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CARIBBEAN BUSINESS
Puerto Rico Is On A Roll!
Economy to outdo remarkable 1990s performance and
edge ahead of national economy by mid-decade
by Francisco Javier Cimadevilla
January 13, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.
Double, double, toil
and trouble;
Fire burn and caldron bubble...
--Shakespeare
After a remarkable performance during the better part of the
last decade, Puerto Rico's economy appears poised for sustained
growth in the first decade of the 21st century.
Moreover, the first available forecast for the next few years
has the island's economy outperforming the national U.S. economy
by mid-decade.
For many, both learned and uninitiated, economic forecasting
may be less scientific than witches conjuring up the future around
a cauldron. Yet, scores of local business and corporation managers
will make decisions involving millions of dollars in budget projections
and allocations based on those forecasts.
In the last 10 years, Puerto Rico's real gross product (i.e.,
the total value of goods and services in constant 1992 dollars)
grew at a moderate average annual rate of 2.8%. But the economy's
rate of growth improved significantly as the decade progressed.
The last seven years, for example, averaged real growth of 3.1%.
And the Planning Board's preliminary estimates for economic growth
in fiscal year 1999 are 4.2%.
Economists disagree as to what these numbers mean. Many even
dispute the validity of official government economic statistics
altogether. But there are areas of consensus.
First, even government economists concede that last year's
4.2% growth was unusually high due to the massive influx of capital
in the wake of hurricane Georges recovery efforts. "At least
1.3% of the growth experienced in fiscal year 1999 was attributable
to the hurricane. Our original forecast had the economy growing
between 2.7% and 3.1%. By adding the effect of the hurricane,
you come close to the 4.2% preliminarily estimated by the [Planning]
Board," economist Heidi Calero told CARIBBEAN
BUSINESS.
Second, most economists agree that even though moderate economic
growth hovering around 3.0% is better than the marginal growth
0.8% and 0.9% that marked the beginning of the decade, it is simply
not enough. Given the still developmental stage of Puerto Rico's
economy, most economists think that it should exhibit growth rates
higher than those registered by the national economy, a phenomenon
economists term "convergence".
"During the 1960's and 1970's Puerto Rico's economy tended
to converge with the U.S. During the 1980's and 1990's we have
been diverging," Estudios Tecnicos president Jose Joaquin
Villamil told CARIBBEAN BUSINESS.
Yet, convergence is precisely what economists at Estudios Tecnicos
forecast will happen again by the year 2003.
From 2000 through 2002, Estudios Tecnicos forecasts moderate
real growth rates averaging 2.3%, which is lower than the 2.7%
growth predicted for the national U.S. economy. By 2003, however,
the forecast has Puerto Rico edging ahead with real growth of
3.1% in 2003 and 3.4% in 2004 compared to the national economy's
2.7% and 2.5%, respectively.
In the case of both U.S. national and Puerto Rico economies,
Estudios Tecnicos forecasts more moderate growth in the next three
years than what they have exhibited in recent years. "In
the year 2000, U.S. economy growth is seen dropping below 3.0%,
in large measure owing to interest rate increases engineered by
the Federal Reserve," states the Estudios Tecnicos report.
"In Puerto Rico, indicators suggest key components of
domestic demand are slowing down, although growth of government
revenue indicates there's still a dynamic streak in the eight-year
old expansion. In the year 2000, there will be some push from
public sector demand, as there usually is in election years. On
the private side, rising interest rates and a slowing U.S. economy
will tend to slow internal demand, although not significantly,"
states the report.
But by the year 2003, Estudios Tecnicos' economic forecast
has the local economy picking up steam, with construction, retail,
and tourism leading the expansion.
Stars in the pack
Investment in construction will remain relatively strong in
the medium term, although it's expected to taper off into a more
moderate and sustainable expansion, again, picking up steam by
2003 and 2004 with growth rates of 6.1% and 6.5%, respectively.
According to the forecast, two factors account for the expected
health of the construction industry: interest rates are expected
to rise only moderately and major infrastructure work already
underway or projected should keep public investment in construction
growing strongly. "While growth in private construction will
level off somewhat, some government-sponsored mega projects will
continue to fuel growth in construction," says Villamil.
Other economists concur. "Construction will continue to
be the "star" performer in our economy for the foreseeable
future. My preference would be that the lead sector be a productive
sector, such as manufacturing," commented Calero.
