Puerto Rico’s economy will need about $10 billion in new investments over the next three years to grow by at least 3.3 percent annually and find its way back to more prosperous pre-recession levels. In the absence of such an unlikely windfall, it will take more than a decade to circle back to acceptable levels of progress.
In the meantime, Puerto Rico could focus its efforts on building upon four pillars — agriculture, tourism, manufacturing and services — to create positive economic movement and speed up the recovery.
“The biggest challenge ahead is vision. We need to have the vision to transform and rethink the economy toward production — in tourism, agriculture, manufacturing and services,” said Heidie Calero, economist and president of H. Calero Consulting, who spoke before the Puerto Rico Association of Financial Analysts last week.
In her presentation, Calero said there “is much work to be done and nobody is less important in that task. We can all contribute.”
Over the past decade, Puerto Rico’s real growth rate has averaged 0.4 percent, a scenario exacerbated by a protracted recession that began in 2006. In that time, there has been a significant drop in private sector investments and an increased reliance on federal transfers and grants — which totaled $22 billion in 2010, representing 34.2 percent of the Gross National Product.
“Public sector investment dropped by 33 percent in 2011, while private sector investment dropped by 22 percent. The heart of economic growth is in investment. Without investment, there is no productive capacity,” Calero said.“If we do nothing and accept the projected growth rates, it will take the island 13 years to get back to the levels we had in 2006. To do it in three years, we need to grow by 3.3 percent,” says Heidie Calero.
Another key point in economic wellness has to do with how banks are doing. Between 2005 and 2012, Puerto Rico banks saw a 33 percent drop in total assets and a 16 percent reduction in loan production to $48.5 billion last year from $57.8 billion prior to the recession.
“If the financing engine doesn’t start aggressively, we won’t pull out of this recession,” she said.
Six challenges to beat
Puerto Rico’s economy has six significant challenges to overcome, all of which have been broadly discussed in public and private sector circles: growing the GNP at the same pace as in the U.S. mainland; addressing the fiscal revenue issue by finding permanent and recurring solutions; reeling in public debt, which currently exceeds the GNP; solving the Retirement System shortfall; dealing with the unemployment problem; and, tackling health costs, which currently stand at $12.3 billion and have been increasing since 1960.
“Puerto Rico’s aging population will need greater health services. Meanwhile, our younger generation is shrinking and is not entering the productive workforce,” she said.
Given all of the pending roadblocks ahead, Puerto Rico’s economic policy model must change to not only generate local capital and substitute imports, but to eventually transform the political structure.
“We have to go back to agriculture, modernize it so that it generates local capital. By working with substituting imports, we will create linkages in the economy. Once the economy is back on its feet, we need a political transformation to happen,” Calero said.
At present, agriculture represents 2 percent of all local jobs, which Calero said must be addressed “so that the sector contributes its part toward that economic transformation.”Unemployment is still a major issue, despite recent signs of improvement. (Credit: H. Calero Consulting)
Full recovery will take time
Puerto Rico is facing many challenges and a very mixed outlook, she said.
Her firm’s forecasts show that the island’s GNP will grow from 0.4 percent this year to 0.9 percent in 2014 and 1.0 percent in 2015 — numbers that sharply contrast U.S. mainland growth estimates of 1.7 percent, 2.4 percent and 3.0 percent in the next three years.
Meanwhile, projected investments for crucial areas, such as construction, are inconsistent through 2015. In construction, Calero’s forecast shows that investments will drop from 2.9 percent this year to 1.6 percent next year and 1.1 percent in 2015. Machinery investments will grow 3.3 percent in 2013, drop to 1.0 percent next year and swing back to 3.5 percent in 2015.
“The drop in construction has to do with a lack of funds,” she said, noting exports are expected to also drop from 2.3 percent this year to 2.0 percent in 2015.
“None of those rates are extraordinary, we should be growing consistently at between 5 percent and 6 percent,” she said. “If we do nothing and accept the projected growth rates, it will take the island 13 years to get back to the levels we had in 2006. To do it in three years, we need to grow by 3.3 percent.”
“We have to rethink our economy in terms of where to put our focus. Agriculture should play a key role in Puerto Rico’s future growth and we have the people and technology available. What we’re lacking is need,” she said.
To illustrate her point, Calero noted that in France the value-added per agricultural worker in dollars was more than $57,000 in 2011, while in Puerto Rico, that figure was $14,565. Tourism’s potential also presents similar opportunities for growth, if Puerto Rico is able to increase the average length of stays.