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Economic Review of the Year 2003
In a word: blah!; Will 2004 be any better?
By FRANCISCO JAVIER CIMADEVILLA
December 25, 2003
The year of the flat: For most businesses and industries in Puerto Rico, there was little or no growth in 2003, but there were some remarkable exceptions
Flat. Flat. Flat. For most businesses in Puerto Rico, 2003 was as flat as a pancake. But with the stateside economy picking up steam and construction by the local government poised for a massive election-year upsurge, most economists and businesspeople interviewed by CARIBBEAN BUSINESS agreed the economic recovery that has eluded the island for three years will finally come to pass in 2004.
In January, CARIBBEAN BUSINESS reported that if the local government came through with the multibillion-dollar infrastructure construction program it had been promising for two years, and if the U.S. had a quick victory in the war with Iraq, most economists forecast real economic growth in Puerto Rico of 2% to 2.5%.
Well, it turned out to be neither nor.
While the U.S.-led coalition did achieve a relatively quick and decided victory in the "shock & awe" phase of the war, the initial euphoria was dampened as the conflict continued, casualties mounted, and Saddam and his weapons of mass destruction remained nowhere in sight.
Locally, the government continued to drag its feet on its promised infrastructure construction program, shoppers kept shopping but business owners maintained their wait-and-see attitude, and the local economy continued to hobble along without enthusiasm.
Then, in the last few months of 2003, everything started to change. News of 7%-plus growth in the U.S. mainland economy in the third quarter was followed by President Bushs enthusiastic Thanksgiving visit to the troops in Baghdad and the spectacular capture of a down-and-out Saddam barely two weeks later.
Locally, construction activity has picked up visibly in the past few months, holiday retail sales have been strong, and the hotel industry is forecasting a healthy high season (Dec. 15 through April 15).
"Were climbing back to normal," said economist Vicente Feliciano, managing partner of Advantage Business Consulting. "Were now growing below 3%, which is what has characterized the Puerto Rico economy for the past couple of decades. Whether normal is good enough is another question."
Puerto Rico Planning Board statistics put the growth of the islands gross national product in fiscal year 2003 (ended June 30) at 1.9%. More disappointingly, gross domestic product, which includes the value of the production of the all-important nonlocal manufacturing industry, grew a mere 0.3%.
Although such performance is nothing to write home about, it was an improvement over the previous fiscal year, when the local economy actually shrank. "In FY 2002, we had negative growth of -0.2%," said Feliciano. "It was the first negative performance by Puerto Ricos economy in 20 years. So positive growth of 1.9% in FY 2003 is getting back to near normal."
"Our number for FY 2003 is lower than the governments," said Estudios Tecnicos Jose J. Villamil. "We think the economy grew only 1.6% in FY 2003."
According to Villamil, however, the first six months of FY 2004 (July 1 to Dec. 31) have been better. This makes him believe the local economy will have grown 2% in calendar 2003, though that is still a low number.
"The second half of calendar 2003 was more active," said Villamil. "There was a backlog in construction permits that was accelerated in the first half of calendar 2003, the effects of which were felt in the second half of the calendar year and will continue to be felt in the first six months of 2004."
According to the Planning Board, the number of construction permits issued between January and October grew a mere 1.6% compared with the same period in 2002. Their value, however, grew a significant 19.7%, from approximately $2 billion in the first 10 months of 2002 to just shy of $2.4 billion for the same period this year.
"Businesspeople out there in the field believe that overall, 2003 was a very difficult year," he said. "First, we continued to be negatively affected by the problems in the U.S. economy during the first half of the year. Although there was an upturn in the third quarter, which we hope will have been maintained in the fourth, we dont think it will have such a direct positive impact locally. Theres going to be a lapse before we see the benefits of the stateside recovery."
Mayol is equally concerned about problems that continue to nag the local business climate. "Take, for instance, the water problems, not just those related to the controversy between Prasa [the Puerto Rico Aqueduct & Sewer Authority] and [private operator] Ondeo, but even the basic concern about whether the water is safe to drink. Then there are the problems businesses in Puerto Rico face in getting paid promptly by the government," said Mayol.
"I just dont see any improvement in business confidence, at least not enough to allow the commercial sector to make major investment decisions," added Mayol. "There might be some exceptions, but when you see the expansion plans of megaretailers on hold because they dont know what position the government is going to take [whether it will back them or side with those who oppose them], you have little reason to be optimistic. I think there is still a lot of apprehension on the part of Chamber members."
What do businesses need to hear from the government in order to gain confidence?
"I dont think they want to hear anything. What they want is action. They want movement toward a more pro-business environment in every sense: on-time payments by government agencies; a streamlined bureaucracy to facilitate all those transactions that you have to conduct with the government, whether it is obtaining a permit or making a payment at Hacienda or CRIM [Municipal Revenue Collections Center]," said Mayol. "You hear horror stories of people whose payments to CRIM dont appear or whose property-registry records cant be located. These may appear to some to be little details, but they are the daily toil of small and midsize businesses trying to survive."
