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Economic Outlook 2003

An industry-by-industry analysis of what’s in store this year for your business and for the economy


January 23, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

The big IF: Unclogging the local government’s construction bottleneck and a quick end to the war with Iraq is deemed crucial for economic recovery this year

Sit tight. The economic recovery that has eluded Puerto Rico for the past two years will finally come in 2003. However, there’s a big if. . .and a big but.

If the Puerto Rico government finally comes through with its much-touted multibillion-dollar infrastructure construction program--and that’s a big if-- most economists forecast real economic growth anywhere between 2% and 2.5% this year.

But if the almost certain U.S. war with Iraq becomes protracted, not even the best-case local economic scenario will be enough to lift the island from its two-year-old economic doldrums.

In August 2002, CARIBBEAN BUSINESS published a front-page story on how the Puerto Rico government’s continuous delays in its previously announced public construction schedule were delaying the jumpstart of the economy that was to have occurred by mid summer (CB Aug. 15, 2002). Two weeks later, the Calderon administration announced a massive $2 billion infrastructure construction program for fiscal year (FY) 2002-2003 (ends June 30, 2003).

The August announcement came on top of the $1.2 billion that was supposed to have been spent in FY 2001-2002. Most of that money, however, was carried over to FY 2003, bringing the announced two-year investment to a total $3.2 billion, enough to have shaken just about any economy out of stagnation.

The enthusiastic reaction of the private sector was immediate and almost unanimous. The announcement also fueled the Puerto Rico Planning Board’s and most independent economists’ growth projections for 2003.

"Right now, we’re in the process of running new projections for Puerto Rico’s economic growth for FY 2003," said Heidi Calero. "This year will see the completion of major projects such as the Urban Train and the Coliseum, as well as more public works spending, as recently announced by the governor. So after a virtually stagnant FY 2002, our initial projections call for growth in FY 2003 on the order of 2% to 2.5%."

Unfortunately, it hasn’t happened so far.

Recent visits by CARIBBEAN BUSINESS reporters to the exact same government construction projects whose status we updated in the August 2002 front-page story--in turn, a selection from the full list we first published in May (CB May 30, 2002)--show that in most projects, progress has been slow. Further, in some cases, the projects haven’t even been started. (See chart.) It can only be hoped the additional $2 billion in government construction projects announced in August will finally get underway this year.

The big question now is, when will these government expenditures start?

Admittedly, there is reason to be more optimistic in 2003, at least with respect to construction. 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 2002 through October 2002) were up, 15.2% and 21% respectively, over the same period in FY 2002. Permits issued are an indication of future construction activity.

However, 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. Only 171 permits, or 5%, were for public-sector projects, valued at $167.8 million, just a fraction of the $2 billion that is supposed to be spent this fiscal year.

Construction industry sources know there’s a huge difference between the government announcing a schedule of projects and actually seeing the money run through the economy, working its magic. Ironically, in many cases the government is being entangled in its own red tape.

"The outlook for public-sector projects is phenomenal in the sense that the local government is taking these projects to bid and is already awarding some of them," said Desarrollos Metropolitanos Vice President Jose Vizcarrondo.

He added, however, that many private-sector projects--mostly social interest and middle & upper-middle-class housing developments--are stalled because of the slow permits process. "There are many housing projects that don’t get the required agency endorsements and so their permits are behind," said Vizcarrondo. "In the commercial construction sector, investors are holding back projects for the same reason."

Elpidio Rivera, president of the local chapter of the Associated General Contractors of America (AGC), agreed with Vizcarrondo. "Despite the local government’s best efforts to streamline and speed the permits process, it hasn’t had much success," said Rivera.

Rivera predicts a great year for the construction industry--if, that is, the Puerto Rico government is able to resolve the delays in the permits process and honor the permits once issued. "The keys here will be how fast the government can issue the construction permits and the validity which it gives to them," Rivera said.

Thus it remains to be seen whether the island’s economy will experience this year the boost expected to come from such a massive investment in government infrastructure construction.

"If the government does what it has said it is going to do, we can expect an improvement in relation to last year," RB Construction Corp. President Manuel Suarez told CARIBBEAN BUSINESS. "Government-sector projects, which were practically dead last year, are going to rebound. That will certainly improve the construction industry."

Still, most economists are cautiously optimistic the latest construction permitting figures and announcements of government infrastructure projects to be built this year support their forecasts.

"Construction will play a key role in the recovery this year, especially public construction. The recovery in manufacturing will be more gradual, and the service sectors will likely move upward at the same rate as the economy as a whole," said Juan Lara of Estudios Tecnicos.

