Economic Pulse

June 2020: Our Pulse Stops Beating

Decades of in-depth analysis of the Puerto Rico Economy

We came of age last year and today, after 22 years of service to our valued subscribers, we have decided to end our monthly newsletter of PR Economic Pulse. It has been an honor and a privilege to provide our clients with a diverse agenda of important and relevant topics as well as forecasts of the Puerto Rico economy. Against all odds, we provided research and analysis of complex and often pivotal topics relevant for business strategic planning and insight into public policies that shape our economy. Our editorial goal has always been to add value to our clients and analyze complex economic crises into comprehensible, common-sense, and pragmatic explanations. It has not always been easy, given the dire situation with economic data in real time. I still believe that now more than ever, businesses, small, medium, and large need to be guided by economic analysis just as the Covid-19 pandemic must be guided by science. Unfortunately, not all agree with our assessment.

Throughout the years, we have had valuable and loyal clients, but after 13 years of economic depression, hurricanes, earthquakes, the Covid-19 induced recession, and the inefficiency of government and the PROMESA Board, it is time to move on.

Still, you can follow our analysis, in “La Voz de Heidie Calero” every Thursday on YouTube. Our 5-minute capsules try to add value to you, our audience.

It has been quite a journey!

Perfect Socio Economic Storm

04-05/2020: PR Economy Interrupted by COVID19

Witnessing a perfect socioeconomic storm

To date, there close to 6 million infected persons and 360,000 deaths globally caused by Covid-19. The US has posted 1.7 million infected persons and over 102,000 deaths. Covid-19 seems to have spared Puerto Rico with 3,486 infected persons and 131 deaths so far. Lockdowns and border closings for persons as well as trade have disrupted commerce and tourism. Reopening these economies will take time and international policies towards migration are reinforcing self-sufficiency and a more inward, self-reliance bias. Puerto Rico has gone through: a more than a decade-long recession, a government debt crisis, a devastating hurricane, earthquakes, and now the COVID-19 pandemic. As an island, Puerto Rico is more vulnerable to all these biases and requires more strategic, forward looking planning and execution than we had over the past 3 decades. Find out what is the short-term outlook for the global, US, and Puerto Rico economies. We know we are in trouble, but there are opportunities.

Plan after the pandemic

03/2020 …And Then Came the Day After Tomorrow

What awaits Puerto Rico after the COVID – 19 crisis

The Covid-19 pandemic is PR’s third major disruptive event in the last three years. Tempting as it may be to blame fate for this, it remains true that destiny is very much molded by our own decisions, actions and, in many cases, our downright procrastination. The ongoing health crisis created an unprecedented paralysis around the Western world, unseen even in the midst of the financial crisis, that stands to be the biggest black swan event in modern memory. For us, it could not have come at a worst moment: in the middle of ongoing debt renegotiations, a yet-to-be implemented debt adjustment plan, and an economy that was headed for negative growth in 2021 prior to the current crisis. Changes to the functioning of domestic markets will take place, some of them much-needed, but our fundamental challenges will be waiting for us once the pandemic is controlled. We need to have a plan and execute.

Redefining Reconstruction in Puerto Rico

02/2020: Redefining Reconstruction in Puerto Rico

What happens when problems are never fully addressed
PR finds itself, once again, at a poignantly grave moment in its modern history. The situation is the result of at least four events that took place in the near past, the consequences of which continue to overlap until today. Each of these events has compounded the challenges produced by the others, feeding into a spiral of problems that has destroyed different layers of the Island’s socioeconomic and institutional fiber. To make matters more pressing, the current debt negotiations are, in effect, negotiations about the viability of PR’s future, not just the repayment of defaulted debt. Flimsy assumptions about the economy’s future may simply lead to further debt negotiations or even defaults down the road. A long-term permanent recovery will require sustainable economic fundamentals, otherwise, there will never be the necessary assurances to posit the type of investment that can trigger positive feedback loops of economic activity on the Island. Time is running out.

PR Needs to Be Rebuilt Once and For All

01/20 Puerto Rico Needs to Be Rebuilt Once and For All

January’s earthquake, if anything, marked a point of no return
Almost two and half years after the devastation caused by Hurricane Maria, PR faces yet another major reconstruction task, albeit this time, mostly constrained to its southern shores. The geographical limitation, however, does not make it any easier as the combination of unpreparedness, lack of any substantial domestic emergency funds and ongoing austerity measures creates a very real and dangerous scenario. Depending on federal approval for reconstruction funds is almost the same as depending on international aid for reconstruction and, in this sense, PR’s recovery looks a lot closer to El Salvador’s than the one that took place in Chile. Moreover, it is by now abundantly clear that we can ill afford another botched reconstruction effort as a second mass migration is likely to ensue. To avoid it, we will need investments that can trigger virtuous cycles of economic activity, not just short-term construction-related projects. Otherwise, we could remain stuck in our current predicament for a long time to come.


