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For Most Businesses In Puerto Rico, 2002 Was A Pretty Bad Year: Will 2003 Be Any Better?
Throughout 2002, most businesses in Puerto Rico kept on waiting for an economic upswing that didnt come. But a moderate improvement the last few months point to a more solid recovery in 2003
By FRANCISCO JAVIER CIMADEVILLA
December 26, 2002
It was a year of unfulfilled hopes. Recurrent predictions that an economic recovery was around the corner were met only with disappointment and frustration time and time again.
Quarter after quarter of 2002, Puerto Ricos businesses hoped for a recovery that never materialized. And they suffered.
The year 2001 had seen the brunt of an economic slowdown that had first reared its ugly head in November 2000. Slowdown turned to recession with 9/11 finally sending the national and local economies into a tailspin.
After that, stateside and local businesses had reason to be hopeful. On the one hand, consumer confidence showed a remarkable resilience despite the circumstances. On the other, observers agreed the injection of billions of dollars into the economy as a result of the ensuing war on terrorism would help ignite an economic upturn across the country that eventually would reach Puerto Rico.
It didnt happen. The federal economic stimulus package fell victim to partisan political squabbles in Washington. Corporate scandals, stock market jitters, and uncertainty about an imminent war with Iraq--in part due to an erratic handling of foreign affairs and poor handling of the economy by the Bush administration--continued to put a damper on investor confidence. Predictions of a turnaround in capital investment by businesses by midyear went bust.
Locally, the situation was worse. Despite recurrent promises to finally roll out a massive and accelerated infrastructure construction program, the local government administration basically decided to sit on $6.7 billion of new money raised through bond issues in late 2001 and early 2002 just for that purpose. CARIBBEAN BUSINESS headlines "R-E-C-O-V-E-R-Y," "Ready to roll," and "Economic boom in public construction will start this summer" in January, March, and May, respectively, based on promises by Calderon administration chiefs, turned to "Wheres our economy going?" by August. The administration was mum.
Worse yet. In the middle of an economic recession, the government decided to raise taxes--hiking excise taxes on basic consumer products such as sports utility vehicles, liquor, and cigarettes--to pay for a 5% across-the-board increase in the governments budget for fiscal year (FY) 2003--including a pay raise for government workers.
Instability and improvisation were the orders of the day. The year 2002 saw frequent changes at the helm of just about every government agency involved in the islands economic development. The Government Development Bank, Economic Development Bank, Commissioner of Financial Institutions, Planning Board, Agriculture Department, Department of Economic Development and Commerce, Tourism Co., and Puerto Rico Industrial Development Co.(Pridco), all had bosses come and go.
Meanwhile, a government permitting process brought to a screeching halt and challenged in court every day continued to erode local business confidence, particularly in the construction industry. The excesses of a government apparently obsessed with rooting out corruption--whether real or perceived--than in spurring economic development had its darkest moment in 2002. A witch-hunt committee, arguing without evidence that the developer had purchased the land below fair market price and had been allowed improper variances in the project, actually recommended the demolition of the Millennium condominium. And the local Justice Department, at loggerheads with the federal government over the Federal Trade Commissions approval of Wal-Marts acquisition of Amigo, has convulsed the local business climate. In 2002, the private sector was spooked.
How bad was it? The first six months of the year were disastrous with the third and fourth quarters starting to show some signs of improvement but nothing actually leading to a local recovery.
"2002 was a slow year, practically one of economic stagnation," said former Puerto Rico Economist Association President Carlos Soto Santoni.
Puerto Rico Chamber of Commerce President Jose Joaquin Villamil agreed. "It was a year of very little growth. The uncertain recovery of the U.S. economy obviously had a lot to do with it, and the threat of war with Iraq wasnt helpful to the economy either."
Last year, Villamils firm Estudios Tecnicos forecast FY 2002 real GNP growth at only 0.6%.