Economists Association President Leroy Lopez agreed. "Contrary to the outset of 2002, it’s evident this year that in the government--and in the Planning Board in particular--there’s a sense of urgency to make sure the public construction projects in the pipeline move forward," Lopez said.

"The construction industry is no longer at a virtual standstill as it was earlier in 2002. Investments in public infrastructure in particular have been climbing substantially in the past few months, and should continue to spur growth in 2003," said former Planning Board economist Juan Castañer of Heidi Calero & Associates.

"Last quarter, we saw certain signs of economic improvement which 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," Castañer said. "In 2003, there will be economic growth that will possibly exceed 2% and even approximate the 2.7% projected by the Planning Board."

Independent economic growth forecasts aren’t tied to official government figures. They couldn’t be. At press time, the Planning Board had yet to release basic economic figures for FY 2002 (ended June 30, 2002), such as the island’s gross national product (GNP). It’s impossible to make a growth forecast from a base that isn’t even known.

Last month, however, Planning Board President Angel Rodriguez ventured to forecast real GNP growth of 2.7% for FY 2003.

"It looks as if it won’t be until well into 2003 that we start to feel the impact of direct infrastructure investments by the government. The projection for 2.7% growth in 2003 seems very optimistic," said former Economists Association President Carlos Soto Santoni.

"Fiscal 2003 will probably see growth on the order of 2.5%," said Estudios Tecnicos’ Jose J. Villamil.

War, oil & the stateside economy

Business executives and economists are in unanimous agreement that, even in the best local economic scenario, the all-but-certain U.S. war with Iraq will have direct repercussions on Puerto Rico. How vast will depend on what kind of war and its effect on the U.S. mainland economy.

"The expectations are that with the American economy picking up and the local government increasing spending, the economy will improve," said Vicente Feliciano of Advantage Business Consulting. "The major question marks now are the possibility of war and all that it entails. If it’s a quick war, the economic impact won’t be significant. If it’s a long war, though, the military will start to be a burden on the federal treasury.

"I see the possibility of budget issues at the U.S. Treasury as more of a threat than the possibility of escalating prices of crude oil," Feliciano continued. "You might have a spike in oil prices if something big happens in Venezuela or the Middle East. However, as a long-term issue for the whole year, I think the fiscal situation of the federal government is a much more troubling uncertainty.

"The proposed U.S. tax cuts are expected to help the stateside economy pick up, but they also might have an impact on interest rates later. If the stateside economy picks up as a result of the stimulus from both heavy defense spending and tax cuts, the impact on Puerto Rico will be positive," Feliciano concluded.

Travel jitters

The Puerto Rico industry most likely to bear the brunt of a protracted military conflict is tourism, with most experts outright pessimistic about its near future. They don’t foresee major improvements in either the economy or corporate earnings for another year to 18 months or so--longer if there is a war with Iraq.

Travel managers don’t anticipate a full recovery in business travel before 2004. The segment will remain down as long as the economy remains unstable, according to a recent study conducted by the National Business Travel Association.

In the late-November 2002 survey, 34.4% of 200 corporate travel managers reported no budget changes for 2003. Almost 11% of those polled predicted a decrease of 2% to 4%. A mere 3.8% of the participants anticipated recovery in first-quarter 2003, while 27.5% said it wouldn’t happen until the latter half of 2004, or later.

"If war does break out with Iraq, overall air traffic will drop by 25% because people will be scared to fly," said Enrique Cruz, managing director of American Airlines in Puerto Rico.

"Thanks goodness nothing happened during the Christmas holiday, which helped air traffic," Cruz said. "December was good, as have been the first 15 days of January. From now until Holy Week, though, there isn’t much happening."

Better shopping

Retailers and wholesalers in Puerto Rico are expecting business this year to be better than 2002, but they aren’t holding out hope for a boom. "The year 2003 won’t be fantastic, but we will be doing better than in 2002," one source said. The threat of war, increasing competition, and an economy that remains weak continue to loom over the industry.

"This year will be better and sales will increase. At least, that is what everyone expects. If war breaks out, however, the economy could worsen," said Jose Colon, president of importer & distributor Colon Bros.

"The businesses that could be negatively affected are restaurants, as during wartime people prefer to stay home to eat," said Supermercados Grande’s Atilano Cordero Badillo.

Valerie Castro, southeast region marketing director for shopping mall manager PMI Inc., said her malls have been experiencing incredible sales in comparison with last year, and she expects the trend to continue.

