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P.R.’s changing economic landscape has forced banks to retrench

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.”

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