to substitute imports; a local tax reform that reduces the island’s relatively high economic inequality, eliminating the hunt for income, and requiring the creation of jobs in the granting of subsidies; a program that provides free counseling to local companies to improve their business concepts and options to expand; and a majority allocation of reconstruction spending (both private and public) for local businesses to increase the multiplier effect of the initial dispersion.

“It remains to be seen if, at the federal level as well as the local level, the correct economic policies are finally adopted. Also, it remains to be seen if the private sector takes better advantage of the situation to generate inclusive growth. For example, many hotels in Puerto Rico were destroyed and some of them will not reopen. Remodeling those closed hotels and making them resistant to future natural disasters can generate good returns in the long term,” Caraballo said.

Another example, he added, is renewable energy. Competitive companies with experience in solar microgrids can offer their services to many communities, since buying solar equipment by individuals is more expensive. Local producers can take advantage of the fact that more Puerto Ricans live stateside than on the island to create a solid commercial connection with the diaspora and start exporting.

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“Finally, the retail market in Puerto Rico will continue to see the departure of multinational retailers that need growing markets to meet the demands of their parent companies. The departures will open up opportunities for smaller-scale companies and for newly formed entrepreneurial youth startups, which would generate greater multiplier effects on the gains that were previously repatriated. It remains to be seen if the private sector takes better advantage of the opportunities and generates the jobs that are so badly needed to improve the economic outlooks for 2018,” the professor warned.

In the report, Caraballo includes such data as August 2017’s Economic Activity Index (EAI), which is the most recent month available, showing a contraction of 1.9 percent compared with the same month the prior year.

He also indicated that the general fund revenue increased $36.8 million in November, or 6.9 percent, compared with November 2016. This increase is because in that month, many businesses remitted their withheld sales taxes from September and October, which could not be sent during those months due to the lack of electricity and internet connectivity. In September and October, the figures were below revenue collections for the same months in the prior year by $289.2 million.

In October, imports decreased 2.1 percent. Imports at current prices also decreased for most of 2017. In September, imports fell 56.6 percent, followed by a 38.9 percent drop in October.

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“The commercial balance was positive again for the month of October, as it has historically been in Puerto Rico. However, this is because the foreign manufacturing sector that has been established in Puerto Rico exports large volumes. Absent those exports, the commercial balance would have been, keeping other variables constant, negative for Puerto Rico,” the document indicates.

Even though the unemployment rate fell to 11.4 percent in October, the Labor Department said 11,000 more people were working compared to the same month in 2016. As an example of Maria’s effect, the professor notes the percentage of claims for unemployment insurance for the first week of November was 385 percent higher than for the same week in 2016.

Meanwhile, self-employment fell by 13,000 people in October 2017. However, the professor adds, the accuracy of the survey that produces these labor statistics may have been affected by the condition of island’s infrastructure in the aftermath of the hurricanes.

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The issue of Puerto Rican outmigration also affected unemployment claims. According to the report, “based on the patterns of recent years, Meléndez and Hinojosa (2017) estimate that between 114,000 and 213,000 people will migrate annually after Hurricane Maria, mostly to the state of Florida.”

On inflation, the document specifies that for 2017, a moderate increase in inflation was seen. For October 2017, a 2.2 percent inflation rate was observed, which dropped to 1.2 percent in November. Therefore, it is very likely deflation has come to an end.

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