The 70% economy of Puerto Rico
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Q2/2020 – The 70% Puerto Rico Economy

Analysis of economic indices in Q2-2020 for Puerto Rico
As of Q2-2020, the Puerto Rico economy is an average 70% of what the quarterly indices used to be in Q2-2006, just before the onset of the current economic depression. This reduction in the economy is miserable and far from “normal”. By all major metrics, most economic sectors have been adversely affected and the fear of a second wave of Covid-19 will cause even more financial hardship to households, municipal, and the central government in PR. Even before the Covid-19 pandemic, unemployment was far worse than the official unemployment rate. The effects of the Covid-19 induced recession will likely be profound and long-lasting. Fear of the disease and uncertainty regarding prospects for a vaccine or whether immunity will endure impacts consumers and the goods and services they normally buy and sponsor. Many businesses are also strapped for cash reserves and cannot withstand continued lockdown or even partial lockdown. No doubt, joblessness will worsen and cause even casual work hard to come by.

Perfect Socio Economic Storm
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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.

Redefining Reconstruction in Puerto Rico
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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.

questions
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Q4/2019 At Year-end, Another Lackluster Quarter

Economic highlights of Q4-2019 economic indices for Puerto Rico
At yearend, the fourth-quarter economic lackluster performance of the PR economy in 2019 depicts weakness in construction, consumption, and more importantly, the leading index for the next quarter into the new year. Although the Banking index grew, its performance was not really due to extension of credit in areas where Puerto Rico desperately needs to rebuild. Instead, healthy net income in banking continued to depict increases in personal loans, including car loans. Overall, this mixed outturn reflects continued sluggish negative growth due to the combined effect of trickle down, limited disaster federal monies after Hurricane Maria; a less than convincing transition from former Governor Ricardo Rosello to the current administration of Governor Wanda Vazquez; and political uncertainty regarding the lack of US Government and President Trump’s trust in Puerto Rico’s competence to manage and disburse disaster funds effectively.

2019 Summary
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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.

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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?

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01/2019: The Banking Sector’s Current Impasse

Remaking Puerto Rico's Banking SectorThe remaking of PR’s economic landscape will reshape banks
The last fifteen years witnessed a remaking of PR’s banking sector that continues to unfold. The process has been largely uneven as consolidations, the bursting of a real estate bubble, an economic depression, population decline, and the default of public debt have all had a direct impact on the sector’s core capabilities and operations. In response to this, banks were forced to retrench their activities, mitigate risk, and become risk-averse. This, understandably, has resulted in a more passive sector, one that, in the future, stands to react rather than lead the creation of new economic opportunities. In this sense, unless the recovery funds are managed to create the right incentives for them to remain on the Island, the banks will simply not leverage capital to jumpstart much needed economic growth, or support development, regardless of continued interest rate hikes. The stakes at the moment could not be higher. PR must get it right this time.

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Q4-2018: Less Than the Sum of Its Parts

Less Than the Sum of Its Parts How Puerto Rico´s Q4-2018 Economic Indices Performed

How Puerto Rico´s Q4-2018 Economic Indices Performed

The end of 2018 left a rather enigmatic picture of PR’s economy as most indices performed well in Q4 with the notable exception of the key leading indicator. It looks as if the accumulation of delays in the disbursements of reconstruction funds coupled with continuous decline in the resident population and the pending consequences of the federal government shutdown started in December—including the possibility that funds initially appropriated to PR could be reallocated to finance the President’s wall—simply worsened expectations Island-wide. At the sector level, manufacturing continued to pull its weight on the back of US demand in spite of changes to the tax code whilst banking slowed down slightly. The first $1.5 bn recently disbursed CDBG-DR funds surely bode well for economic activity over the next few quarters. It remains to be seen, however, whether these will be enough to sustain economic growth in the long-term.

Puerto Rico Economic Pulse ©
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12/2018: 2018 – A Year of Lost Opportunities

Lost OpportunitiesSerious challenges continue to estrange the economic outlook everywhere
2018 came in on the heels of a devastating last three months in 2017, with the anticipation that it would finally bring the opportunities that PR needed to debunk its economic malaise. Yet, 12 months later we are about to exit it with basically more questions than answers and an almost universal dismay with the ongoing situation. To make matters more unsettling, we continue to lack consensus—and with it a sense of collective purpose—on what needs to be done in the best interest of PR, its people and the holders of the Commonwealth´s defaulted debt. Matters elsewhere have not helped either as the accumulation of tension and disruption continued unabated throughout the year. The US-China trade war and the accompanying political instability in the developed world stand to leave unintended consequences on the Island sooner rather than later. Businesses will need to focus on risk mitigation at all levels in 2019 as PR continues its painfully slow reconstruction process, hoping for the best but, certainly, preparing for the unexpected.

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09/2018: A Landmark Institution in Distress

UPR Río PiedrasFewer students and less money will shape UPR’s future

The University of Puerto Rico (UPR), one of the Island’s longest serving, and most respected institution is facing a dire process of retrenchment. Realities on the ground simply caught up. The combination of a contracting population and stagnant personal income over the past 15 years (as well as several strikes) led to a slow decline in enrollment. The ongoing fiscal crisis is just the last straw on a long process of deterioration as debt restructuring stands now to override—for some time—any other consideration. The stakes, however, could not be higher with a reduction of over $200 mn. in its FY18 budget and its own debt restructuring to sort out, the UPR now risks losing its academic accreditation and, with that, access to Pell grants. Without these, enrollment could end up unraveling. Whatever the final outcome, this is the story of the inevitable.