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The Year In Review: For Most Businesses In Puerto Rico, 2001 Was Not A Good Year. Will 2002 Be Better?

BY Francisco Javier Cimadevilla

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

Is the party over?

As the economic slowdown in late 2000 turned into recession in 2001 and was further aggravated by Sept. 11, shockwaves that sent the economy into a complete tailspin, Puerto Rico’s long economic expansion came to an end. Remarkably, many local industries weathered the storm unscathed, and others are well poised for a vigorous recovery next year.

Marred by a slowdown in the U.S. economy that later graduated into a very mild but very official recession and a local government administration unable to get its act together throughout all of 2001 to jumpstart local business activity, Puerto Rico’s economy this year went bust after years of moderate but consistent growth.

And businesses hurt. From advertising to retail, from manufacturing to tourism, the majority of business executives in Puerto Rico will tell you they’ll bid 2001 farewell with gusto. "And, please, don’t come back!," they’ll say.

The year saw the brunt of an economic slowdown that first reared its ugly head in November 2000. Christmas retail sales last year, and the high tourism season that extends through April and Mother’s Day 2001 were flat or down in comparison to the previous year.

As the year progressed, the high hopes with which the Puerto Rico business community ushered the new administration and its economic dream team into office went stale and eventually vanished.

Hundreds of public construction projects in different stages of planning, permitting and actual construction were brought to a screeching halt. Permits for the construction of private projects were withheld or revoked. Economic incentives for hotel development and airlines were scratched. The fiasco in planning finally resulted in the approval by the Legislature of an unbalanced budget for fiscal 2002. There was a lack of leadership at the Tourism Co. until late in the year. And in the midst of rising unemployment, the promise of jobs to come in the long run was based on a new federal tax break with scant chances to succeed in Congress. All of it contributed to the disenchantment.

Then, just when the U.S. mainland economy started to show signs of recovery in early September, the Sept. 11 terrorist attacks on New York and Washington, D.C. sent the economy into a tailspin, both on the island and across the country. On both fronts, reaction was swift to counteract the adverse effects on business and the economy.

Observers now agree that the injection of billions of dollars into the economy as a result of the ensuing war on terrorism will help to ignite an economic boom across the country that will eventually reach Puerto Rico. But still, as the year draws to a close, the Washington economic stimulus package is still on hold as many local industries, notably tourism and retail, are still struggling with the effects of depressed consumer confidence and the prospects of recovery in 2002 that continue to be pushed back later and later in the year.

The big picture

So how bad was it, anyway?

Although Planning Board figures for fiscal year 2001 were still not available at press time, estimates by economic consultants Estudios Tecnicos pins Puerto Rico’s GNP growth for FY 2001 (July 1, 2000 thru June 30, 2001) at 1.1%. That’s very poor growth in comparison to the 3.0% to 4% growth averaged in recent years.

Furthermore, FY 2001 includes the last six months of calendar 2000, when the U.S. mainland and Puerto Rico’s economy were still experiencing the tail end of the longest economic expansion in U.S. history.

If the 12 months of calendar 2001 were compared to the same period last year, the numbers would probably show that Puerto Rico’s economy actually shrunk this year.

"It was a year of slowdown and recession," Estudios Tecnicos’ Juan Lara told CARIBBEAN BUSINESS. "And we don’t see a recovery until the latter part of calendar 2002. So for fiscal year 2002 we’ll be in recession. We’re forecasting real GNP growth of only 0.6%."

Other economic indicators have also deteriorated throughout 2001. Notably, unemployment, which had been steadily declining during the last six years to the point of registering single digits (9.0%) in November of 2000—a feat not accomplished since June 1969—started to climb again. Unemployment stood at 11.2% in November, 2.2% more than the 9.0% registered for the same month a year ago, with the participation rate holding steady at 45.1%.

Job losses to a steady stream of manufacturing plant closings throughout the year were compounded after Sept 11, when much heavier than usual losses were registered in the hospitality and transportation industries. Compared to last year, the number of people employed in Puerto Rico fell by almost 20,000, or 2%.

Three weeks after the attacks, local hotels cut about 11% of their 14,000 employees. By November, some had laid off as much as 25% of their work force. Major hotels also closed some of their room inventory to further save costs.

Indeed, post Sept. 11, many local hotels saw occupancy rates hover in the 10% to 40% range, with corresponding drops in revenue.

For the retail industry, recovery after Sept 11 has been mixed. Commercial Centers Management Inc. executive vice president Jorge Fournier told CARIBBEAN BUSINESS that even though shoppers camped outside shopping malls the Friday after Thanksgiving, sales through the early Christmas season (late November) didn’t look positive.

Mike Nolla, president and COO of Manley-Barenson Puerto Rico, was more upbeat. "Shopping malls are full this Christmas. Tenants have told me that sales are either the same or a little better than last year. The economy is where it was before the terrorists attacks."

The silver lining

2001 was not all gloom and doom. As a matter of fact, many industries in Puerto Rico emerged relatively unscathed from both the 12-month long slowdown-turned-recession and the Sept 11 debacle.

In fact, according to Lara, the relatively mild recession we’re currently experiencing is actually good news. "One can never minimize the down side, particularly for those who have experienced the loss of a job, but this is not a bad way at all to finish such a strong economic expansion as we’ve had for the past 10 years. Historically, strong expansions like that are followed by much deeper recessions," explained Lara.