"We were perhaps overly optimistic in terms of expecting the government construction projects to get moving a little earlier. All in all, it wasnt a good year for the economy. The only thing one can say is that obviously 2003 is going to be a lot better," said Villamil.
At press time, the Planning Board refused to release figures for FY 2002 (ended June 30, 2002) but happily shared statistics on July through November 2002, i.e., the first five months of FY 2003, some of which show a moderate improvement in the economy during the second half of calendar year 2002. Planning Board President Angel Rodriguez even ventured to forecast real GNP growth of 2.7% for FY 2003, half of which has run its course already.
"On balance, 2002 was disappointing from an economic point of view. On the other hand, at least during the second half of the year--and especially during this last quarter--there are certain signs of economic improvement that are going to have more of an impact in 2003. Those signs include the increase in the number of construction permits approved, the increase in cement sales and an improving employment picture since July," said former Planning Board economist Juan Castañer.
"The construction industry is no longer at a virtual standstill as it was earlier in the year. Investments in public infrastructure in particular have been climbing substantially in the last few months, and should continue to spur growth in 2003," he said.
"It looks like it wont be until 2003 that we start to feel the impact of direct infrastructure investments by the government. But the projection for 2.7% growth in 2003 seems very optimistic," said Soto Santoni.
"In 2003, there will be economic growth possibly exceeding 2%, and possibly even closer to the 2.7% that the Planning Board projects," Castañer said.
"Fiscal 2003 will probably see growth on the order of 2.5%," concluded Villamil.
On the positive side
This was a banner year for the majority of local banks, who reaped benefits of favorable interest rates, strong capital market activity, and diversified income sources.
As a group, Puerto Ricos leading banks continued to grow with gusto in 2002. The sectors seasoned, world-class executive teams sought to make the most, not only of the growth opportunities they respectively identified during the year, but also of favorable external factors such as the low interest rates, which drove record mortgage production, strong capital market activity, and increasingly diverse income sources.
Assets held by the 11 commercial banks that serve Puerto Rico grew from $55.7 billion on June 30, 2001 to $66.3 billion on June 30, 2002, according to the Office of the Commissioner of Financial Institutions. The sector continued to be characterized by fierce competition, as well as by expectations of further consolidation.
At a Brean Murray institutional investors conference held here, New York Stock Exchange Chairman & CEO Dick Grasso hailed local financial stocks as one of the financial markets best-kept secrets.
Local brokerages sought to limit their exposure to the bear market in U.S. stocks, and produced a good flow of fixed-income products throughout the year. During 2002, Puerto Ricos securities firms benefited from underwriting Commonwealth bond issues (topping $7 billion once again this year), as well as from several major private development bond issues, common and/or preferred stock issues by W Holding, R&G Financial, and First BanCorp.
Meanwhile, the favorable interest rate environment, coupled with the islands housing shortage and aggressive federal and state government affordable housing subsidy programs, fueled a high level of activity in the mortgage banking sector throughout the year.
Despite a sluggish economy, Puerto Rico remained a piece of retail heaven. Prompted by the past performance of so many stores that usually do better in Puerto Rico than on the U.S. mainland, several new retail chains set up shop on the island while others with established operations expanded in 2002.
In line with local retailers expectations, total sales for the year should be more or less equal to last years. Figures offered by the local government show total retail sales were at about $15 billion in 2001 and had reached about $7.5 billion by mid-2002.
RadioShack recently announced its best-selling store in the world is the one at Plaza Las Americas, with $6 million in revenue for fiscal year 2002. According to industry sources, Kmart is also doing well on the island, despite the massive store closings in the States since it filed for bankruptcy.
Some of the chains that have recently entered the local market or have announced their intentions to do so are Bed Bath & Beyond, Best Buy, Cold Stone Creamery, Johnny Rockets, Ebel, Limited Too, Roche Bobois, Starbucks, and Taco Time.
