Sunday, January 20, 2019

Economic Outlook 2019

By on January 11, 2019

Editor’s note: The following originally appeared in the Jan. 10-16, 2019, issue of Caribbean Business.

Economic projections for 2019—presented in December by financial consulting firm Estudios Técnicos Inc. (ETI) in its report “The Economy: 2018-2019”—reveal a somewhat discouraging outlook for Puerto Rico in part because of international developments that could directly affect Puerto Rico this year.

According to the report, the island’s economy is subject to external situations that will have an impact on prospects for growth throughout the year. For example, globally, the uncertainty resulting from the withdrawal of the United Kingdom from the European Union, or Brexit; the trade wars initiated by the administration of President Donald Trump; and political upheavals in the Middle East and Europe are producing a business climate that is not propitious for investment growth.

It is no secret that financial markets in the U.S. and Europe have been presenting a great deal of recent volatility, while the International Monetary Fund (IMF) has projected a global growth slowdown to 2.5 percent that will definitely have an impact on the island’s economy.

Regarding that scenario, ETI’s report explained that the global economy’s center of gravity is rapidly shifting toward China, India and other Asian economic powers. China, in particular, has become a very aggressive global actor, which is reflected in its insertion in the economies of Latin America and the Caribbean.

In the United States, according to ETI, perhaps the most damaging external shock to Puerto Rico has been the approval of the Tax Cuts & Jobs Act, the federal reform approved in December. It does away with Puerto Rico’s tax-based advantage, both by lowering stateside corporate tax rates and increasing taxes for U.S. firms operating abroad and generating profits from intangible assets—such as patents, copyrights, franchises, the reputation of a business as represented by the excess of the price paid for the acquisition of a company over its market value, trademarks, trade names and software–developed in the U.S.

Puerto Rico is considered a foreign jurisdiction for certain tax purposes and thus will not benefit from measures in the Tax Cuts & Jobs Act that provide incentives for firms bringing back production to the States. In addition, tariffs imposed on aluminum and steel will have an impact on construction costs on the island and, finally, the threat of increased interest rates is another risk factor.

For ETI, any projection of gross national product (GNP) growth in Puerto Rico is subject to these international factors and, above all, to assumptions concerning federal funding and disbursement rates.

“There is still a great deal of uncertainty concerning the two. A number of the indicators included in this report began showing signs of a slowdown in the past two months, which could be a harbinger of 2019’s economic performance. Most likely, 2019 and 2020 numbers will be adjusted downward based on the current pace of federal fund disbursements. There are, of course, other risks that will have an impact on GNP growth, including factors mentioned above that are external to Puerto Rico and will have an impact on our medium and longer-term prospects,” the report reads.

In March 2018, William C. Dudley, the then-president & CEO of the Federal Reserve Bank of New York, visited Puerto Rico and warned the island’s government not to be seduced by temporary federal reconstruction funds, a fact that has been apparently ignored by the administration of Gov. Ricardo Rosselló Nevares.

According to the ETI report, “the prospects for 2019 depend on the amount and rate of disbursement of federal funds, but also on external factors both in the global context and in the U.S. The latter have been obscured by the former when looking at our economic prospects. This misappreciation of what matters in economic growth can lead to serious mistakes in projecting prospects beyond 2019 for our economy. It is also relevant to mention that some indicators are showing signs of slowing down in the past two months, possibly as a result of the impact of FEMA [Federal Emergency Management Agency] and insurance payments running out.”

Slow recovery

Meanwhile, the annual Economic Summary published this week by the Puerto Rico Planning Board assures the economic damages caused by the hurricanes that struck the island in September 2017 could affect its economic sectors for a yet-to-be-determined period.

The report details that through Oct. 12, 2017, the net impact on the local economy had been estimated at about $43.1 billion and the impact on the gross domestic product (GDP) at $4.1 billion, or 1.4 percent, of the total economy. However, the document adds that these figures could change as recovery efforts continue.

Hurricane “Maria’s battering caused the government to interrupt its operations, which together with the damages, represented an approximate loss of $8.472 billion at the central-government level. This figure includes the $4.608 [billion] in damages to infrastructure, $1.776 billion in expenses and reported income loss of $2.088 billion. To date, the figure is estimated at $6.090 billion after the funds assigned by [FEMA] and the money disbursed by insurers,” the report indicates.

However, the Planning Board said that during the first quarter of the current fiscal year, which ends in June, the labor force increased 1.1 percent, for a total of more than 1.1 million people employed, compared with the same month in the previous fiscal year.

The study’s long-term projection pegs Maria’s direct impact on the economy as equivalent to 30 percent, as a result of the $69.9 billion expected to be received for recovery. However, for the gross product, the impact would be 10 percent of the funds assigned for new investment.

On the other hand, the Puerto Rico Trade & Export Co. (CCE by its Spanish initials), said the trend in the quantity of exports reflected in recent years on the island has begun to show signs of change. According to data collected by the government entity, from July to October, the island made $21.86 billion worth of exports, mainly to the States.

Of these exports, $16.85 billion went stateside, while $4.92 billion worth went to other countries. On the other hand, imports during the same period reached $18.71 billion, of which $9.41 billion mostly came from foreign countries, with Ireland being the largest trade partner, representing $2.17 billion. However, the CCE does not offer projections on the expected performance of exports and imports for 2019.

According to the report, local economists say that in the case of exports, this trend responds to a variety of factors, but is mainly attributed to a decline in local production, which was greatly affected in the aftermath of hurricanes Irma and Maria. In the case of imports, experts attribute the decline in consumption mainly to the massive outmigration of island residents after the historic storms as well.

According to the government entity, the commercial balance in October 2018 reflected a reduction of 94.5 percent compared with October 2017.

During October 2018, exports to the U.S. mainland were a little more than $4.3 billion, while imports totaled $2.59 billion. As for foreign countries, exports totaled slightly less than $1.2 billion in October.

Discouraging panorama

For the former director of the Office of Planning & Urbanism of the municipality of San Juan, Tato Rivera Santana, the economic outlook for Puerto Rico this new year is not very encouraging, although he admitted there is very little certainty about the island’s economic behavior amid political and social changes that are occurring both in Puerto Rico and stateside.

“There will be some upticks in some economic indicators, all of which is in projection territory because one does not know with certainty what those numbers are going to be, but there is no doubt there has to be a rebound because there is income entering as some FEMA disbursements and from insurers that result in more commercial activity but that is the result of that disbursement” the expert said, noting that these indicators are a sort of mirage because they do not represent recurring factors, but are the result of the passage of two devastating hurricanes in 2017.

For Rivera Santana, once that impact begins to diminish, given that structural changes in the local economic system have not materialized, Puerto Rico will return in 2019 to negative growth.

“The other important thing is that from a planning point of view, we are in an even worse situation than we were because, not only can we not plan because we don’t have the capacity to execute, because the entity that plans is the fiscal control board, but also the administration of Gov. Ricardo Rosselló Nevares has been very indulgent and also acts in tune with the board in weakening the institutions that are responsible for the country’s planning,” denounced Rivera Santana, who is also a lawyer.

“If we have a Planning Board with fewer experts, fewer resources and, in addition, the Legislature is also passing measures such as SB 696, which establishes an amnesty in location consultations and permits granted before 2013, then we are weakening regulatory capacity and Planning Board regulations. It is beyond belief after the hurricanes, after we have seen what happens when we give permits to build any which way and they are used for risky uses,” he added.

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