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When The Going Gets Tough…

The Calderon administration is taking the bull by the horns, with Economic Development and Commerce Secretary Ramon Cantero Frau leading the efforts to help the island’s economy rebound by early next year.

…the tough get going


September 27, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

‘Tough times are obviously ahead of us,’ says World Trade Center survivor Ramon Cantero Frau. But a war economy, accelerated public construction projects, economic development legislation, and a refocused tourism campaign could help us bounce back.

Puerto Rico’s economic development and commerce secretary is himself one of the survivors of the opening round of the first major war of the twenty first century.

Now his marching orders are to lead the government’s economic development squadron through the booming economic recovery expected to hit the island by early 2002.

The morning of Sept. 11, 2001 found Ramon Cantero-Frau a mere 150 yards from the epicenter of the devastating terrorist attack on the World Trade Center. Along with the rest of Governor Sila Calderon’s core economic team--Treasury Secretary Juan Flores-Galarza, Government Development Bank President Juan Agosto-Alicea and Office of Management and Budget Administrator Melba Acosta--Cantero was in New York to meet with Wall Street analysts on the Commonwealth’s general obligation bond issue.

[In the harrowing evacuation the team made on foot in the moments immediately following the attack, Cantero became separated from the rest of the group and was almost overcome by the blinding cloud of dust and smoke that swept over the area. It wasn’t until hours later that he was able to make his way out and get through to Gov. Sila Calderon by phone to report that he was alive.]

When Cantero and the rest of the governor’s top-tier team finally made it back to Puerto Rico on Sept. 14, what awaited was the responsibility of leading the effort to cope with the economic adjustments Puerto Rico must make in what he describes as an essentially "wartime" economy.

Money moves

In an exclusive interview, Cantero told CARIBBEAN BUSINESS that the regrettable tragedy of the attacks on New York and Washington two weeks ago might actually accelerate the recovery of both the mainland and island economies sooner than had otherwise been expected.

"Remember that in a war economy, money moves," the economic development chief emphasized.

For that to happen, one of the main priorities of the Administration is to maintain a positive spirit within the private sector and among consumers.

With a federal economic stimulus package on the way, following on the heels of the $40 billion Congress has earmarked for reconstruction and $17 billion in federal funds to shore up the airlines, Cantero prognosticated that the current economic slowdown—though temporarily sharper in the near-term than previously anticipated—will be reversed, as early as the first quarter of 2002.

"This is the critical period," said Cantero, "businesspeople are now beginning to see how they’re going to recover." Federal moves to inject new spending to both prepare for war and turn the economy around quickly, coupled with the Calderon administration’s local efforts, have convinced Cantero that "though we’re initially going to have a bigger drop, we’ll then have a faster bounce-back."

Don’t leave the country, vacation in P.R.

Cantero’s optimism even extends to Puerto Rico’s tourism sector. "We can save tourism," he insisted. In addition to providing tourism businesses with relief on a case-by-case basis, Cantero said the government will go forward with a redesigned tourism promotion campaign for the U.S. mainland to be launched quickly.

"Without offending anybody, we need to send the message that Puerto Rico is home, with the U.S. flag, Federal Aviation Administration (FAA) regulations and all that comes with it," Cantero said. "In times of conflict, people stateside don’t want to venture far from home," Cantero reflected. "They’re not going to go to the Mediterranean or Europe or to other countries for their vacations," Cantero continued, "so when East Coast residents start to look for warm weather vacations this winter, it’ll be down to Florida or Puerto Rico."

Cantero said this travel pattern was already seen during the Gulf War period, when tourism to Puerto Rico came back strong.

Manufacturing upswing

Cantero said the U.S. economy is in a wartime mode, therefore he’s ordered the Puerto Rico Industrial Development Co. (Pridco) to concentrate on promoting contract- or assembly-manufacturing operations related to current U.S. mainland needs.

"We have a lot of major high-tech companies--like Sensormatic with a 1300-man workforce in Aguadilla, which produces electronic surveillance equipment--that manufacture products and equipment that will probably now be in much greater demand," Cantero said. He also said the pharmaceutical sector remains strong, and that none of Pridco’s manufacturing promotions made to date have been pulled back as a result of the crisis.

Bumpy ride at first

Consulting daily with economists at major financial firms on the U.S. mainland and in Puerto Rico, Cantero admitted the short-term economic situation will be difficult. Third quarter economic growth figures are now expected to confirm that the U.S. has entered a recession, with a drop in economic activity shown in the growth rate of around —1%.

As a result of the terrorist attacks on the U.S. and the global war on terrorism that has ensued, projections for the fourth quarter are even more grim. Estimates for fourth quarter economic activity range between —1% and —2.5%.