"Business began picking up in September and since then we have seen a continuous increase in both sales and traffic. Things might slow down this month, as they always do after the holidays, but 2003 will be a good year, with sales exceeding those of 2002. Of course, this could change if war breaks out," said Castro.

The weather vane

If you fear the storm, check the weather. There’s no better gauge of short-term business confidence than advertising budgets. Judging from the winds blowing from the local advertising industry, there’s smooth sailing ahead.

"It isn’t hard to feel optimistic after what we’ve seen during the past two years," said John Raevis, president of De la Cruz & Associates. "Clients’ budgets seemed to trickle in during 2001 and 2002, but now clients have started planning and assigning budgets for the whole year," he said. Raevis added he expects double-digit growth for his agency in 2003.

A 10% to 15% rate hike in television advertising space is expected to take place this year (see related story p. 54), which ad execs said could have positive repercussions. Jorge Rodriguez, president of J. Walter Thompson, said such a hike would force those clients who insist on advertising on television to increase their budgets. Meanwhile, clients who can no longer afford to place television ads will increase their investments in other media, such as radio and cinema.

Finally, the advertising industry is also counting on the local government to spearhead the economic recovery, not only through increased construction activity but also through greater media investments as part of its own communications efforts, which typically increase in a year before general elections. "The government’s involvement could be the catalyst for the economy to finally turn around," said Jaime Fortuño, general manager of Lopito, Ileana & Howie. "If that happens, I think we should be experiencing growth by midyear."

Quotable predictions for 2003

"If the government does what it has said it is going to do, we can expect an improvement in relation to last year."

-Manuel Suarez, RB Construction Corp.

"Fiscal 2003 will probably see growth on the order of 2.5%."

-Jose J. Villamil, Puerto Rico Chamber of Commerce

"If the Bush plan is approved, it will be favorable to the stock market this year. People are going to invest in stocks again."

-Eduardo Colon, BBVA Capital Markets

"We think interest rates are likely to stay low until near the end of the year."

-Richard Carrion, Popular Inc.

"Consumer spending may remain about the same, but government activity will be the big difference."

-Victor Galan, R&G Financial Corp.

"I see this as a friendlier year than 2002."

-Carlos Garcia, Santander Securities

"If war does break out with Iraq, overall air traffic will drop by 25% because people will be scared to fly."

-Enrique Cruz, American Airlines

"We are optimistic about 2003."

-Jose Campo, Caribe Hilton

"This year will be better and sales will increase. If war breaks out, however, the economy could worsen."

-Jose Colon, Colon Bros.

"2003 will be a good year, with sales exceeding those of 2002. Of course, this could change if war breaks out."

-Valerie Castro, PMI Inc.

"The first six months will be slow, but sales will start to pick up in the second half of the year as the process to select the candidates for the 2004 election begins."

-Ricardo Garcia, Hyundai de Puerto Rico

"Barring any kind of tragedy that could heavily impact tourism and thus the island’s economy, we look forward to good things for Puerto Rico in the year."

-Bill Wynne, Ford International

"The government’s involvement could be the catalyst for the economy to finally turn around. If that happens, we should be experiencing growth by midyear."

-Jaime Fortuño, Lopito, Ileana & Howie

Select list of government public works projects slated to start construction between April and July 2002, in alphabetical order




Project / Cost / Scheduled Construction Start / Status as of August 2002 / Status as of Jan. 23, 2003



Construction of PR-148 (From La Plata to Porton sector) / $10 million / June 2002 / Construction hasn’t started. Bid hasn’t been awarded yet. / Project awarded to CSA Arquitects-Constructora Jose Carro. Construction began August 2002. Completion date pending.

Rehabilitation of Annex 308, Bayamon Detention Center / $5 million / July 2002 / Construction hasn’t started. Bidding process ongoing. Bid to be awarded by Sept. 15 / HBA Contractors Inc. was lowest bidder. Waiting for permits from Dept. of Corrections and Office of Historical Preservation to request funds from U.S. Dept. of Justice.

Regional wastewater treatment plant / $1.76 million / June 1, 2002 / Construction hasn’t started. Bid was awarded to Bermudez & Longo June 27, but contract hasn’t been signed / Project awarded to Bermudez & Longo. Construction began at the end of December 2003 and will be completed in December 2003.


Replacement of bridge No. 349 over Caguitas River, PR-156 / $3 million / June 2002 / Sign, construction workers, and heavy equipment seen on site. / Construction began on Aug. 19, 2002 and is slated for completion in September 2003.


