NEWS

Bankruptcy filings in PR rose 25% in calendar 2009 compared with the previous year, according to statistics published by the Boletín de PR. This takes filings to their highest point since tougher bankruptcy laws were introduced at the end of 2005. That change brought a spike of bankruptcies, as companies and individuals rushed to declare themselves broke under the more lenient old regime. The data suggest that an older trend is reasserting itself. This is more bad news for PR. These numbers reflect the impact of the current recession, which started in FY2006 and continues to the present. And judging by the rise in unemployment, lower pay, massive layoffs, fewer people with health insurance, the mortgage and foreclosure crisis, depressed sales, and tighter credit, the situation may get worse rather than better. This issue examines bankruptcy in PR, its historic trends, changes in bankruptcy law, most affected economic sectors and municipalities, and finally explains what bankruptcies entail for our economy.

The local economy’s transformation will require a renewed understanding of Puerto Rico’s challenges and opportunities as it slowly comes out of the current recession. This issue examines the Island’s economic outlook and new economic trends without any reference to public policy. Emerging consumption and production patterns are thus analyzed without assuming that the government can or will provide the appropriate incentives. New consumption trends are now becoming noticeable and, more importantly, Puerto Rico’s production base is in the midst of a profound transformation. The opening of new export and import markets will continue to provide challenges but, almost unnoticed until recently, will also offer immense business opportunities. The world economy changed radically almost 15 years ago and Puerto Rico was left behind. If anything positive is to come out of the recession, it will be a decisive push towards a definitive embrace of world markets.

The Puerto Rican economy is in the midst of a long and deep recession, which is expected to leave permanent effects on the Island’s economy. In this sense, much remains to be seen given existing economic trends and public policies as well as the limited impact of what traditionally have been PR’s engines of growth, what can we conclude about the island’s economy. In our opinion and despite all the negatives, it is still possible to transform Puerto Rico. This first issue of a two part series takes a look at some of the main concerns and provides a long-term view of key economic variables that shed light on the structural causes of the current situation. Some of these effects were clearly imposed on the PR economy. Others were not. Find out what these are and how they could evolve if public policy does not deal with them. Part II (July issue) will examine the business models and consumer of the future, as well as emerging economic opportunities.

Since 1899, the US dollar is the official currency of Puerto Rico. In economic terms, the island acts as an official dollarized country. In theory, PR should then benefit from the relatively low inflation experienced by the US economy during the past few years. However, this advantage has disappeared in PR over the past decade. According to official numbers, the difference between the PR and US inflations over the past 5 years was 11.2% higher in PR than in the US. This gap indicates something is wrong with the way the Consumer Price Index (CPI) is computed in Puerto Rico. Even more disturbing is the fact that since December 2009 or five months into 2010, the PR Department of Labor has not issued any new data on inflation. What then is wrong with the new CPI index, which was published in August 2007? This issue reviews some of the causes, effects, and possible solutions for this serious problem that affects all in Puerto Rico.  

Since 2006 to the present, Puerto Rico’s economy has shifted away from real economic growth. This particular cycle has been reinforced by a global financial crisis that damaged the financial system’s ability to channel savings to productive investment. All economic sectors, including households and businesses are struggling with surplus housing, buildings, equipment, and accumulated debt. Virtually every industry has shed jobs in the past two years. Bank share prices have fallen dramatically and households’ wealth has shrunk by $19 billion or 89% since 2004. And if consumers feel less rich, they are less inclined to spend. With a push from regulators, banks are less willing to lend: they have tightened loan standards. Recovery in this environment is often slow and weak but not impossible. Rebalancing PR’s banking is at the forefront. This issue examines some of the reasons for the recent bank mergers.  

Fiscal 2009 marked a milestone with the harshest worldwide economic crisis since the Great Depression. The crumble of several financial giants at the end of 2008 sparked a crisis that ripped through the entire world with unknown strength.  Recovery has already started in the US mainland, but jitter and fear have not disappeared. Puerto Rico has also felt the heat and is immersed in a protracted slump that threatens to extend to five consecutive years.  The truth is that the PR economy remains off the path of sustainable growth and desperately needs to restore growth.  Some meager gains, mostly as a result of temporary inflows from the mainland, could mislead the public regarding the dismal situation of our economy. This issue of Pulse analyzes what really lies beneath the recent glimmer of hopes. It evaluates economic events in fiscal 2009 and presents our forecasts thru fiscal 2012.

In the decades following World War II, Puerto Rico was hailed as a success story in Latin America (LA). The island sustained impressive rates of real economic growth and raised its domestic living standards. The transformation and modernization of this economy thru manufacturing, attracted the attention of its Southern neighbors. PR played a role model. Nowadays, it is different. PR is immersed in a deep recession with no apparent immediate light at the end of the tunnel. Two thousand miles South, Peru’s economy shines because of its strong macroeconomic performance, low inflation, and fiscal surpluses (7.3% real growth, 3.1% inflation, and $1.4b fiscal surplus). This was not always the case. Twenty years ago, Peru faced -13% growth, 7,482% hyperinflation, and huge fiscal deficits approaching 10% of GDP. Find out if Puerto Rico can learn some valuable lessons from Peru’s economic policies.

As we start the New Year, it is wise to review the economic events of the past year. In 2009, the PR economy continued into its 3-year old recession and survival seems to be the name of the game. The labor market lost 40,000 jobs in different sectors and unemployment increased. The government adopted painful policies, which included the announced reduction of almost 15,000 public jobs by January 2010 and imposed new taxes during 2009. With less income and jobs, consumers made fewer purchases, including cars, compared with 2008. The financial system posted record loan losses and felt the wave of the global financial crisis. A new President in the US addressed one of the largest fiscal rescues in US history. A new Governor in PR took office with the promise of change. The island expects to benefit from the American Recovery and Reinvestment Act (ARRA) and the local or “Criollo” Plan (PEC). Despite poor results in 2009, there is the hope of a new year when we can start all over again.