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Wheres Our Economy Going?
Delays in public construction schedule trump governments hope to jumpstart the local economy this summer; top local business executives in every major industry worry they will not see a recovery till next year
By Francisco Javier Cimadevilla
August 15, 2002
Mañana, mañana . . .Cantero Frau acknowledges delays in public construction schedule presented to CARIBBEAN BUSINESS in May; now expects pace to pick up in September and October
Drive around. Ask around. Theres an eerie stillness in the air. Puerto Ricos economy seems to have come to a standstill.
More than two months after the local government administration announced a massive infrastructure construction program (CB May 30) that was expected to jumpstart the local economy by summer, not much is happening. And the little thats happening is taking forever.
CARIBBEAN BUSINESS visited the construction sites of 25 infrastructure projects in eight municipalities around the island, 15 that were scheduled to begin construction between May and June and another 10 that were supposed to have broken ground in July. With few exceptions the projects had not started. Those that have started did so after considerable delays.
"We are confronting a bit of delay because of permitting backlog," Secretary of Economic Development and Commerce Ramon Cantero Frau told CARIBBEAN BUSINESS. "I would say that, on average, we are about 20 days behind schedule."
In fact, the delays run more like 30 to 90 days, depending on the project.
As earlier reported by CARIBBEAN BUSINESS (CB March 7), in 2001 and early 2002, the government issued and successfully sold bonds totaling more than $9 billion at attractively low interest rates. Of that amount, $6.7 billion was new money to be used primarily for construction of the governments infrastructure program for the next few years.
The $6.7 billion for public infrastructure construction running immediately through the local economy is what business executives were hoping might finally jumpstart it into recovery. For now, that money is just sitting in the bank earning interest [more details to come] and trickling out ever so slowly, which has most business executives resigned they will not see that local recovery until next year.
In May (CB May 30) the government announced that at least $1 billion would be used to build around 100 projects in a period of 10 months. With that schedule, money was to start circulating in the construction of infrastructure projects at the rate of about $200 million per month, starting in June. Secretary Cantero Frau said at the time that problems in the execution of the administrations capital improvement program had been largely solved and as a result, the actual construction commencement dates would be concentrated in the summer months of May through September, 2002.
"Were expecting everyone to noticeand feelthe impact of the boom in public construction this summer," Cantero Frau said upon releasing the specific details of each of the construction projects scheduled to CARIBBEAN BUSINESS in May.
Wishful thinking. Information obtained from the agencies responsible for the various projects, the mayors offices in the various municipalities, and the contractorsin those cases where the bid has already been awardedindicates that the delays are considerably longer and, in some cases, theres not even a clear idea when the project will start.
"The projects are going slower than I would like," Cantero Frau told CARIBBEAN BUSINESS last week. Evidently frustrated by the battles he has to fight with the governments own bureaucracy, the economic development chief now expects the pace of the public works construction program to pick up considerably in September and October. (See sidebar.)
Failure by the government to get the infrastructure construction program underway this summer as originally planned has business executives worried they will not see the local economy recover until some time next year.
As a group, the banking industry appears to have the most positive outlook, which should come as no surprise. Prevailing low interest rates, which have allowed their commercial and real estate lending business to thrive in the last year and a half, are expected to remain low at least until the stateside economy starts to give a clearer indication of recovery.
But local executives in more than one industry, including some bankers, stressed that it is extremely important for the government to fix the permit process, or do whatever it has to do to get public sector construction going, arguing that only then will construction take off again, setting off a chain reaction of economic recovery that will seep into every segment of the economy.
One of the sectors of the local economy that has been hit hard over the past year has been the construction industry.
The uncertainty of validly issued construction permits to private sector developers, with many of them being challenged in court after having been approved by the government; the slow pace of the government permits certification process, and the numerous government bids of infrastructure projects still not being awarded are the main issues brought up by construction industry sources interviewed by CARIBBEAN BUSINESS.
The consensus among construction industry sources is that the stock markets recent downturn and accounting scandals have investors concerned, which has further aggravated the local economys stagnation, with a recovery expected by first quarter 2003 at best.
"I do not agree that the stateside economic recession has ended yet. The stock markets sharp downturn has investors very concerned and the economy stagnant," Miguel Sabater, president & CEO of Bird Construction Co. told CARIBBEAN BUSINESS. "As it has been historically, our economy follows the statesides, three or four quarters behind."
Sabater explained that the slowdown in government construction projects has reduced his companys revenue for this year. Bird Construction had to reduce its workforce this year because of the inability to start new projects (delay in permits), some of them already negotiated.
Jose Basora, vice president of American Builders Corp., is more optimistic. He expects a recovery in the local economy by first quarter 2003, but warns about the present lack of confidence among the companys clients.