"Because Puerto Rico is the largest offshore U.S. jurisdiction, the negative impact on its economy is expected to be proportionately greater," Cantero explained. "Remember that the economy of Puerto Rico was suffering more than any U.S. state before the current terrorist crisis," Cantero observed, "manufacturing employment on the island has already declined by 23,000 jobs—a drop of over 14%. No jurisdiction in the U.S. mainland has lost manufacturing jobs at such a high rate."

The terrorism crisis instantly compounded that downturn, with Puerto Rico and other U.S. areas most reliant on air travel and tourism now facing the brunt of the negative impact. Additionally, the crisis has shaken the psyche of mainland and Puerto Rico consumers alike. "We’re in for a rough ride," Cantero admitted.

A plan for action

"But when the going gets tough, the tough get going," Cantero said. He reviewed a series of proactive steps the Calderon administration is taking to soften the impact of the recession and stimulate the economy’s recovery. The administration’s economic development chief said the strategy to cope with the crisis includes action in three major priority areas.

The Administration’s first priority, Cantero told CARIBBEAN BUSINESS, is to aggressively move forward with public works construction projects. "We have funding for all the public works we’ve announced—including roads, electrical energy, and ports--and we’re going to move up the schedule in order to push through $1.2 billion in contract bids for these projects over the next four months," Cantero said.

The Governor announced last week that by the end of this month, the government will have completed awarding bids for more than $367 million of this total. Moreover, the Commonwealth government is now ready to proceed with the bond issue that was temporarily suspended as a result of the terrorist attacks. "And that bond issue will benefit from the Federal Reserve’s latest cut, which will save Puerto Rico money," Cantero indicated.

Cantero also said that the Government Development Bank is in a strong position to weather the economic downturn. The Bank’s liquidity has increased from less than $300 million when the Calderon government took office, to over $1.2 billion at present.

The second area the Administration will aggressively push forward

is the economic development legislation package that the Governor announced to the Legislature in August. "We’re working full blast with the Legislature to get these measures approved within the next two to three weeks," Cantero said.

This legislation includes a new incentives package for companies which produce what are called "pioneering products." News of this package has captured the interest of the manufacturing sector according to Cantero who said more than 20 companies have called to inquire about and express their support for the measure.

Other legislative measures by the Administration expected to receive swift approval include new tax exemptions for companies that export products made in Puerto Rico, tax exemptions for the rehabilitation of rental housing, tax incentives for private bank guarantees of tourism projects, tax exemption for timeshare projects, and the extension of a preferential 7% tax rate for secondary sales of stocks of publicly traded Puerto Rico corporations.

In addition to the legislative measures, the Administration is taking action on other fronts, including the creation of an Entrepreneurial Fund at the Economic Development Bank, which will be capitalized with $10 million and which will receive matching funds from the federal Small Business Administration.

The administration is also going forward with $50 million re-capitalization of the Government Development Bank’s Tourism Development Fund for the development of hotels and other tourist facilities.

Two other administration initiatives Cantero said will further boost the economy are the Accelerated Permitting Center and the crude oil price-hedging program.

Window of opportunity

The third area the Commonwealth’s economic team is focusing on is the U.S. economic stimulus plan currently being put together in Congress. Cantero said that because Washington is now focused on winning the war against terrorism and getting the entire economy on the road to recovery, there is a new opportunity for winning approval of amendments to Section 956 of the U.S. Internal Revenue Code, possibly as part of the economic stimulus package that is currently being considered in Congress.

The proposed 956 amendments would allow U.S. companies, which incorporate in Puerto Rico as controlled foreign corporations (CFCs), to lend or invest up to 90% of their profits from Puerto Rico operations--free of tax--to their U.S. parents or shareholders. The alternative 956 proposal would allow the CFC to repatriate dividends and would give the recipient the benefit of an 85% deduction of dividends received. As the law stands now, these profits are fully taxed.

The Calderon administration is pushing the 956 amendments as a win-win economic incentive for Puerto Rico and for the U.S. as a whole. With the proposed tax provision, the administration contends, U.S. companies in Puerto Rico will have an incentive to remain in Puerto Rico as CFCs, instead of leaving for competing foreign countries, as they have been doing in increasing numbers.

As of press time, Cantero was in Washington, D.C. to make the case for including the Section 956 amendment as part of the national economic stimulus package. He said there is now a receptive attitude to move on the legislation in the Senate.

More to come

The economic development chief also said more is in the works in terms of additional local initiatives to stimulate economic recovery, including a possible loosening of development permit regulations in light of the current emergency situation.

"With the intense efforts being made federally and locally, and if we keep our spirits up, we’ll get through this," Cantero insisted, recalling previous cyclical downturns in the ‘70s and ‘80s and the recoveries that followed them.

"We’re going to make it," the economic czar assured. "Tough times are obviously ahead of us, but we’ll come out of this stronger."

This Caribbean Business article appears courtesy of Casiano Communications.
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