Planning Board: P.R. GNP to shrink by $116.4M in FY16

Written by  //  November 11, 2016  //  Economy  //  No comments

Planning Board President Luis García-Pelatti

Planning Board President Luis García-Pelatti

The Puerto Rico Planning Board presented Thursday revised economic projections confirming that the Commonwealth’s gross national product (GNP) will be reduced by $116.4 million during fiscal 2016 and $143.0 million in fiscal 2017.

Some of the factors behind this decline are the island’s employment drop and the unexpected increase in oil prices, among others, the agency stated based on its econometric models.

The trend gathered through leading economic indicators forced the Planning Board to review the economic projections prepared in April 2016 and published in the Economic Report to the Governor in May 2016.

The current GNP projection shows a drop of 0.6 percentage points, registering a 1.8 percent drop compared to the 1.2 percent decline projected in April 2016.

As for Fiscal 2017, the agency predicted a decrease of 0.3 percentage points at 2.3 percent, from the 2.0 percent projected in April 2016. The percentage changes refer to the projection of the baseline scenario.

Among the main assumptions for the revision of the current and prospective projections factors whose movements could have any effect on economic activity in Puerto Rico were considered.

Key assumptions
The main assumptions of the projections are based on changes in the following variables considered as exogenous in the model: the U.S. economy; the world economy; oil prices; Puerto Rico’s population; adjusted merchandise exports; visitor spending; investment in construction, machinery and equipment; and federal transfers to individuals

“Macroeconomic activity is dynamic, which is why it is important that the projections are updated periodically based on the changes that are occurring in it,” said Planning Board President Luis García-Pelatti.

“Both performance and accuracy of the projections depend on factors, some endogenous and other exogenous, that affect the economy in general,” he said.

Those events include the Commonwealth’s fiscal situation, which continues to affect levels of government spending and public investment. In addition, the lack of access to capital market aggravates the problem, the Planning Board said.

The agency also said the Puerto Rico Oversight, Management and Economic Stability Act will also represent a hit to the economy, as it extends “extensive and rigorous powers over Puerto Rico.”

Another issue that affects the economy in the short, medium and long term has to do with the demographic component. Since the mid 2000s there has been a consistent decline in the population level, causing the decline in the number of births and increased migration.

The current wave of migration exceeded the one recorded in the 1950s when more than 237,000 people left the island, the agency said.

For its revision, the Planning Board kept the assumption made in April 2016 of a reduction in government spending of $700 million for fiscal 2017. Meanwhile, the agency said some of the fiscal stabilization measures adopted in the last two years that involved a policy of economic contraction, have failed to raise the projected levels of revenue.

Job market continues weakening
Puerto Rico’s job market continues to show signs of weakness, as confirmed by the Establishment Survey of the Department of Labor and Human Resources.

In fiscal 2016, 10,700 jobs were lost, registering a total of 894,900 jobs. In terms of employment by industry sector, the private sector recorded 7,300 fewer jobs, with the biggest losses recorded in construction (-3,500), manufacturing, (-1,900), professional and commercial services (-1,400), and educational and health services, (-1,200.)

Meanwhile, the government showed a decline of 3,400 jobs. In estimating the GDP projection for Fiscal 2017, a reduction in the level of employment similar to that recorded in fiscal year 2016 was assumed. This impacts wages and salaries, personal income and personal consumption, among others, the agency said.

Exogenous factors changed paths
Several of the exogenous factors used to model the economy of Puerto Rico suddenly changed their trend, the Planning Board said.

First, the respective values of real growth of the U.S. economy projected for fiscal years 2016 and 2017 were reduced by 2.1 and 2.6 percent in March 2016, to 1.7 percent for both years, according to figures published in October 2016 .

Meanwhile, the price of a barrel of petroleum is expected to continue to rise gradually. Values of $38.59 and $36.08 for the respective fiscal years 2016 and 2017 were projected in March 2016. In October 2016, those prices rose to $41.74 and $46.71, respectively.

The Commonwealth’s financial sector has failed to strengthen, with indicators such as total assets, net loans, deposits and investments, as well as mortgage originations remaining at a low point.

On the other hand, the availability of financing to support economic activity continues to be affected by the reduction in the rate of growth of deposits and investment funds or mutual funds also represent an important source of financial resources.

Projection risks
Ten years after the start of the longest recession in the economic history of Puerto Rico, signs of recovery seem “very ambiguous,” García-Pelatti said.

The risks that Puerto Rico’s economy will face involve different factors, namely: A sudden increase in the price of oil; an unexpected decline in economic growth in the United States; continued deterioration of the labor market and the consequent drop in employment; continued decline in the population; and a decrease in the levels of collection by the government, among others.

Another detrimental factor has to do with the fact that between fiscal years 2008 to 2014, the ratio of cash and the total assets of the Government Employees Retirement Systems of Government employees has decreased, on average, by 22.3 percent annually. The loss of liquidity will require increases in contributions to the funds to avoid disruption in the payment of benefits.

Elections and the Board
While the results of this week’s elections in the U.S. will be decisive for Puerto Rico’s economic future, so will the pending course of action by the Oversight Board, particularly with regard to the payment to bondholders and pensioners, the Planning Board said.

“We have to wait for the proposals by the PROMESA Economic Development Task Force, which aims to seek federal initiatives that impact the island’s economy,” the Planning Board said in its analysis.

In terms of economic indicators, the agency said there are very few available and that show a tendency for Fiscal 2017.

“At present there is insufficient quantitative information to feed econometric models and this influences the projected values. Incorporating public policy is essential because it can justify the estimates,” García-Pelatti said.

“Finally, it is important to note that certain economic projections is a function of the prospective movement of the underlying exogenous factors as a basis. So, all economic projections have to be subject to evaluation in line with changes occurring in these factors,” he concluded.

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