Calero explains that manufacturing sector performance has been
a mixed bag. While manufacturing employment on the island has
shrunk during the last 10 years, manufacturing payroll has increased,
as have the values of manufacturing output and export sales. "Exports
continued growth is a good sign, although it's inconsistent with
the reduction in manufacturing employment," says Calero.
Increases in productivity and transfer pricing probably account
for the apparent inconsistency, she said.
According to Estudios Tecnicos' forecast, retail sales--which
registered $13.7 billion in 1999--should soar to $18.4 by 2004.
And consistently with other indicators in the forecast, retail
sales are expected to reach higher growth rates of 7.2% and 7.3%
in 2003 and 2004, respectively. "There's no doubt that Puerto
Rico's financial sector continues to have great confidence in
local consumer ability to repay. To that extent, personal consumption
will continue to perform strongly," noted Calero.
Perhaps the most significant growth in the Estudios Tecnicos
forecast goes to the tourism sector. By 2004, annual tourist arrivals
are forecast at 5 million, compared to 3.6 million in 1999, and
annual tourist expenditures are expected to reach $3.4 billion
in 2004 compared to $2.3 billion in 1999. Again, the most significant
aspect of the forecast is that growth rates for both tourist arrivals
and expenditures are expected to spike up sharply by mid-decade,
reaching 11.9% (tourist arrivals) and 12.9% (expenditures) in
2004, considerably higher growth rates than these categories have
experienced during the 1990's.
Villamil says the reason behind the more dynamic performance
of Puerto Rico's economy by mid-decade lies in some of what has
been done in the last few years. "What we've done is to lay
a foundation. There are a number of initiatives that have been
launched but aren't expected to yield short-term results."
Science and technology, a recently launched initiative, exemplifies
areas where results aren't expected before four or five years.
"Of course, that presumes for the next two years we do what
the strategic plan calls for: make requisite investments in the
technology corridor, establish centers of excellence, and give
out the science and technology grants," warns Villamil.
Calero agrees. "Puerto Rico must stop exporting the past
and start exporting the future," she says. "We must
get in the business of manufacturing and exporting products based
on newer technologies, whether in computers or telecommunications.
The problem is that we still don't have adequate incentives to
attract those operations to the island. You need much more than
a policy on Science and Technology. We have to recognize that
tax exemption continues to be an exceedingly powerful tool to
attract investment. Not just corporate tax exemption. It's time
we consider preferential tax treatment for individuals [whom we
want to attract to Puerto Rico to perform research and development
of new technologies]."
Likewise, in the area of tourism, it appears Puerto Rico has
barely begun to scratch the surface. Despite significant growth
in room inventory and massive investments in marketing the destination
during the last decade, some of the most significant growth--tied
to such mega projects as the new Convention Center, cruise ship
piers along the Golden Triangle, and other hotels in the pipeline--won't
kick in until mid-decade.
Clouds in the sky?
Both Villamil and Calero concede that the favorable economic
outlook for Puerto Rico depends on continued positive performance
of the U.S. national economy. Stability in the price of crude
oil and low interest rates are key factors.
"Most industry observers take for granted that the Fed
will authorize an interest rate hike next month and perhaps again
in March," said Calero. "Though I hope it's not more
than 50 basis points, it could be as much as 1%." Calero
notes Puerto Rico's government and other borrowers correctly took
advantage of lower interest rates in the past few years to refinance
outstanding debt. "That was a good move. Still, regardless
of who's in charge, Puerto Rico's new administration will go to
the bond market in less favorable circumstances, which should
be taken into account."
Calero worries less about possible interest rate hikes than
about negative fallout the Vieques issue may have on the economy.
"It's a huge black cloud. Washington's political establishment
may take reprisals against Puerto Rico by cutting federal funding."
Calero notes federal funds are an excruciatingly important factor
in Puerto Rico's economy. "They don't necessarily fuel growth,
but they're tremendously important for stabilizing the economy."
What about the second part of the decade? "We feel optimistic,"
says Villamil. "From 2005 to 2010 we expect to see real term
economic growth around 4%, perhaps even surpassing that figure."
Villamil warns, however, that growth will require continued
effort.
"That forecast requires the same prescriptions we've advocated
in the past: lower transaction costs (i.e., overall cost of doing
business in Puerto Rico); improve infrastructure, both physical
(emphasizing telecommunications and transportation) and social
(health and education); foster science and technology industries;
deregulate and privatize; and make private sector more proactive
in articulating an economic vision for the future.
This Caribbean Business article appears
courtesy of Casiano
Communications.
For further information please contact www.casiano.com
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