Improvements and expansion to PR—1 (third phase) / $5 million / June 2002 / Construction of third phase hasn’t started. Bid was granted to Unique Builders July 23. Contract signing is pending. / Contract awarded and signed. Construction started August 2002. Project expected to be completed in November 2003.


Geometric improvements, intersection of PR-923 and PR-9923 / $250,000 / July 2002 / No sign or evidence of any work at project site. / Problems securing agency endorsements have caused project delays. Construction started Aug. 19, 2002. New completion date is March 12, 2003.

Raw and potable water pipes in Candelero sector / $2.6 million / May 2002 / Sign and heavy equipment seen on site. / Project was completed in December 2002.

Las Piedras

Placement of light posts on PR-30 between Las Piedras and Humacao / $2.2 million / July 2002 / Construction hasn’t started. No sign or evidence of any work at project site. / Construction started Aug. 12, 2002. Project to be completed Aug. 12, 2003.

Housing project for elderly / $6.8 million / June 2002 / Construction hasn’t started. No work being done on project. / Construction has not started. No sign of work at project site.

San Juan

Barrio Obrero Fire Station-Santurce / $841,000 / May 22, 2002 / Construction hasn’t started. Bid recently awarded to Apenas Electric. Construction expected to start in one or two weeks. / Bid also awarded to Precision Builders Corp. Construction started October 2002. Project expected to be completed in August 2003.

Traffic Patrol Station—San Juan / $1.87 million / May 27, 2002 / Construction hasn’t started. Bid has yet to be awarded. / Bid awarded to JAR Construction Inc. Construction started Oct. 2002. Completion by Jan. 2004.

Tree planting and reforestation plan PR-18 and PR-22 / $169,690 / May 2002 / Bid awarded to Landscape Contractors & Designers April 29. Contract signed June 21 and construction started July 1. Increased construction activity seen since last week. Expected to be completed Nov. 27, 2002. / Project completed on schedule.

Relocation of sewer main, Baldorioty de Castro Expressway PR-26 / $8.78 million / May 16, 2002 / Bid No. 02-115 was awarded April 5, 2002 to Longo de PR. Contract was signed May 6, 2002. Work started full time last week. / Work on project started August 2002. Completion date pending.

New parking structure & commercial building next to Matienzo Theater—Santurce / $40 million (public / private investment) / June 2002 / Construction of project didn’t start as scheduled. No construction activity seen at site. After significant work on theater’s roof structure, work hasn’t continued. / No construction activity evident. Project still in the planning and design stage.

Rehabilitation of former Professional Building on De Diego Avenue-Santurce / $15 million (public / private investment) / June 2002 / Construction hasn’t started. Sign was put up, but no construction activity seen. / No construction activity evident. Project still in the planning and design stage.

Electrical and plumbing improvements to State Penitentiary (2nd bid) / $40 million / July 2002 / Bid not awarded yet. Bidding process was originally set to open May 22, 2002. / Green light for project given on Jan. 13, 2003. Work began this week. Completion date pending.

Fence around perimeter of Prepa’s Energy Control Center-Monacillos / $400,000 / June 17, 2002 / Bid was to be awarded April 26, 2002 and contract was supposed to be signed by May 13, 2002. A trailer has been installed, but no signs of construction activity yet. / Construction started August 2002. Fence 65% finished. Project to be completed next month.

Toa Alta

Replacement of bridge over Escarcha / $1.4 million / July 2002 / Construction hasn’t started. No sign or work activity seen on site. / Contract for $1.75 million awarded to Antilles Construction. Construction began Aug. 2002. To be completed August 2003.


Southeast detour PR-5561 (from PR-149 to PR-150) / $9.1 million / July 2002 / Construction hasn’t started. / Contract awarded to Las Piedras Construction. Work began in October 2002. To be completed by October 2004.<BR>Emilia Bonilla Elementary School / $6.9 million / July 2002 / Construction hasn’t started. / Contract awarded to JR Ramos Inc. Work began October 2002 and is expected to be completed by September 2004.

Improvements to bridge / $1.1 million / July 2002 / Construction hasn’t started. No sign of work at site. / Contract awarded to CC Construction Corp. Work began August 2002. To be completed by February 2004.

Source: List compiled by Jose L. Carmona from research by CB staff reporters Ken Oliver-Mendez, Marialba Martinez, Laura Rentas-Guisti, Taina Rosa, and Jose L. Carmona.

This Caribbean Business article appears courtesy of Casiano Communications.
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