CB_2018-02-08

12 COVER STORY THURSDAY, FEBRUARY 8, 2018
PATH TO STRUCTURAL BALANCE I ECONOMIC OUTLOOK
Negative impact of hurricanes on
economic outlook is mitigated by
federal support and positive impact
of structural reforms
NOMINAL
GNP GROWTH
(PERCENT)
FY18 FY19 FY20 FY21 FY22
9.3
4.0 3.2 3.0
-9.3
• Nominal GNP is estimated to fall sharply in FY18 due to the impact
caused by Hurricanes Irma and Maria. Disaster recovery assistance and
rebuilding efforts drive higher nominal growth in subsequent years.
• The key driver to the financial projection is revenue growth, which is
estimated for FY18 using the elasticity of revenue to nominal GNP observed
during the U.S. Great Recession and is consistent with general
fund collections through November.
• Revenues are not anticipated to recover to pre-Hurricanes levels
through the projection period: revenues are forecasted to remain 1.3%
lower than pre-storm levels by FY22, in nominal terms.
REVENUE
GROWTH
(PERCENT)
INFLATION
(PERCENT)
POPULATION
(PERCENT)
-18.3
2.1
-7.7
9.3
4.0 3.2 3.0
1.6 1.5 1.4 1.4
-2.0
-3.6 -3.2 -2.9
Continued from page 11
construction investment lost about
$3 billion, or 55.6 percent of its
FY2000 volume.
However, real estate is expected
to decline. According to the Construction
& Sales Activity Report,
prepared by Estudios Técnicos,
sales of new housing units barely
reached 2,339 in FY15, compared to
9,762 in FY08 and 13,400 in FY05.
Not only did the number of new
housing-unit sales decline to historic
lows, the trend of mortgage
originations suggests further deterioration
in upcoming years. The
total volume of mortgage-loan originations
declined from about $6.59
billion in 2008 to about $3.17 billion
in 2015. Additionally, mortgage delinquency
rates increased from
6.8 percent in 2008 to 12.4 percent
in 2015. In June 2017, there
were 15,000 homes in the foreclosure
process, or a 12.29 percent
delinquency rate, which was a
reduction compared to 12.89 percent
in December 2016.
The weakness of the housing sector
is also reflected in the fact that
the number of foreclosed residential
units increased from 2,357 in
2008 to 4,459 in 2015, for an 89.2%
increase. Around 5,000 homes were
foreclosed by June 2017.
The reduction in population and
average family size has resulted in a
steep increase in the percentage of
vacant housing units.
The labor sector has also
weakened, but officials hope new
jobs will be created from reconstruction
work and the proposed
local tax reform. Nonfarm salaried
employment has declined to
lows unseen since before 2000.
For FY15, there was an average
of 887,700 employees, with
about 671,000 people employed
in the private sector. Compared to
FY2000, private employment in
FY15 decreased by 68,300 and public-sector
employment by 48,300
employees. In July 2017, there were
879,000 nonfarm salaried workers,
but by December 2017, that number
had dropped to 847,000. The total
number of persons employed was
980,000 in December 2017. The unemployment
rate was 10.9 percent.
In July 2017, there were 989,000
people employed. The unemployment
rate was 9.8 percent. In January
2017, there were 981,000 people
employed and the unemployment
rate was 12.2 percent.
In FY17, the government approved
a labor reform law that
sought to create more jobs by easing
labor laws that protect workers.
Labor Secretary Carlos Saavedra
said the storms erased any progress
made by the law. However, he said
there were 200 more jobs in August
2017, before the hurricane, than
there were in January 2017.
“It was the first time in four
years that the private sector has
created jobs,” he said in a report
to the Legislature. Saavedra hopes
the economic outlook for labor
will improve. While Maldonado
noted the government hopes to
create more jobs through the proposed
tax reform, he said recuperation
efforts are already creating
jobs despite the shutdown of
numerous businesses.
Tourism up,
Manufacturing at risk
The manufacturing sector, which
is the core of the island’s economy,
however, is expected to suffer. The
Fiscal Plan says Act 154 revenues in
the baseline are assumed to decline
by 15.3 percent, from $1.76 billion
in FY18, with continued erosion
through FY22 to $1.03 billion.
The impact of the Tax Cut & Jobs
Act, compounded by Hurricane
Maria’s negative impact on the infrastructure
supply chain, accelerates
the previous declining revenues
trend of controlled foreign
corporations. The cumulative discount
in FY22, relative to FY17, is
about 50%. “Moreover, during the
FOMB
1990s, manufacturing represented
almost 19% of total employment,
yet today this number plummeted
to 8%. The reduction in the relative
importance of this sector, vis-à-vis
other sectors in the economy, has
caused a structural shift in the labor
market, international trade and
capital flows,” the plan says.
Manufacturers Association
President Rodrigo Masses said
manufacturing is still the leading
industry in Puerto Rico and
praised the government for working
on a tax reform proposal that
will reduce corporate taxes and
make the island competitive.
The outlook, however, is not as
grim as the tourism sector is expected
to grow.
The Puerto Rico Tourism Co.
(PRTC) said tourism is recovering
rapidly and sees a positive
outlook for 2018. In a statement,
the PRTC says there is more than
$1.9 billion in hospitality development
in the pipeline and a lodging
inventory undergoing renovations.
More than 122 hotels are
now operating, which equates
12,458 available rooms. Some
2,670 more rooms will be added
to that inventory after undergoing
renovations. For example,
the Wyndham Grand Río Mar
Puerto Rico Golf & Beach Resort,
the Ritz-Carlton Reserve and El
San Juan Hotel were undergoing
renovations.
Looking ahead, the Puerto Rico
Tourism Co. estimates there are
25% more rooms in the pipeline
under development, which equates
to 3,800 new rooms. Some hotels
in the pipeline are the JW Marriott,
Aloft San Juan Convention
Center, Aloft Ponce, Serafina Hotel
and Four Seasons Cayo Largo.
About $1.9 billion will be injected
into new developments and renovations,
which contributes to adding
roughly 3,831 new jobs.
By the end of June 2018, Puerto
Rico will have received 1.04 million
passengers from cruiselines. The
2018-2019 cruise season is set to
witness a record-breaking 1.7 million
passengers, which is expected
to generate roughly $250 million in
revenue for the economy.
Two weeks after Hurricane Maria,
the Luis Muñoz Marin International
Airport had 20 daily flights,
but today, there is an average of 110
daily flights. Capacity is also on the
rise with current monthly seat volume
of 391,000. By July 2018, seat
capacity is expected to increase by
81,000 more.