The new year that began yesterday is already characterized by a high level of uncertainty, largely due to the changes that have occurred and will occur in Puerto Rico’s environment.
Furthermore, 2018 is emerging as a year that will bring “important challenges,” but also opportunities for the re-establishment of a vigorous economy, the Puerto Rico Manufacturers Association, or PRMA, predicted.
The way in which funds that will enter Puerto Rico — as a result of the catastrophe that Hurricanes María and Irma left in their wake — are used is key to this recovery, as are the reforms that the island implements leading to a more efficient government and a tax system that stimulates investment, the trade group confirmed.
“There will be an economic stimulus in 2018 and 2019, but this will be temporary and, if the necessary measures are not taken, the economy will return to the pattern that has characterized it for the past 12 years,” the organization added.
“At the PRMA, we’re convinced that Puerto Rico has the necessary elements to convert this temporary impulse to the economy into a permanent one,” the trade group predicted.
“To achieve this we have to ensure that we will have a solid and growing manufacturing. Achieving this is the PRMA’s mission and is what guides us in our actions both in Puerto Rico and in Washington,” the PRMA added.
The PRMA spent many months conducting lobbying efforts in Congress to protect manufacturing Puerto Rico’s economy.
“That struggle began when the bill that culminated with the Puerto Rico Oversight, Management and Economic Stability Act in 2016 was considered, continued in 2017 in relation to the federal tax reform, and will continue in 2018 seeking the support of Congress for measures to boost our economic recovery,” the PRMA stated.
The organization noted that 2017 was the year of the three hurricanes: Irma, María and the federal tax reform. Puerto Rico’s economy, which was experiencing a long and deep economic contraction, was in “very unfavorable conditions to face these three events.”
“The two hurricanes, María being the most devastating, found an economy in which the infrastructure, particularly in the energy sector, was in very poor condition due to lack of maintenance and without the resources to improve it due to [the Puerto Rico Electric Power Authority’s] fragile financial situation,” the PRMA stated.
The prolonged economic contraction and the problems related to the Puerto Rican government’s debt meant that the administration had neither the resources nor the flexibility to intervene adequately in this and other areas where its intervention would have been necessary.
The third hurricane, the federal tax reform, has not yet been felt, but it will be if not in 2018, then in 2019, the PRMA predicted.
The negative impacts on the island’s economy — and particularly on its manufacturing sector — have been widely discussed in recent months. The reform increases taxes to manufacturing companies in Puerto Rico, imposing a 12.5 percent tax on the profits derived from products developed in the United States and reducing them to the corporations operating on the U.S. mainland, from 35 percent to 21 percent.
“In the United States, the Trump presidency has changed the practices and processes of the administrations that preceded it and has implemented economic measures that could be justified internally, for example that manufacturing returns to the United States, but that disrupts international markets and, of course, they affect us in Puerto Rico by treating us as a ‘foreign tax jurisdiction’,” the PRMA noted.
That condition benefited Puerto Rico for decades as far as its manufacturing promotion was concerned. It made the phased-out Section 936 of the U.S. Internal Revenue Code possible, for example, the PRMA said.
“Today, the fact that we have been treated, for tax purposes, as Singapore, Mexico or any other country is treated, puts us in an extremely disadvantageous competitive position,” the trade group noted.
All that being said, the PRMA believes the influx of federal funds and insurance companies payouts for reconstruction will have a positive effect on 2018’s economic indicators.
How much that influx will be is still a question but the figure that is mentioned as the most likely amount is about $15 billion, the trade group noted.
The other question is the speed with which these funds enter the local economy. Shortly after Hurricane María hit, the PRMA commissioned an estimate that supposed that 60 percent of that amount would come in 2018 and 40 percent in 2019.
“Today, everything indicates that these proportions will be reversed because the processes have been slower than expected. This means that the real GNP growth will be positive for 2018, but lower than 4 percent. If the bulk of federal funds and insurance companies impact in 2019, real growth in GNP will be around 5 percent in that year, higher than previously projected,” the PRMA further predicted.
Finally, the PRMA added that Puerto Rico’s uncertainty is also affected by global events, such as BREXIT, volatility in certain markets — such as oil — geopolitical events in the Middle East and, closer to Puerto Rico, what happens in Cuba, Venezuela and some other neighboring countries.
“There are surprises in our neighborhood like what happened in Ecuador, where the President, Lenin Moreno, has reversed the leftist policies of his predecessor and co-religionist, and seeks to strengthen the economy not led by the government, but by returning to the market economy, the PRMA noted.