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10 COVER STORY THURSDAY, FEBRUARY 8, 2018 Puerto Rico 2018 Economic Outlook Economists Weigh in on Puerto Rico’s Long Climb BY EVA LLORÉNS VÉLEZ e.llorens@cb.pr In September 2017, Hurricane Maria made landfall on Puerto Rico with the storm’s eye passing directly over the island. The effect was devastating, leaving a total of $90 billion in damages and taking its toll not only on the human, social and psychological fabric of Puerto Rico but also on its fragile economy, labor market dynamics and individual businesses. Grim outlook What’s more, Puerto Rico’s economic outlook faces a bleak prognosis. The latest indicators suggest the decline in real gross national product (GNP) for 2017-18 could be close to double digits and then should improve in subsequent years as federal funds come in, some $21 billion in insurance claims are paid and restoration moves into full force. The government’s most recent revised fiscal plan painted a bleak picture of Puerto Rico struggling to jumpstart an ailing economy that was wounded further still after suffering one of its worst natural disasters in a century. Puerto Rico has requested $94.4 billion in Federal Disaster Relief Assistance, but its projections assume the island will get $35.3 billion. While the previous 10-year fiscal plan, issued in March of last year, set aside some $3.9 billion to pay the island’s creditors across five years, or an average of about $787 million annually, the new plan, revised after the hurricane, contains no funds to pay creditors. Now, Gov. Ricardo Rosselló is saying the government will wait for the bankruptcy proceedings enabled by the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) to be completed to determine debt repayment. A $3.7 billion surplus in the previous plan
THURSDAY, FEBRUARY 8, 2018 COVER STORY 11 for the first five years, will now be a $3.4 billion gap, even after the elimination of funding to municipalities, rightsizing the government and enforcing tax laws. Real GNP, inflation, population, revenues The real GNP is expected to shrink by 11.2 percent this year next five years. Lyman Stone, an adviser for consulting firm Demographic Intelligence, who was invited Nov. 16 to a listening session of the Financial Oversight & Management Board (FOMB), said at the time, the island’s population would shrink by 587,943 in the five years after Maria. Government revenues are also consumption and fixed investment decrease. For FY18, FocusEconomics Consensus Forecast panelists estimate the GNP will contract 1.8 percent but predicted GNP growth for FY19 will be only 0.3 percent. The Economic Intelligence Unit of the Economist, meanwhile, projects the economy will shrink by 8 percent, in the wake of the difference in the projections traces to the assumptions. The government has predicted a drop of 11.2 percent in the GNP because preliminary numbers show that up to 200,000 taxpayers have left Puerto Rico since the hurricane. “It is not the number of people; it is the type of taxpayer. I know 10,000 businesses have closed; services always grows after a disaster, and everything having to do with finances, accounting and legal advice achieves a key role,” he said, insisting on the government’s policy of promoting job creation. One of the sectors predicted to grow, after 15 years in a recession, is construction. Stephen Spears, head of the Associated General The island’s economy grew after hurricanes Hugo and Georges…and there is more investment now than at that time. I know 10,000 businesses have closed; for every 100 businesses that are closed, 40 will not be able to reopen. I predict the economy will grow by 4 percent because of the flow of federal funds and insurance claims. For every million dollars coming into the island, some 22 new jobs are created. — José Joaquín Villamil , Economist — Raúl Maldonado, Treasury Secretary — Antonio Rosado, Economist and then grow by 7.6 percent in fiscal 2019, dropping to 2.4 percent growth in FY20 and grow in subsequent years fueled by the $35 billion in federal disaster support. The nominal GNP, which is calculated at current price levels, is estimated to fall sharply in FY18, by minus-9.3% because of the hurricanes, only to grow in FY19 by 9.3 percent and 2.4 percent in FY20. In addition to disaster relief assistance, Puerto Rico requires external liquidity support to finance the gap until fiscal measures are fully implemented, according to fiscal plan numbers. The plan states the hurricanes will create a spike in inflation of 2 percent in FY19, with subsequent average increases of about 1 percent over the next five years, until FY22. A 19.4 percent cumulative decline in population is expected over the slated to decline 18 percent in FY18 before increasing 9 percent in FY19 and 4 percent in FY20. Taxes collected from individuals and corporations are expected to decline by 19.1 percent and 11.7 percent, respectively, for FY17 and FY18, as a result of hurricanes Maria and Irma, then will grow annually at a nominal GNP growth rate of 4.5 percent through FY22. Housing down, labor may surge However, not all economic studies paint the same negative outlook. Trading Economics predicts the gross domestic product will shrink by an average of 1.5 percent over the next year. FocusEconomics, which provides forecasts from leading world economists, said the economy is expected to remain in recession this fiscal year as private devastating hurricane that left the island without electricity. Economist Antonio Rosado, who is an economic adviser to retailers, predicts the economy will grow by 4 percent because of the flow of federal funds and insurance claims, as well as growth in the construction sector. For every million dollars coming into the island, some 22 new jobs are created. “The island’s economy grew after hurricanes Hugo and Georges… and there is more investment now than at that time,” he said. Economist José Joaquín Villamil has also predicted very minor growth in the real GNP projected at 2.6 percent in FY18 and 3.6 in FY19 with the disclaimer that those numbers are under revision because there is still a lot of uncertainty. Why the difference? Treasury Secretary Raúl Maldonado said the small businesses that were a microcosm because they provided jobs to the owner, his wife and children. That is a strong blow. The numbers also show that for every 100 businesses that are closed, 40 will not be able to reopen,” he said. While the island expects an injection of federal funds for reconstruction, the money will come in slowly and the projects are not slated to start immediately. “We already finished the first response stage, but the planned reconstruction will take time, which is why we see shrinking in the economy followed by growth,” he said. What should the people do? Maldonado advised Puerto Ricans to weather the effects of the storm and consider staying on the island. “There will be lots of opportunities for growth, once we get the capital injection. The area of professional Contractors Puerto Rico chapter, said most of the 214 members of the organization have created an estimated 20,000 jobs. Government construction investment is expected to grow by 141.3 percent in FY18 and 94 percent in FY19. Private construction investment is expected to grow 107 percent in 2018 and 71 percent 2019, according to an Estudios Ténicos Inc. study. A prior 2016 study by Estudios Técnicos for the Economic Development & Commerce Department had noted construction investment in Puerto Rico declined significantly as a share of GNP, from 14.8 percent in FY2000 to 4.6 percent in FY15, because of a decline in private construction. The largest decrease occurred in the private sector; from FY2000 to FY15, private Continues on page 12
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