Puerto Rico’s changing economic landscape will prompt banks to keep a tight grip on their activites until risks recede, an analysis by H. Calero Consulting firm concluded.
The “retrenching,” as the firm called it, will likely
lead banks to remain a “passive sector, one that, in the future, stands to react
rather than lead the creation of new economic opportunities.”
The firm identified loan payment delinquency and a shrinking
population as ongoing risks for local banks. Also, it questioned whether the recently
approved debt restructuring agreement between the government and Sales Tax
Financing Corp. creditors will remain sustainable past 2023, and whether it
will enable Puerto Rico to return to capital markets.
“Either scenario — or worse, a combination of both —
would be directly detrimental to the banking sector’s outlook. Until risk
recedes, banks will simply contend themselves to follow the road that others
dare first take,” the firm noted.
The firm added that another factor that could prompt
banks to remain on the shy side is a lack of opportunities to participate in
financing of post-hurricane recovery contracts, which have been granted to foreign
companies for the most part.
“In this sense, unless the recovery funds are managed to
create the right incentives for them to remain on the island, the banks will simply
not leverage capital to jumpstart much needed economic growth, or support development,
regardless of continued interest rate hikes,” H. Calero Consulting said. “The stakes
at the moment could not be higher. Puerto Rico must get it right this time.”
“While the aftermath of Hurricane María was expected to trigger
massive inflows of reconstruction funds, almost a year and a half afterwards, none
of the 3,000 projects submitted to Congress by the Central Recovery and Reconstruction
Office this past August, $139 billion —including water, energy and housing initiatives
— are fully disbursed due to red-tape procedures imposed by federal government,”
the firm stated in its publication.
“The result — essentially zero growth since last June. More
worrisome, the latest data from the Puerto Rico Planning Board (up to November
2018) suggests that economic activity may, in fact, have slowed down over the past
three months in spite of continued cement sales,” it added.
In the last two decades, Puerto Rico’s banking sector has
seen a contraction in its footprint by about 40 percent reaching $62.4 billion
in 2017, in line with the island’s economic performance during this period. Loans
and leases mirrored a similar trend, falling sharply after 2009, but climbing
back up in 2017. That same year, delinquency rates also rose, after having
decreased for several years, to reach 9.1 percent. The market’s consensus was
that this last rise was connected to the aftermath of Hurricane María.
“Consolidations, the bursting of a real estate bubble, an economic
depression, population decline, and the default of public debt have all had a direct
impact on the sector’s core capabilities and operations. In response to this,
banks were forced to retrench their activities, mitigate risk, and become risk-averse,”
the firm stated in the latest edition of “Pulse,” an internal publication. “Banks
will react, not lead.”