P.R.’s slight economic growth expected to ‘run out of fuel,’ economist firm says
Puerto Rico’s economy is predicted to have a base scenario of 0.5% real Gross National Product growth in Fiscal 2019 with a slight growth of 0.8% in Fiscal 2020, according to a forecast published by economic analysis firm H. Calero Consulting.
In its latest edition of its “Pulse” publication, the firm says, however, that the slight growth will “run out of fuel” in subsequent years, barely breaking even at 0.3% in 2021 to, then drop to 0.01% in 2022.
The firm bases its forecast on several assumptions. In the short-term, federal aid will float most investments, with $17.7 billion in recovery fundings from the Federal Emergency Management Agency already in circulation as of Mar. 31.
“Actual money spent by FEMA in Puerto Rico reached $12.4 billion during that same period. On the other hand, FEMA budgeted for another $8.0 billion in funds until September 2019. These funds should help increase investment in FY2019 by 4.4% and 1.3% in 2020,” the firm noted.
However, the upward trend should buckle in the following two fiscal years, boosted only by insurance settlements, the firm predicted.
“We also find that Fiscal Oversight Management Board projections of FEMA aid are unusually optimistic and are contributing to the false impression that the federal government has already sent $91 billion in aid,” the firm noted.
“This view could risk future allocations as well as slow down the aid that has already been promised. This is a significant risk in the short-term. President Trump’s possible 2020 reelection will reinforce the probability that aid will trickle over the next five years,” it added in the analysis.
Looking ahead beyond its short-term forecast, H. Calero Consulting mentioned that the recent growth in high-end housing transactions “will contribute little to future economic growth. Most of these sales are of second-hand assets, which by definition do not add anything to GNP, and its income is likely to be invested outside the island.”
The firm also said Puerto Rico’s ongoing outflow of people will continue to hinder the island’s reconstruction work. The firm predicted a drop in the island’s population of some 3 million people by 2021, leaving the older generation behind.
“In consequence, the expansion in personal consumption expenditures will be short-lived. We expect it to topple 4.2% in 2019, aided by insurance payments, FEMA aid and short-term labor gains. Consistent with this, disposable income to rise by 4.8% in that same year. After that, expect spending and income to decelerate,” the firm noted.
H. Calero also predicted the possibility of a new default in the payment of the recently restructured Sales Tax Financing Corp. (known as COFINA for its initials in Spanish) debt starting in 2021. A population decline means a smaller tax base, which will leave COFINA debt payments increasingly contingent on U.S. reconstruction money, “a stream of flows whose impact should fizzle by 2022.”
“The exodus has one bright spot: the unemployment will trend down as more people leave the local labor force. Expect the unemployment rate to trend downward,” the firm noted.
Despite the grim predictions, the firm noted that Puerto Rico’s inflation rate should remain low this fiscal year, but could rise slowly up after 2021. Cost of living expenses on the island could also surge, with rising costs of electricity, college tuition and price increases looming.
“After factoring the lack of a coherent plan to drive the economy; population decreasing at exponential rates; and the return to public debt payments, the chances of another debt do-over are increasing rapidly. It is worth restating the obvious message: that without a strong economy, policy and political decisions lose support,” the economic analysis firm noted.