The lack of progress in getting Puerto Rico’s economy back on track does not bode well for what should happen in 2020, according to an analysis by H. Calero Consulting Group Inc.
“The economy needs to grow soon, or the assumptions made in negotiating with bondholders may have to be revisited. Something everyone will want to avoid,” according to the firm in the latest edition of its internal publication, “Economic Pulse.”
Matters such as a fizzled-out rebound after Hurricane María, a lack of significant private sector investment through the Opportunity Zones initiative and incomplete key structural reforms, such as the pensions system, may bring about a severe backlash this year, the firm stated.
“Significant expectations were created for Puerto Rico’s economic prospects in the aftermath of Hurricane María in 2017. Since then, however, economic activity went through a cycle that lasted from October 2017 to May 2019 as the rebound that followed the paralysis in the months after the hurricane lasted for more than a year,” H. Calero Consulting concluded, citing economic activity index results.
While the numbers expanded by 2.7% in the first five months through May 2019, it plummeted by -0.4% on average during June-October, possibly due to delays in disbursement of reconstruction funds, lack of structural reforms, continued outward migration, and lack of strategic economic development plans.
In its analysis, the firm outlined how life on the island became more fragile in 2019, with higher energy costs, lower income levels, and the fact that people that depend on pensions or that invested heavily on “safer” government bonds saw a significant increase in their income’s exposure to risk this past year.
“In effect, government pensions above $1,200 monthly face cuts of up to 8.5%. The pension system shifted to a PayGo system, which banks heavily on workers saving large amounts of money over their lifetimes,” the analysis stated.
“The consequences of this are direct: a higher savings rate means less money available to consume now. In this scenario, retail spending should continue to slow down in 2020, with the effects on the activity already being felt — retail sales were down by 3.9% in the first nine months of 2019,” according to the publication.
“Chapter 13 bankruptcies were also up by 10.3% in the first 11 months of 2019. Expect these number to worsen once energy prices hike in 2020,” the firm added.
Finally, the firm predicted that a reduction in recovery funding available to Puerto Rico will have a “compounding effect on our economic recovery expected to be largely diluted in 2020.”
“Regardless of this, governance should be at the top of the list for the next government, whoever is finally elected, as one thing will be clear in 2020: there will not be significant increases in resources,” the firm added. “2020 promises to be a challenging election year and public policy is put to a test to generate the economic growth needed to pay debt agreements to be signed with bondholders.”