Puerto Rico’s Prospects: Beyond Reconstruction · Source: P.R. Commerce & Export Company (2018)....
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Puerto Rico’s Prospects: Beyond Reconstruction Presented to: Puerto Rico Chamber of Commerce San Juan March 8, 2019
Transcript of Puerto Rico’s Prospects: Beyond Reconstruction · Source: P.R. Commerce & Export Company (2018)....
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Puerto Rico’s Prospects: Beyond Reconstruction
Presented to:Puerto Rico Chamber of Commerce
San JuanMarch 8, 2019
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Topics
The Economy
The economy
Demographics
María
Damages
Federal Funds
Reconstruction
Beyond Reconstruction
Sector opps
The six infrastructures
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TOPICSThe Economy
María
Beyond Reconstruction
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Long Term TrendsPuerto Rico Real GNP
5.3%
7.0%
4.2%
1.8% 2.7%0.3%
-1.4%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%19
5019
5119
5219
5319
5419
5519
5619
5719
5819
5919
6019
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8019
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9019
9119
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9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
1420
1520
1620
17
Real GNP Growth Decade average
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Investment in Construction(I/GNP)
Investment in construction fell from nearly $7.0 billion to around $2.4 billion in 2017.
17.1%
3.4%
10.3%
2.3%
8.4%
1.1%1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
Private
Public
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ECONOMIC CONTEXT• María impacted an economy that is 17% smaller than in fiscal year 2006. This made the Island
extremely fragile and reduced the Government’s capacity to react quickly.
Source: PR Planning Board.
1.5%
-0.3%
2.1%
2.7%
1.9%
0.5%
-1.2%
-2.9%
-3.8%-3.6%
-1.7%
0.5%
-0.1%
-1.8%
-0.8%-1.3%
-2.4%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real GNP Growth in Puerto RicoFiscal Years -- 2001-2017
Source: P.R. Planning Board (2018). Statistical Appendix (Various Years)
Average Growth between 2006 and 2017: -1.5%
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Economic Indicators: After María
2935
4046 45
40 37 40 4044
48 45 4743 42 44
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
Construction Employment ('000s)August 2017 - December 2018
Source: PR Department of Labor & Human Resources (2019). Empleo y Desempleo.No survey was performed on september 2017 due to the hurricane.
$649 $609 $628$469
$574$701
$585 $671
$941
$1,443
$901
$1,143
$741 $670$833
$739$557
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep-
18
Oct
-18
Nov
-18
Fiscal Revenues ($ millions)July 2017 - November 2018
Source: PR Treasury Department (2018). Estadísticas y Recaudos.
2.5%2.2%
1.2% 1.1%
1.9%1.5% 1.6% 1.5%
1.1% 1.0%
1.7%1.5%
0.8%0.5%
1.2%
0.6%
Sep-
17
Oct
-17
Nov
-17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
P.R. Inflation RateJuly 2017 - August 2018
Source: PR Department of Labor & Human Resources (2018). Índice de precios al consumidor.
1,022
299
491
680
8831,034
1,1741,297 1,331 1,366
1,233 1,192 1,2621,101
1,1951,117
1,002
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-1
8Ju
l-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Cement Sales (94lbs bags - thousand) August 2017 - December 2018
Source: Banco Gubernamental de Fomento (2018). Producción y ventas de cemento.
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Economic Indicators: After María$2
,580
$2,6
84
$1,2
22
$3,2
91
$2,8
39 $3,4
19
$2,8
45
$2,5
87 $2,8
80
$2,6
07
$2,9
48
$2,9
13
$3,0
29
$3,0
12
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
P.R. Retail Sales ($ Millions)July 2017 - August 2018
Source: P.R. Commerce & Export Company (2018). Informe de Ventas.
357
449
29
371
292
425
316
Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18
New Housing Units Sales2017-Q1 - 2018-Q3
Source: Estudios Técnicos Inc (2018). Construction and Sales Activity Report.
977
964
935
992 1,00
1
981
979
981 98
9
993 1,
005
1,00
0
988 995
993
993 1,00
0
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
Total Household Survey Employment ('000s)July 2017 - December 2018
Source: PR Department of Labor & Human Resources (2018). Empleo y Desempleo.No survey was performed on september 2017 due to the hurricane.
