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Economist: Oversight Board’s 8% contraction in Fiscal ’18 incompatible with indicators

Puerto Rico’s economic indicators are showing signs of improvement, suggesting that the Financial Oversight and Management Board for Puerto Rico’s predictions for an 8 percent contraction in Fiscal 2018 are incompatible, according to economic analysis firm Estudios Técnicos.

In a recently released paper, the firm predicted that while growth for the 2018 calendar year will be “0,” prospects for 2019 depend on the amount and rate of federal funds disbursed for the island’s recovery efforts.

The firm predicted Puerto Rico’s total Gross National Product will grow by 5.3 percent in 2019 and by 4.7 percent in 2020. As of August 2018, $46.3 billion in federal recovery funding had been approved, but disbursement has been slow.

Frowth projections for 2019 will also rely heavily on the effects on Puerto Rico of the changes taking place in response to last year’s approval of the “Tax Cuts and Jobs Act,” which eliminated the island’s tax-based competitive advantage. Tariffs imposed on aluminum and steel will impact construction costs on the island, while a threat of increased interest rates represents another risk factor, Estudios Técnicos stated.

On the other hand, the firm noted improvements in key economic indicators. In Fiscal 2018, total unemployment decreased from 10.7 percent in January to 8.3 percent in October, the firm noted. Cement sales have surpassed 2017 levels, although growth has slowed down since May 2018.

Meanwhile, Puerto Rico’s retail sales showed a 14 percent increase from August 2017 to August 2018, the firm noted, citing Puerto Rico Trade and Export figures. New car sales also grew, by 27 percent, during the same period.

“It is also relevant to mention that some indicators are showing signs of slowing down in the past two months, possibly a result of the impact of Federal Emergency Management Agency and insurance payments running out,” Estudios Técnicos pointed out.

After analyzing pre- and post-María trends, as well as preliminary damages and economic impact estimates, the firm concluded that the negative impact of the storm was initially overestimated. While the Puerto Rico Planning Board and FEMA pegged damages at $42.3 billion and $90 billion (including the U.S. Virgin Islands), respectively, the estimates could change as more data becomes available.

Estudios Técnicos estimated the damages at between $53.8 billion and $67.8 billion, the bulk of which — or $19.5 billion — was assigned to damaged infrastructure including electric, water, transportation, housing and communications. The firm estimated economic damages at $19.1 billion, while the cost of reconstruction was placed at $28.8 billion.

“Much confusion has been created due to the varying numbers presented to [U.S.] Congress, including the $134 billion in the [government’s] Reconstruction Plan, an original request by the government for $94 billion in aid, and now the Puerto Rico Planning Board’s number,” Estudios Técnicos stated. “Agreement on the basic assumptions underlying the estimates would remedy much of the confusion.”

According to the firm, any growth in 2019 will also depend on external factors both globally and trickling down from the U.S. mainland, the study noted.

“The latter have been obscured by the former when looking at our economic prospects,” according to the study. “This mis-appreciation of what matters in economic growth can lead to serious mistakes in projecting prospects beyond 2019 for our economy.”

The firm mentioned the uncertainty generated by BREXIT, the trade wars initiated by the Trump administration and unrest in the Middle East and Europe, as triggers for a “business climate that is not propitious for investment growth.”

“Financial markets in the U.S. and Europe have been characterized by a great deal of volatility, a condition that has also characterized energy markets. The International Monetary Fund has projected a slowing down of global growth to 2.5 percent,” Estudios Técnicos noted.

The firm noted the leading role that China has been taking in the economies of Latin America and the Caribbean, including Puerto Rico, where it has been picking up real estate in recent months. In the Dominican Republic and Ecuador, the country will be financing infrastructure investments.

Author Details
Business reporter with 25 years of experience writing for weekly and daily newspapers, as well as trade publications in Puerto Rico. My list of former employers includes Caribbean Business, The San Juan Star, and the Puerto Rico Daily Sun, among others. My areas of expertise include telecommunications, technology, retail, agriculture, tourism, banking and most other areas of the economy.

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