Puerto Ricos tourism industry continued to contend in 2002 with the economic slump, the drumbeat of war in Iraq, lingering fears of terrorist attacks, and the resulting hassles in air travel.
Fortunately, the island has been able to weather the storm better than competing tourism destinations in the Caribbean, which rely more heavily on leisure travelers. Nevertheless, Puerto Ricos room revenue and hotel occupancy are still below 2000 levels. According to the Puerto Rico Tourism Co., hotel occupancy was 61.8% in FY 2002, compared with 66.7% in FY 2001 and 70.7% in FY 2000.
The top story in the manufacturing sector was Abbott Laboratories announcement it would invest $350 million to build a biotechnology facility in Barceloneta. Scheduled to be operational by 2006, the new plant will add 200 new jobs to the companys work force. Eli Lilly & Co. and Amgen biotechnology centers groundbreaking ceremonies in Carolina and Juncos, respectively, also took place in 2002; their $900 million investment will eventually create nearly 900 jobs.
But otherwise, the manufacturing sector showed contraction during 2002, with new promotions virtually at a standstill. Pridco reported 74 plant openings in FY 2002 (ends June 30), compared with 73 in FY 2001.
But the number of new jobs created decreased 48% to 1,228 jobs in FY 2002, compared with 2,374 new jobs in FY 2001. The majority of new jobs created were in the chemical/pharmaceutical sector.
In the first four months of fiscal year 2003 (July 2002 through October 2002), 14 companies started operations and 181 jobs were created, compared with 19 companies and 341 jobs during the same period a year earlier.
The local construction industry, a pillar of Puerto Ricos economy, remained alive in 2002 thanks mostly to the private sector.
Fueled by a strong demand for housing and low interest rates, the private home-building sector basically carried the construction industry in FY 2002 as governments continuous postponement and red tape delayed $1.5 billion in public-sector infrastructure projects. The bulk of these infrastructure projects are now expected to begin construction in 2003, spurring a boom in the public sector not seen since the mid-1990s.
According to Puerto Rico Planning Board (PRPB) statistics, the total value of public and private construction permits issued for FY 2002, an indication of future construction activity, was $2.2 billion, a 26.7% overall decrease over FY 2001s $3 billion.
The value of construction permits issued in FY 2002 was $1.8 billion for the private sector and $438 million for the public sector, down 10% and 57.3%, respectively, from FY 2001.
Meanwhile, private-sector leaders continued to express concern over the alarming number of government-issued construction permits that have been revoked. Industry sources contend the uncertainty has scared away investors and made construction financing much more difficult to secure.
"Once permits are issued, they should be final. How can you obtain financing if financial institutions lose faith in the approved permits a developer presents? This is bad not only for the industry but also for the islands economy in general," said Jose Gonzalez Nolla, president of the local chapter of the Associated General Contractors of America.
But things are starting to look brighter. According to Planning Board statistics, the number (3,396) and value ($847.3 million) of construction permits issued during the first four months of FY 2003 (July through October 2002) were also up, a respective 15.2% and 21%, over the same period in FY 2002.
Of the total construction permits issued between July and October, some 3,225, or 95%, were for private-sector projects, with a value of $679.5 million. Some 171 permits, or 5%, were for public-sector projects, valued at $167.8 million.
PRPB records also forecast an increase in housing construction. During the first four months of FY 2003, the number of permits issued for housing units was 6,855, a 33.4% gain over the 5,139 issued during the same period in FY 2002. Of those 6,855 permits issued between July 2002 and October 2002, 6,650, or 97%, were for the private sector and 205, or 3%, were for the public sector.
The PRPB contends these numbers point to strong construction activity in 2003 for both the private and public sectors.
CARIBBEAN BUSINESS Associate Editors Jose Carmona, Evelyn Guadalupe-Fajardo, Marialba Martinez, Ken Oliver-Mendez, and Staff Reporter Taina Rosa contributed to this story.
This Caribbean Business article appears courtesy of Casiano Communications.