"I see confidence still on hold and not much spending among clients," said Basora. "As for investors, I see no confidence. They are not spending."
Basora added that the governments delay in getting out its infrastructure projects did not affect the firms operations this year because "luckily, our base has been mainly private projects."
Jose Gonzalez Nolla, president of the Puerto Rico Chapter of the Associated General Contractors (AGC), said members were alert and hopeful that the numerous government infrastructure projects would be awarded and their construction could start soon.
"The government should make sure that the technical, administrative, and managerial personnel responsible for the permits process in all pertinent agencies have the necessary resources and the authority to be able to process these in an expeditious and responsible way," said Sabater. "If they do, they will be able to move the hundreds of permits requests in their hands."
Retail industry insiders are not all smiles when talking about sales, consumer confidence, or the anxiously awaited economic recovery. Still, many are doing the best they can to stimulate sales, including proceeding with expansion plans, expecting that next year the industry will fare a little better than it has since late 2000.
For the month of July, most retailers are reporting an increase in both traffic and sales in comparison with last year, but it is only a slight increase. These gains can be attributed in part to the Back to School season.
"Sales have been mostly flat, and we are seeing an upsurge now with Back to School sales. Back to School traffic has even helped our sales in the home furnishings department," said Kattie Martinez, manager of public relations & marketing at JC Penneys local headquarters.
Some retailers, however, note a general improvement over last year. "We are doing better than last year," said Victor Gonzalez, manager of La Defensa shoe store in Plaza Carolina, "but only because the economy was very bad then. Were just not doing as badly as we did last year."
Jorge Fournier, executive vice president of Commercial Centers Management Inc., told CARIBBEAN BUSINESS that sales for this year are up only by 1% to 2%. "Our main industry problem for 2002 is low retailer demand for new stores, not necessarily retail sales."
"The projected trend is sour," added Fournier. "Retail sales will stay flat or increase a little, maybe 1% or 2%, conservatively speaking, as economic uncertainty lingers and consumer spending drifts lower. Neighborhood shopping centers," he predicted, "will lead the retail sector due to strong supermarket sales thanks to new residential-complex developments."
Mike Nolla, president of Manley Berenson Puerto Rico, expects a stronger economy in 2003 with a boost in consumer confidence. "Im seeing an improvement in consumer confidence," he said. "They are spending more because they know things are going to get better soon. As Ive said before, everything is a cycle. Many people dont remember past recessions, and like those, the current slowdown eventually will disappear."
Some retailers expect this Christmas shopping season to be equal to or better than last years. Nolla expects a satisfactory season. "Last Christmas sales werent better because 9/11 provoked many retailers to cancel inventory," he explained, "but the demand was there. If they hadnt cancelled inventory, they couldve sold more."
Angelo Mercado, Marshalls local corporate affairs director, is looking forward to a good Christmas season. "There is still uncertainty in the local and mainland economies, but theres no indication that we will have a bad Christmas season. Last years Christmas sales were good and we expect the same this year," he said.
Gonzalez, however, notes, "Inventory levels are more or less the same as last year."
"We plan to be about even with last year," said Michael Silva, president of mens apparel chain Jeans.com. "However, we closed two stores, which means that we will have a small increase in inventory." [Who??Acevedo] concurred with both Gonzalez and Silva, saying, "Our inventory is the same as last year."
Puerto Ricos top bankers see a number of positive signs in the local economy, but most also dont hold back from pointing to areas in need of improvement.
"We have a tendency to complain too easily," Oriental Group Chairman, President and CEO Jose Enrique Fernandez told CARIBBEAN BUSINESS, commenting on the need to be realistic in adjusting expectations following almost a decade of buoyant economic growth in the mainland U.S. and in Puerto Rico. "We should reasonably expect to see a 2% to 3% economic growth in Puerto Rico this year."
"Theres no doubt that consumer confidence has basically remained strong in Puerto Rico," FirstBank Chairman, President and CEO Angel Alvarez concurred. "The relatively low unemployment and high home ownership levels in Puerto Rico are two factors which contribute to that confidence," said Alvarez.
"Our economy depends more on what individuals and entrepreneurs do than on what government does," remarked Richard Carrion, Popular Inc. chairman, president, and CEO, thus downplaying the long-ingrained conditioning to look to government to drive economic growth.
Still, Carrion is cautious when talking about the economic outlook for Puerto Rico and for the U.S. as a whole, pointing out that the U.S. and global economic horizon remains clouded due to uncertainty over the impact of a possible U.S. invasion of Iraq and the threat of terrorist violence.
Ramon Prats, president of R&G Financial, the islands second biggest mortgage bank, said hes observed home sales somewhat slower during the summer months; buyers have been holding back because of the economic uncertainty. "This isnt the market of a year or a year and a half ago," said Prats. "Generally, its a buyers market thats prevailing at the moment."