2019 Summary

12/2019: Economic Events That Defined 2019

Puerto Rico’s economy facing new realities and challenges
Albeit several positives were observed in 2019, such as the first fruits of the debt restructuring process, it was also a year marked by lack of progress in getting the economy back on track. Once the tail winds from the post Hurricane Maria rebound fizzled, economic activity hit negative territory once again. To make matters more worrisome, there was no significant private sector investment through Opportunity Zones (OZ), key structural reforms remained incomplete while others, such as the pensions system, may yet bring about a severe backlash. This year also saw the formal confirmation of everyone’s worst fears—that US funds for reconstruction will be significantly less than expected at first (around $30 bn less), which, unfortunately, altogether, does not bode well for us in 2020. The economy needs to grow soon, or the assumptions made in negotiating with bondholders may have to be revisited. Something everyone will want to avoid.

11/2019: The Fiscal Board’s Disingenuous Approach

PR’s fragile outlook may hit home sooner than expected
The Fiscal Oversight and Management Board’s (FOB) recent admission that there would be fewer reconstruction funds than originally expected, around $30 bn less, is a devastating blow to PR’s recovery efforts. Worse yet, the announcement carries a sense of foretold inevitability that erodes the FOB’s credibility as a guarantor of good fiscal practices. As result, the down scenario is now beginning to gain traction with the economic activity index having shown no gains during FY 2019 (in fact, it contracted slightly). Moreover, the process of reforms has been based on unrealistic and sometimes unfounded assumptions, such as the perceived damage caused by Law 80 on unjustified firings. In our opinion, there are risks in negotiating a debt restructure based on flimsy assumptions. Can these probable scenarios be changed?


10/2019: Brexit: the Story of a Forewarned Tailspin

The realities that continue to divide the UK after three years

With a little over three weeks to go before the UK faces its moment of truth, the process of delivering Brexit seems anything but clear. Over the past three plus years since the electorate narrowly voted in favor of leaving the European Union (EU) by a 52% to 48% margin, the political climate has significantly deteriorated as opinions have become bitterly polarized. The upside—if there is one—is that by now it is abundantly clearer what Brexit would look like, with and without a deal. Along the way, the UK has seen three Prime Ministers (PM), the overwhelming rejection by Parliament of a negotiated deal and a negotiating team that has repeatedly stumbled in its approach and strategic objectives. The negotiators, however, are not the whole problem. Reality has repeatedly clashed with intent as the process became mired around four key fallacies driving the country’s public debate. Unfortunately, the solution is not easy, but there are a few lessons PR can learn.

Can PR create the conditions for local investors to return?

09/2019: The Long Road to Repatriate PR’s Capital

Can PR create the conditions for local investors to return?

Long before the onset of PR’s current debacle, the economy used to generate consistent savings that in part justified its status as an attractive investment destination. In effect, personal savings ranged between 8% to 15% of personal income during the 1980s (the golden years for S.936 companies) and 1990s (the golden years of construction), most of which were channeled towards financial investment on the Island. Fast forward 15 years and those same assets under management are now almost entirely outside PR, the majority of them under tight institutional restrictions on questions such as geography, risk and return. Despite this, there is still a window of opportunity if the government is able to develop an investment plan articulated through the Opportunity Zones (OZ) initiative. Such a repatriation of capital requires an active risk-mitigation role from the government and, above all, allowing the economy to expand through stimulus rather than austerity. The final decision will have long lasting implications.

The Dire Reality of Most Municipalities The case of Puerto Rico´s municipalities in times of austerity

08/2019 The Dire Reality of Most Municipalities: The case of Puerto Rico´s municipalities in times of austerity

The days of business as usual for PR’s 78 municipalities are long gone. What started as sluggish economic growth back in the early 2000s mutated into a full-blown crisis that now includes the highest emigration wave since the 1950s, negative yearly average investment growth since 2010, a default on $72bn of public debt, $49bn in unfunded retirement liabilities, the imposition of a Financial Oversight Board (FOB) and, most importantly, the continued contraction of central government subsidies to the municipalities. In early May 2019, the FOB approved a statute to certify the sustainability of each municipality’s budget. The possibility of lengthy red-tape disbursements for federal reconstruction funds may be the last nails on the coffin of many local governments. Find out why PR’s municipalities face financial distress and what needs to be done. The solution lies in viable regional economic development strategies, which have yet to see the light of day.