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Bankers Are Confident That Puerto Ricos Economy Will Pick Up
BY LIDA ESTELA RUAÑO
June 14, 2001
Local bankers are confident that Puerto Ricos economy will pick up by the third or fourth quarter this year and that 2002 will be better.
FirstBan Corp. Chairman & CEO Angel Alvarez said the Federal Reserves dramatic lowering of the federal funds rate from 6.5% to the 4% so far this year has brought the prime rate from 9.30% to 7%. The immediate effect of the drop is felt in commercial loans, which depending on client credit rating may be up to half a percentage point above the prime rate.
"It can take anywhere from six to nine months for interest rates to impact the economy," Alvarez said. "Short term, it doesnt affect consumer products like personal or auto loans, compare to commercial loans which are directly tied to the prime rate."
Many consumers wonder why the interest rate drop hasnt produced a proportional drop in mortgage rates. Alvarez said that mortgage rates are tied to 10-year U.S. Treasury Notes. These notes reached a low of 4.70% and have since risen to 5.28%, meaning mortgage rates have increased 50 basis points. Currently conforming loans [Freddie Mac and Fannie Mae] are at 5.5% to 5.75%.
"Mortgage rates have reached their lowest level. From now until years end mortgage rates should remain fairly stable, with slight increases," he said.
Alvarez is optimistic the economy will pick up sometime between September and December of this year. "Theres a 75% chance there will be an upturn in the economy,"
he said, adding that as part of this scenario mortgage rates will increase.
Alvarez said that the $1.3 trillion-over-10-years federal tax cut will boost the U.S. economy with a corresponding positive impact locally.
According to Alvarez, as U.S. consumers keep more money in their pockets, they will renew their purchases. That should boost the manufacturing industry, which represents approximately 40% of Puerto Ricos economy. "We are a very attractive manufacturing site so we should be able to promote new plants," Alvarez added.
"The worst is over although we have yet to reach the bonanza stage but Im very bullish about next year, " he said.
FirstBank, the islands third largest commercial bank, has not felt any economic downturn because, according to Alvarez "we revised all of our portfolios and prepared ourselves very carefully."
The bank grew $1 billion in assets last year and Alvarez anticipates reaching $6.7 to $6.8 billion in assets this year. FirstBank is now placing on the market 3 million preferred shares of the institution at $25 per share to raise $75 million "to have the needed capital to sustain the expected growth."
Scotiabank de Puerto Rico President Ivan Mendez said interest rate cuts pushed personal and auto loan rates down 0.25% to 0.5%.
To Mendez, the economic slowdown has not produced a drop in housing sales locally. "Customers are selling their houses or apartments pretty much the same. They have not had exceptional problems with purchasers canceling their pre-sale contracts," Mendez said.
"Everyone expects the local economy to grow 2% to 2.2% this year, which is lower than 2000. Lower oil prices and new infrastructure projectslike the Convention Center, the Condado Trio, and the Transshipment Port of the Americasexpected to kick off with the new fiscal year starting next month will help the local economy pick up steam."
Meanwhile, Banco Bilbao Vizcaya Argentaria Capital Markets president Eduardo Colon said interest rate cuts represent a reduction in costs for consumers and counterbalances other dramatic economic drops, such as losses incurred in high tech stock and higher food, gas and electricity prices.
"I am cautiously optimistic that the Fed has taken the right steps to stimulate the economy. The effects will be seen in the third or fourth quarter which is when we will have a better picture of where the economy is really heading," Colon said, adding that key elements, such as unemployment, inflation, and economic development need to be constantly monitored. This information can produce a clearer picture of what to expect.
For Victor J. Galan, chairman & CEO of R-G Premier Bank of Puerto Rico, the seventh largest bank on the island, and whose flagship R-G Mortgage Corp., is the fourth largest mortgage bank, lower interests have meant an increase in mortgage refinancing.
Of the $2 billion R-G mortgage financing origination he anticipates this year, half will be in refinancing. Of that $1 billion, about $500 million will be for new homes or re-sales, and both will be at the prevailing low mortgage rates.
"We dont know how consumers will use the refinancing money, whether to compensate for the increase in their electricity, gasoline, and food bills or to go on a vacation, but certainly the money will help consumers catch up on their debts. They will start spending again when they feel they have solved their financial crunch." Galan said.
Rafael Arrillaga Torrens, chairman & CEO of Eurobank, said the islands 12th largest bank is well positioned to benefit from a lowering of interest rates. Compared to the wait-and-see attitude that prevailed in the last few months of 2000 and early 2001, Arrillaga Torrens has seen an upswing in demand from developers, especially those building homes for the middle and lower income markets.
The only dissident voice among the bankers interviewed is Frank C. Stipes, chairman, CEO, & president of Westernbank, the islands fifth largest commercial bank. He sees pretty much the same economic scenario for the next 18 months, which may extend to 24 months.
Stipes said that, if not balanced out, high petroleum prices and the impact they have on all areas of the economy hurt consumers immediately and could create stagflation.
"Stagflation is the combination of inflation and recession, due mainly to the high cost of oil and lower productivity. Were too dependent on oil and the ripples it causes in the financial sector affect everything," Stipes said.
Stipes said that Puerto Rico still has a carryover effect from many ongoing construction projects. Since the lower interest rates have increased mortgage refinancing, the fact that only a few new projects are being financed is not being perceived.
"Theres just not enough steam to keep the economy running at the same speed as before. We are experiencing a contraction or economic slowdown. But it is not a debacle." Stipes any further interest rate cuts could be a double edge sword. Perceiving an economic slowdown, consumerseven those with money to spendmay hold back. Bankers and analysts expect the fed to decide on a 25 or 50-point drop next week.
Westernbank is strongest in the islands west and southwestern regions, areas hit hard by plant shutdowns. Stipes said clients are complaining of less construction and lower retail sales. "It is only normal that simply out of prudence, consumers spend less. Thats why everyone is so keen on the consumer confidence report. If spending remains at a standstill, there will be further economic contraction."
This Caribbean Business article appears courtesy of Casiano Communications.