Although most local businesses had a flat year, some sectors did achieve favorable results.
Puerto Ricos economy was boosted in 2003 by the financial industrys growth in the commercial, mortgage, and securities sectors.
Assets held by the 11 commercial banks serving Puerto Rico increased from $66 billion in December 2002 to $73.6 billion in the third quarter of 2003, according to the Office of the Commissioner of Financial Institutions. There were notable gains in mortgage ($11 billion estimated) and commercial ($5 billion estimated) loan disbursements. And, at $31 billion as of Sept. 30, the sale of securities also outpaced 2002 figures.
The much-talked-about boom in mergers and acquisitions didnt materialize, although many people believe it will happen in the next three years. Nevertheless, several players made moves here and abroad.
As the interest rate on a 30-year fixed-rate mortgage loan remained under 6%, local mortgage bankers again had a banner year, with high activity not only in refinancing but also in first- and second-home purchases, consolidations, and home improvements. Doral Financial and R&G Financial retained their first and second rankings in the sector.
Other banking institutions also went after mortgage business. Banco Bilbao Vizcaya Argentaria (BBVA) created BBVA Mortgage and tripled its mortgage volume. First BanCorp, meanwhile, catered to this hot market by establishing FirstMortgage.
Local financial institutions continued to receive praise for their performance. According to Brean Murray & Co., a New York investment firm, the index of local bank stocks has appreciated 30.5% over the past 10 months, compared with 7.9% for the S&P Bank Index and 6.4% for the S&P 500 Index. Doral Financial and Westernbank also made U.S. Banker magazines top 10 banks for the second year in a row.
It was the best of times for consumers seeking bargains. For retailers, however, 2003 was a year in which companies big and small had to work hard to boost their business or hold their own in an increasingly cutthroat environment.
Despite the ups and downs of an economy beginning to recover from a recession, the islands retail industry performed reasonably well. Retail sales, which should surpass $15 billion for all of 2003, increased 6% between January and October (the last month for which figures are available), said Jorge Laboy, chief economist of the Commerce Development Administration.
The categories that performed best during this 10-month period, said Laboy, were furniture, cars, jewelry, hardware stores, cafeterias & restaurants, pharmacies, and food stores. These are businesses whose sales tend to shrink when the economy is in trouble since they sell mostly nonessential items, he said.
"At the beginning of 2003, expectations were that it wasnt going to be a very good year," said Laboy. "Even though economic conditions on the U.S. mainland havent been the best, sales here grew at a higher pace than last year."
Occupancy rates at local hotels held fairly steady throughout the previous peak season (Dec. 15, 2002 through April 15, 2003). Occupancy levels in May rose slightly to an average of 72%. Tourism activity for the first quarter of fiscal year 2004 (July through September) was 77.4%, a 5.2% increase compared with the year-ago quarter.
October and November saw occupancy rise 3.9% and 2.8% respectively, over 2002.
Industry experts forecast blue skies for Puerto Rico tourism this peak season, continuing the pickup registered over the summer (CB Oct. 2). Major U.S. airlines are increasing service to the Caribbean for winter, and intra-Caribbean airlines are changing their schedules to facilitate connections between various gateways.
Contrary to Puerto Rico Tourism Co. Executive Director Jose Suarezs forecast, the upsurge in hotel development didnt happen in 2003. CARIBBEAN BUSINESS reported earlier in the year (CB Feb. 6) that there were major delays in the 24 hotels under construction, which would have added 2,425 rooms to the islands inventory of approximately 12,000. As of Nov. 30, the official number of Tourism Co.-endorsed rooms stood at 12,325.
"By the end of 2003, we should have added at least 2,000 new rooms," Suarez told CARIBBEAN BUSINESS (CB May 15.) Seven properties should have opened: LMM International Airport Hotel in Carolina, Paradisus Puerto Rico in Rio Grande, Promenada Plaza and Vendign 2 in San Juan, Costa Bonita in Culebra, Caguas Hampton Inn in Caguas, and Hacienda Santa Isabel in Santa Isabel. They didnt.
In 2004, the Tourism Co. expects to add 1,000 rooms from the opening of the Condado Vanderbilt and La Concha hotels and from expansions of the Ponce Hilton and smaller hotels.
The local construction industry, a pillar of Puerto Ricos economy, remained afloat in 2003 thanks to low interest rates, a strong demand for housing, and the revival of public-sector infrastructure projects.
Private-sector leaders remain concerned, however, over the alarming number of government-issued permits that have been stalled, challenged, and even revoked after construction has begun.
The year 2003 was mixed for Puerto Ricos real-estate industry. While sales of new residential units remained strong thanks to low interest rates, the commercial and industrial markets were depressed because of the glut (excess inventory) caused by business and plant closures.
