Environment of ‘moderate financial fragility’ persists in Puerto Rico
Estudios Técnicos’ Consumer Financial Fragility Index indicates deterioration this year, although low unemployment and real income growth have partially offset rising loan delinquencies and personal bankruptcies.
The Consumer Financial Fragility Index (IFFC, in Spanish), prepared by planning and consulting firm Estudios Técnicos Inc. (ETI), shows a worsening financial position for Puerto Rico’s consumers, rising from 35% in the first quarter of 2023 to 49% in the third quarter of 2024.
“The consumer in Puerto Rico went from being immersed in an environment of extreme financial fragility during 2000 to an environment of moderate financial fragility in recent years,” said economist Leslie Adames, director of ETI’s Economic Policy and Analysis Division.
“The index had reached a value of 78% in the second quarter of 2020 but improved significantly in subsequent quarters, averaging 39% between the first quarter of 2021 and the third quarter of 2023,” he noted.
This improvement was attributed to federal fiscal stimulus exceeding $16 billion during the pandemic, labor market recovery and stabilization of consumer loan delinquency rates, supported by federal funds used to pay noncurrent debts, he added.
The IFFC measures five variables: delinquency rates for consumer and mortgage loans, the unemployment rate, personal bankruptcies and inflation-adjusted worker income. The index categorizes fragility into four ranges: low (0-25), moderate (26-50), high (51-75) and extreme (76-100).
Over the past year, the IFFC has averaged 50%, indicating moderate fragility, with the third quarter of 2024 figure at 49%. Adames attributed this trend to increasing loan repayment challenges among consumers.
Rising loan delinquencies
Delinquency rates (30 to 89 days past due) for consumer loans (credit cards, personal loans and autos) rose from 2.74% in the first quarter of 2024 to 3.12% in the third quarter of 2024, surpassing pre-pandemic levels.
For example, consumer loans in the third quarter of 2024 stood at 3.33% compared to 2.98% in the fourth quarter of 2019, credit card loans at 2.51% versus 1.87%, and auto loans at 3.52% versus 3%. Additionally, accumulated bankruptcies increased from 2,138 in the third quarter of 2023 to 2,777 in the third quarter of 2024, the report showed.
Although labor market conditions remain favorable, with declining unemployment and private sector income growth outpacing inflation, the trends in other components of the index raise concerns heading into 2025.
Significant risks could disrupt the current state of consumer financial fragility. One issue is the depletion of excess liquidity that consumers built up from federal stimulus funds.
Additionally, rising indebtedness, particularly in credit cards, poses a challenge. Many consumers are using credit cards to replace this liquidity and maintain consumption, a troubling trend given prevailing high interest rates, said Adames.
“We’ll have to pay attention to what happens next year with the policy of rate increases proposed by President-elect Donald Trump, whether the rate adjustment requested by LUMA is approved, and the outcome of the restructuring of the Puerto Rico Electric Power Authority’s debt and what this implies for the cost of electricity,” Adames said.
“These risks would reverse the progress observed so far in the deceleration of inflation, negatively impacting financially vulnerable business operations, forcing adjustments in the workforce and in people’s ability to generate income,” he explained.
“This would create additional pressures in a delicate economic context where the consumer is already experiencing an environment of moderate financial fragility,” Adames concluded.