"Right now, the labor market is soft, with rising unemployment. But, again, recessions following strong economic expansions usually witness unemployment rates increasing by 3% to 4% or more, whereas in Puerto Rico what we’re seeing is unemployment going up by around 1% on an annual basis," said Lara.

Helping to soften the blow, the local construction industry remained strong and alive in 2001, but it is no longer experiencing a boom. A high demand for housing and low interest rates kept the construction industry going during 2001. The large number of construction projects (mostly housing) in the private sector sustained the industry’s growth in 2001,but public sector infrastructure projects did not contribute as they did in years past because of the government’s decision to paralyze and reevaluate them.

"The arrival of a new government administration and uncertainty over validity of government-issued construction permits had a negative effect on the construction industry," Associated General Contractors of America (AGC) local chapter President Jose Vizcarrondo told CARIBBEAN BUSINESS.

According to Vizcarrondo, during the first months of the Calderon administration all existing infrastructure projects were put on hold to be reevaluated, and the administration did not announce any new ones. Additionally, uncertainty over the validity of government-issued permits on private projects created a widespread sentiment in the industry that construction activity had slowed down considerably during the first half of the year.

According to industry sources, the construction industry lost some 20,000 direct and 50,000 indirect jobs this year.

In an effort to jumpstart the construction industry, in August, Gov. Sila Calderon announced some $1.5 billion worth of government-sponsored projects that would go out for bids between September and December, ahead of schedule.

"These projects went out to bids, and many have already been adjudicated, with the exception of those from the Public Buildings Authority," said Vizcarrondo. "The feeling now among the construction industry is a much more positive one. Thanks to these bids, there is now more interest in construction projects."

The auto industry remained relatively on par with last year despite the economic slowdown. Auto sales, while not surpassing the levels reached in 2000, did fairly well. As companies rushed to counter the effects of Sept. 11 by offering ever greater rebates and 0% financing, October and November actually saw the best two months in the year, helping to bring the number for the entire year to end only 1% down from last year.

In the telecommunications industry deregulation continued to fuel both carrier competition and expansion of services in 2001, particularly in wireless, or cellular, telecommunications. At the beginning of the year, the number of local cellular users was estimated at 1.2 million, or 30% market penetration. By yearend, that number is expected to reach between 37% and 39%, for a total of 1.4 million users, easily surpassing the number of fixed lines available.

"We expect the market to continue growing, but at a slower pace. We also think there’s enough market for six companies to offer services," said Telecommunications Regulatory Board president, Phoebe Forsythe, referring to new entrant Sprint PCS.

But the star performers this year were, without doubt, Puerto Rico’s banking and real estate industries.

Most of Puerto Rico’s leading financial institutions experienced solid growth and profits in 2001. Profits were boosted by several factors, including an unprecedented series of eleven consecutive cuts in interest rates by the Federal Reserve, along with the ongoing—albeit slower than expected—implementation of financial modernization that allowed financial institutions to diversify into other business, including insurance.

The Federal Reserve’s interest rate cuts were certainly one of the main catalysts for local banks’ better-than-expected performance throughout the year.

"The drop in interest rates has benefited banks by expanding profit margins, reducing the cost of funds, and increasing net income growth, thus achieving improved results," Puerto Rico Bankers Association (PRBA) President David Chafey told CARIBBEAN BUSINESS at the height of the rate-cutting spree.

As a sluggish economy prevailed and consumer confidence plummeted in 2001, the real estate market received a much-needed boost from reduced interest rates. First-time as well as existing homebuyers took advantage of low interest rates to buy or refinance.

Enjoying favorable rates (6.5% to 7.5% for a 30-year loan), many families traded their existing homes for bigger ones, particularly walkups and middle-to-high income single-family homes. Without a doubt, people in Puerto Rico were buying homes in 2001.

In addition to a strong housing market continuing to fuel growth year after year, 2001 saw the biggest refinancing boom in the industry since 1993. Nearly half of the mortgage loans produced during the first nine months of 2001 were refinancings.

All this refinancing and home buying because of low interest rates has greatly benefited the mortgage bankers and mortgage lending departments of commercial banks.

Doral Financial Corp. registered the greatest growth, with net income during the first nine months of 2001 surging by more than 50%, to $95.5 million, compared to $61.9 million during the same period last year.

In terms of profit growth rates, R&G Financial Corp. wasn’t far behind, with net income during the first six months of 2001 reaching $45.8 million, compared to $31.6 million during the same period last year.

Popular Mortgage also registered impressive growth. During the height of the refinancing boom—from June through October 2001—loan production almost doubled, reaching $622 million, compared to $342 million during the same period last year.

Also, market competition among existing and new properties intensified, as a result of an abundance of new projects in the $200,000 to $300,000 range.

In spite of economic uncertainty--caused by plant closings and layoffs—sales of homes in the $500,000 and higher range did well in 2001, but they did not sell as quickly as in previous years.

Sale of high-priced second and third (investment) homes continued during 2001— because of their tax shelter advantages—although at a slower pace.

In fact, local realtors are comparing 2001 with 1999, an excellent year for the industry that enjoyed the influx of post Hurricane Georges relief funds.

This Caribbean Business article appears courtesy of Casiano Communications.
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