The response to the COVID-19 pandemic left Puerto Rico’s economy better in some ways better and worse in others, experts told The Bond Buyer, noting the next six months hold considerable dangers for economic activity.
The island’s economic trajectory may affect bond negotiations currently underway and, ultimately, its ability to pay off its bonds.
Puerto Rico consultant Advantage Business Consulting projected a15% decline in Puerto Rico’s second quarter economic output, compared to a quarter earlier. The U.S. economy fell about 9.5% in the quarter before being annualized.
“The local lockdown started earlier than in the mainland, lasted longer and covered a broader range of economic activities,” said Juan Lara, Advantage's chief economist.
However, some factors have contributed to a strengthening in May and June, according to Advantage President Vicente Feliciano. “Federal transfers, particularly the unemployment benefits programs, are having a significant impact. The $600 per week represents a much larger percentage of the salary of a Puerto Rico worker than of a U.S. worker. Household income in Puerto Rico up to July 2020 had increased with respect to 2019.”
The increased income may have contributed to improved cement and car sales in May and June relative to the same months in 2019, Feliciano said.
Gustavo Vélez, chairman of Inteligencía Economica, said certain sectors of the island's economy have been struggling since March. Shopping centers are one of the worst hit, he said, with 30% to 40% of tenants under pressure. Small retail shops outside of shopping centers also remain endangered.
The tourism, restaurant and entertainment sectors are in bad shape, Vélez added.
Manuel Laboy Rivera, secretary of the Puerto Rico Department of Economic Development and Commerce, agreed those sectors are suffering. “Twenty to 30% of small and medium enterprises are at risk of disappearing,” he said.
Vélez said 20% to 30% of these enterprises would fail without government assistance. The federal government has given the local government money to distribute to businesses, but, he said, it remains to be seen if it will be used for this purpose.
The impact of COVID-19 and the related lockdown take added weight because the island's economy has been in decline since 2006, said Ricardo Fuentes, Puerto Rico Oversight Board economist.
Laboy Rivera said Puerto Rico’s real gross national product grew by 1.5% in calendar year 2019. The series of earthquakes that started in late December 2019 and the pandemic have caused the economy to sputter.
Of the 50 U.S. states, only Nevada has had more unemployment insurance claims filed than Puerto Rico, said José Caraballo Cueto, University of Puerto Rico associate professor.
The Puerto Rico Economic Development Bank has released the island’s economic activity index only through April.
On Friday, the U.S. Bureau of Economic Statistics released employment statistics for the island based on its establishment survey. It showed seasonally adjusted employment in July was down 9.2% from March but up 2.9% from June.
Gov. Wanda Vázquez introduced a stringent lockdown in March to deal with the pandemic. Being an island gave Puerto Rico an advantage in fighting the spread, Laboy Rivera said.
The government could have fought the pandemic without affecting the economy as much if it had focused more on widespread testing and contact tracing, according to Caraballo Cueto.
Several experts said the distribution of aid, or lack thereof, would be key to how the economy performs in the next few months.
A recent Puerto Rico House of Representatives Committee presentation noted the local government hadn’t disbursed 45% of a $787 million locally funded relief act and 63% of the $2.2 billion of federal funds in the CARES Act for Puerto Rico. Distributing the latter is essential to preventing a wave of small and medium-sized enterprise failures, Vélez said.
Inteligencía Economica is projecting Puerto Rico’s gross national product will decline 5.5% to 6% in the current calendar year.
“The taper off of federal transfers, particularly the unemployment programs, should lead to a slowdown in August 2020,” Feliciano said of the economy. “In addition, the opening of the economy has gone into reverse as COVID cases have increased substantially.”
“Projecting the economy of Puerto Rico is basically projecting the behavior of the pandemic,” he continued. “Thus, it is a function of whether cases come down and when is a vaccine available.”
Since the pandemic will probably continue for the next six months, the period is “going to be a real challenge,” Laboy Rivera said.
“Because lockdowns have been more extensively used in Puerto Rico than in the states, we can expect that the pandemic leaves larger scars on the economy in the island than in the states,” Caraballo Cueto said.
Mario Marazzi, former director of the Puerto Rico Institute of Statistics, said the federal elections would be key to Puerto Rico’s economic future.
Democratic presidential candidate Joe Biden has already done something for Puerto Rico’s economic development, Marazzi said. Biden had a hand in bringing the Lufthansa Technik airplane overhaul facility to the island in 2015.
Trump administration officials and members of Congress have recently talked about taking steps to relocate international drug manufacturing in Puerto Rico. Doing this would be a “game changer” for the island, he said.
Howard Cure, director of municipal bond research at Evercore, said he was “pessimistic about how Puerto Rico will fare during the pandemic and in the aftermath.”
The economy was already weak before the pandemic, he said. While the island still needs to rebuild from Hurricane Maria, COVID-19 will hinder this process. Many Puerto Rico workers won’t be eligible for unemployment insurance because they normally work off the books.
Puerto Rico House of Representatives Minority Leader Rafael Hernandez was more optimistic. He said the new local government arriving in January must aggressively invest federal Community Development Block Grant Disaster Recovery funds. It should also lobby the U.S. Congress to pass the bills that would bring drug manufacturing to the island. Finally, it should create a long-term economic plan.
Puerto Rico economic consultant Heidie Calero is projecting the economy will contract 6.9% in fiscal year 2021 (which started July 1, 2020) but grow 3% in fiscal year 2022.
Calero said the oversight board has a history of being wrong with its economic projections. Between 33% and 39% of the board’s projected general fund revenues for fiscal years 2021 and 2023 are from Act 154 foreign corporate taxes and sales and use taxes.
Given the downturn in the economy, one should be skeptical of its projections for the SUT taxes, Calero said. U.S. Treasury Secretary Steven Mnuchin has said he plans to withdraw the tax exemption that supports U.S. companies investing in Puerto Rico as “foreign” corporations. Taken together, the board’s projections are dubious, Calero said.
Matthias Rieker of the oversight board replied, “Our economic projections do reflect the effect of COVID-19 on SUT, and our projections include a decline in non-resident withholding (NRW) and Act 154 revenues due to US tax reform, supply chain diversification, and patent expirations. The effects are addressed in the Certified Fiscal Plan for the Commonwealth, including on Exhibit 15.”
Update: This article was updated to include the response from the oversight board.
