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
By H. Calero Consulting Group Puerto Rico Compass© • • • 0 Comments

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.

By H. Calero Consulting Group Puerto Rico Compass© • • 0 Comments

Q3/19: A Long Hot Summer

Economic highlights of Q3-2019 economic indices for Puerto Rico
Who could imagine Puerto Rico was to witness the resignation of then Governor Ricardo Roselló in August 2019!! Daily protests disrupted sales in shopping centers and on-location retail and other businesses in Old San Juan. A consumer shocked by political corruption became more thrifty conscious. Despite some meager increases in construction jobs, that sector remains in recession. Manufacturing, though geared to export markets, has remained flat and observant of a global slowdown and impacted by the as yet unresolved US-China trade war. The exit of yet another foreign bank – Santander Bank (Spanish owned) – could see the end of bank consolidations in the Island. Will PR start focus on feasible public debt renegotiations under the leadership of the Promesa Board? Will the new Governor choose a path of economic growth? Will President Trump continue to withhold badly needed federal disaster monies? Still, what lies ahead may not be short of drama.

By H. Calero Consulting Group Puerto Rico Economic Pulse© • • 0 Comments

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?

Brexit
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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?
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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.

Puerto Rico at a Crossroads
By H. Calero Consulting Group Puerto Rico Compass© • 0 Comments

Q2/2019: The Roots of the Problem

Inside Q2-2019 economic indices for Puerto Rico
Puerto Rico still needs to find a new economic compass. At the root lie not only endemic generations of political corruption to which people now have said enough, but a search for new leadership that defines a new vision of economic growth and efficient performance by cabinet members and the private sector. A few of Q2-2019 quarterly indices are in positive territory, but construction and the consumer index are definitely negative. Our leading index is positive, but only barely. There is no definite take-off by Banking, which continues profitable at the expense of car loans. The next 3 to 4 months are not exactly a forecast of economic recovery, a crossroads between stagnation or realizing opportunities in Tourism, housing, and infrastructure, among others. Will President Trump continue with a different assessment of the threats facing PR? This Compass attempts to shed some light on these questions.

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

Raising the Stakes of Our Economic Recovery The unintended consequences of the US-China Trade War
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06/19: Raising the Stakes of Our Economic Recovery – The unintended consequences of the US-China Trade War

With a potential disruption to world GDP of around $600 bn by 2021—in the full trade war scenario—the stakes of the US-China row could not be higher. For the US, the problems (tariffs are only the surface) were years in the making, which is why President Trump enjoys (rare) bipartisan support on the issue. On the other side of the Pacific, China found a niche, a model of authoritarian capitalism, that no longer seeks to accommodate the West´s values or its international architecture. In fact, it seems content to project its influence outside its domestic borders, in the best traditions of the West. For PR, the spat will mean a shift in the structure and dynamics of prices, including costlier construction costs, and increased risks of a delayed economic recovery. Worse yet, it can jeopardize the viability of recently renegotiated debt repayments. These risks imply that economic policy will need to be flexible so as not to be caught off guard once again.