The military downsizing (including the eventual shutdown of Naval Station Roosevelt Roads in Ceiba) as a consequence of the U.S. Navys departure from Vieques has resulted in a massive exodus of military personnel from Fajardo, Luquillo, Rio Grande, Ceiba, and Naguabo. The large number of empty houses and apartments, in turn, has lowered property values in the area.
The local auto market was flat in 2003. Despite special financing deals and manufacturers rebates, sales of new vehicles in Puerto Rico in 2003 are expected to end slightly below last years figures, primarily because of the excise tax increase on sport utility vehicles (SUVs) and luxury cars imposed by the Calderon administration in June 2002.
According to industry leaders, an estimated 121,500 new vehicles are expected to have been sold by years end; that is 1.3% below the 123,054 units sold in 2002.
Low interest rates, special financing deals, and manufacturers rebates have helped to cushion the blow of the tax hike on the auto industry. In fact, most luxury brands have seen sales gains of more than 35%.
"These figures are a telling reflection of the local economy. When you have an indicator such as overall car sales that is lower than the year before, that tells you the economy still hasnt picked up," said economist Vicente Feliciano. "On the other hand, when you compare it with the significant increase in luxury vehicle sales, despite the higher excise taxes, that tells you a small segment of the population is doing very well."
Nonetheless, industry insiders say this years numbers are good in light of the prevailing weak economy and the excise tax hike.
The islands $5 billion-plus insurance industry had much to be thankful in 2003: The property & casualty insurance sector was spared from natural disasters; health insurance firms fared well amid heavy price competition; and life insurers reaped more business thanks to the tendency for people to seek protection when the economy is shaky.
"For the industry, the year was excellent," said Luis Pimentel, president of Universal Insurance Co., part of property & casualty market leader the Universal Group. He said the industry benefited from the absence of hurricanes and other major catastrophes that can break insurers. The millions of dollars in property damage caused by the heavy rains in November will be taken care of by the federal governments flood insurance program, he said.
"It was excellent, even though we didnt see any new jobs generated," said Socorro Rivas, president of health insurer Triple-S, one of three companies holding multimillion-dollar contracts to provide medical coverage to 1.6 million people enrolled in the governments Health Reform program. She added that Triple-S expects to end 2003 with a higher volume of premiums.
CB Managing Editor Yahira Caro, Associate Editor Jose Carmona, and Staff Reporters Luis Ramos and Lorraine Blasor contributed to this story.
What do local economists and businesspeople want Santa to bring Puerto Rico?
Puerto Rico Chamber of Commerce economist Ramon Cao: "Three gifts: first, continued and accelerated expansion of the stateside economy; second, that here in Puerto Rico we may take advantage of the upcoming period of economic growth to totally rethink our economic model, starting with the realization that we must significantly improve our rates of growth, particularly vis-à-vis the [U.S.] mainland economy; and third, a total revamp of our system of economic statistics so that we all may make better, more-informed decisions."
Heidi Calero: "New economic, social, and infrastructure & environment development models for Puerto Rico. Above all, a vision for the future. We need a new sense of direction and a new sense of urgency. Unless we become really hungry for all the opportunities out there, were going to miss the train."
Jose J. Villamil: "I would like the private sector to take on a more active and energetic role in defining the economic agenda. Unless it does, we will go nowhere, particularly with the political changes here every four years. I also wish not just for a tax reform but also for a total overhaul of Puerto Ricos fiscal system. Unless we adopt serious changes on the spending side, we wont go very far with just a tax reform."
Vicente Feliciano: "How about good luck with the Puerto Rico Aqueduct & Sewer Authority? Im worried about the recent developments and what would happen if [operator] Ondeo leaves and the government takes over. The governments previous track record wasnt very good. What are we going to do this time that would make it different?"
Agustin Marquez, executive director of the Puerto Rico Pharmaceutical Industry Association: "The best gift for the Puerto Rico pharmaceutical industry would be assistance in the formation of a new generation that will help strengthen the industry and take it to its next level, which is biotechnology. We need a new generation of professionals and scientists."
Manuel Cidre, president of the Puerto Rico Manufacturers Association: "I would wish for the private sector to be more dedicated and to assume its responsibility in the promotion of new companies and the retention of existing ones in Puerto Rico, and for Pridco [Puerto Rico Industrial Development Co.] to concentrate on what it does best, which is to administer the buildings."
Hector Mayol: "That the government may find all properly filed tax returns and canceled checks duly paid by taxpayers. In fact, a wonderful gift for all businesses and consumers in Puerto Rico would be for the government to be prohibited from demanding from you any information that it should have in its possession. Second, that we may see a better economic-planning process so that businesses, particularly in the commercial sector, may make more-informed decisions. And third, that it all translate into overall social improvement."
This Caribbean Business article appears courtesy of Casiano Communications.