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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.
Thursday, February 8, 2018 PUERTO RICO 13 Investment Summit to Showcase Opportunities Renewable Energy, Blockchain Technologies to be Highlighted at Event BY YANIRA HERNANDEZ CABIYA y.hernandez@cb.pr The fifth edition of the Puerto Rico Investment Summit that kicks off Feb. 12 in San Juan will focus on new business possibilities on the island after the devastating Hurricane María passed across Puerto Rico last year. The event was slated for October 2017, but the conditions in Puerto Rico just weeks after storm led to its postponement until 2018. “In the end, it has been very interesting because we have been able to work on new approaches that were not contemplated in the beginning of 2017,” said Brenda González, president of the Investment Summit. This time, the themes of renewable energy and blockchain technologies will be highlights of the event. The Puerto Rico Investment Summit was created in 2013 to promote the various incentives that Puerto Rico has to offer to attract investment to the island. In principle, it was understood that it was aimed at foreign investors who would benefit from Acts 20 and 22; however, each day there are more local entrepreneurs who attend the event to learn about available incentives, while they also use the opportunity to network with potential business partners. “Some people think this is just for the foreign investor but it’s not. The themes are relevant to both the investors who come from abroad to do business on the island and the local investor who has a new enterprise and does not know how to benefit from existing incentives. The event has an educational element but we also try to give some space for networking. That way, attendants can share in a less formal atmosphere and establish connections that will serve them in their businesses,” González said. Throughout the summit’s two working days, attendants will hear the experiences of successful investors who have set up their businesses in Puerto Rico, and get to know their successes and challenges, as well as their expectations for coming years. The new panorama Interesting business opportunities are expected in Puerto Rico as a result of the federal money that will arrive to the island for post-hurricane recovery and proposed structural changes to expedite Puerto Rico’s economic development. In fact, the first guest speaker during the summit will be Economic Development & Commerce Department Secretary Manuel Laboy, who will trace the main outlines of the new Law of Incentives that the administration of Gov. Ricardo Rosselló will present this year. The secretary has anticipated that given the new political and economic reality that the island faces, the focus should be directed to the generation of local capital, joined with the island’s economy through the export of goods and services that do not depend on federal incentives. The impact of the recently approved federal tax reform on the local economy and businesses will also be a focus of analysis at the summit. Energy and blockchain The transformation of the island’s energy system, which is beginning to take shape after Rosselló Nevárez announced a new policy to privatize the Puerto Rico Electric Power Authority (Prepa), will be discussed during a panel moderated by Caribbean Business Executive Editor Philipe Schoene Roura. Participants on the panel include Julia Hamm, president & CEO of Smart Electric Power Alliance, a Some people think this is just for the foreign investor, but it’s not. The themes are relevant to both the investors who come from abroad and the island. —Brenda González, president of the Investment Summit. not-for-profit entity that facilitates effective transition toward cleaner power generation, such as with the use of solar energy. The highlight of the event will be the presentation by Brock Pierce, co-founder of Block.one, Blockchain Capital and chairman of the Bitcoin Foundation; and Steve Bassi, founder & CEO of Narf & Swarm and Swarm Technologies Inc., to discuss cybersecurity in these times of blockchain technologies. At the end of the event, there will be a question and answer session, so attendants can clarify any doubts on how, where and why to invest in Puerto Rico.
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