All the bankers expressed concern over the economic effect of reversing construction permits that had been previously approved. The phenomenon has recently halted well-advanced construction projects in both the private and public sectors. Santander BanCorp president Jose Ramon Gonzalez warned it has had a "chilling effect" on banks and developers alike. "We have to get our act together on this," he said.
"The finality of legal processes is extremely important in creating an environment that is conducive to investment and to economic development," Gonzalez observed. "Without that certainty, a serious problem is created that affects future economic growth." The situation has raised the risk premium on projects across the board, he said, and obviously makes the banking sector more cautious.
"The government has got to step up to the plate. The challenge it is facing right now is not financialthe government is in good shape financiallythe challenge it faces is in converting those paper initiatives into action to have real impact on the real economy," Gonzalez declared.
"The government is going to have to throw more money at the economy to wake it up," concurred Alvarez. The government particularly needs, he said, to demonstrate it can overcome the obstacles that have slowed the development of high-profile construction projects, such as the Convention Center and the Eastern Corridor.
The economic recession may have simmered down in the U.S., but top tourism executives in Puerto Rico and hotel chain executives with properties on the island say it has not ended for all.
"Who says the recession in the states has officially ended?" asked Daniel Hughes, vice president of Hilton International. "The continuing downward trend in the stock market, combined with the weak dollar, continues to squeeze the hospitality sector."
Not until the economic recession is over, tourism experts say, will consumer confidence in vacation travel return.
Horst Sicher, general manager of the San Juan Marriott Resort & Stellaris Casino, is optimistic that business in the next six months will be much better than the last six of 2001, the years worst period.
"We should equal or beat the numbers of 2000," Sicher said. "I knew we would have a good month of June and was concerned about July, but reservations came in better than our projections. September also looks good, but its always a gamble because of the hurricane season. Still, if you have three good months ahead of you then business appears to be getting back to normal."
Richard Cortese, vice president for Wyndham Resorts in Puerto Rico and the Caribbean, said he expects occupancy levels to return to 2000 levels in the next six months, albeit with hotel rates 5% to 10% below what they were before 9/11.
The combination of 9/11, the ensuing war on terrorism, the drop in the stock market, and prolonged reductions in corporate travel have obviously made investors take a wait-and-see approach so the island should not expect a lot of activity in terms of new hotel properties.
"Investor confidence right now is cautious," said Nick Ward, senior vice president of international hotel development at Marriott International. "There is a feeling of concern about recent and current performance mixed with a general expectation that things will improve. But until there are clear signals that improvement is taking place or is about to appear, everyone is taking a more wait-and-see attitude," he said.
"Puerto Rico is definitely trending toward recovery, thereby boosting investor confidence for both the short and the long term," said Randall Villareal, senior vice president for Tishman Hotel Corp., which owns The Westin Rio Mar Beach Resort & Country Club. "We at the Westin Rio Mar Beach are not only moving forward but have also expedited several capital programs."
Opinions about the state of the local economy vary from cautiously optimistic to downright pessimistic among the islands top advertising agency heads. The local governments handling of economic issues, according to some publicists, has exacerbated the inevitable damage that the slow U.S. economy has caused in Puerto Rico.
Most agree that the economy should start to pick up by the first or second quarter of next year, if not sooner. "We have started to see some indication of improvement in the local economy, which should be more evident toward the fourth quarter of this year," said Miguel Escobar, president of McCann Erickson Puerto Rico. "However, we do not anticipate a fully recovered economy until sometime in 2003."
Still, expectations about the holiday season are running high, especially since spending during that time will be a barometer for recovery. "Clients are starting to spend a little more than they did last year, but its still not at normal levels. I think the situation should stabilize by Christmas," said Rene de la Cruz, CEO of De la Cruz Group.
Some in the ad industry criticized the governments wayward handling of the economy. "It has been horribly bad," said Joey Jimenez, president of JMD Communications. "They dont have a plan. We have not seen any real solutions to generate employment or to get the construction industry up and running. Honestly, I give the government an F," he said.
"I have to recognize that the present administration has had to deal with our economic situation half blindfolded and with one hand tied behind its back," said Franco Sotomayor, president of Premier Euro RSCG. "Nonetheless, I believe its approach has not been the best. Puerto Rico needs a massive flu shot now."
CARIBBEAN BUSINESS Associate Editors Jose L. Carmona, Evelyn Guadalupe Fajardo, Marialba Martinez and Ken Oliver-Mendez, and Staff Reporters Laura Rentas-Giusti and Taina Rosa contributed to this story.W
This Caribbean Business article appears courtesy of Casiano Communications.