6,94
7
7,20
9
2,27
1 5,63
5
9,34
5 11,3
36
7,72
0
6,82
6
8,02
4
8,10
5
9,15
2
9,59
6
9,72
4
9,15
6
8,33
5
8,59
4
10,0
01
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep-
18
Oct
-18
Nov
-18
New Auto SalesJuly 2017 - November 2018
Source: PR GUIA Group (2018). Auto Industry Sales Report.
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Total Deposits in Commercial BanksBy quarters
$47,906.0 $48,748.0
$49,600.2
$51,619.1
$53,576.4
$51,370.0
$44,000.0
$46,000.0
$48,000.0
$50,000.0
$52,000.0
$54,000.0
$56,000.0
2017-Q2 2017-Q3 2017-Q4 2018-Q1 2018-Q2 2018-Q3
Source: OCIF.
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ECONOMIC CONTEXT• Projections for the next five years are dependent on the amount of federal money allocated to and
spent in Puerto Rico, thus there is a great deal of uncertainty present.
Real GNP Growth-2
.4%
0.3%
3.1%
4.2%
2.1%
1.7%
-2.4
% 1.5%
5.3%
4.7%
1.0%
0.8%
-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%
2017 2018 2019 2020 2021 2022
2019 Projection 2018 Projection
Fuente: PR Planning Board (2019). 2017 Statistical Appendix [Table 1]. Estimates by Estudios Técnicos, Inc. (January 16, 2019).
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TOPICSDemographics
María
Beyond Reconstruction
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Demographic Context
• Population was contracting at a fast pace even before hurricane María.
• Prior to María the projection for population in 2025 was 3.1 million, now it’s closer to 3.0 million.
3,725,7893,678,732
3,634,4883,593,077
3,534,8743,473,177
3,406,5203,337,177
Census(2010)
2011 2012 2013 2014 2015 2016 2017
Population in Puerto Rico2010-2017
Source: U.S. Census Bureau (2018). American Community Survey [Table PEPANNRES].
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Population projection
Fuente: Estudios Técnicos, Inc. U.S. Census Bureau.
3,825,000 3,743,000
3,406,520 3,337,177 3,195,118 3,131,191 3,100,000
3,000,000
2000 2010 2016 2017 2018 2019 2020 2025
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Migration
47,2
08 66,8
09
60,0
68
67,8
62
62,0
74
59,8
85 76,2
18
74,5
00
73,8
46
83,8
44
89,0
00
93,0
00
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net Migration
2014 55,092
2015 65,0892016 64,757
Outward migration to the U.S.
• The estimate for calendar 2017 is for net out-migration of some 250,000, of which some 175,000 occurred after hurricane María.
• 2018 should go back to numbers similar to 2015-2016.
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Migrant profile
Educational attainment of the Puerto Rican Migrant Population 25 years or older
Associate degreeUndergraduate
degree
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Migration is More Prevalent Among Younger Populations
Migrant Profile
• Out of all immigrants, 41% are 24 years old or younger.
• This has obvious implications for future population growth.
27.5%
13.1%
29.3%
19.7%
7.5% 2.9%
Net Migration in Puerto Rico, by Age Group2016 1 to 17
18 to 24
25 to 39
40 to 54
55 to 69
70 and over
Sources: US Census Bureau (2017). 2016 American Community Survey 1-Year Estimates [Tables B07001PR and B07401PR]. Estimates by Estudios Técnicos, Inc.
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Population Growth: Births and Deaths
• Puerto Rico’s birth rate has been falling for the last three decades and the rate decrease accelerated after2010.
• In 2015 and since that year deaths have surpassed births.
42,079 41,029 38,84636,479 34,422
30,99128,267
2011 2012 2013 2014 2015 2016 2017
Births in Puerto RicoFiscal Years-- 2011 - 2017
Source: US Census Bureau (2018). Annual Estimates of the Components of Resident Population Change [Tabla PEPTCOMP].
Births and Deaths: 1935-2015
Live births Deaths
Source:
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Annual Household Formation
18,723 20,640
11,521
2,300
1980-90 1990-00 2000-10 2010-20
Fuente: US Census Bureau, American Community Survey.
Household formation is a key variable in estimating housing needs. This graph helps in understanding the major reduction in new housing sales.
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Population Pyramids
• An aging, mostly low and moderate income population will impact all markets: housing, financial, labor, health services and education.
• Contraction in the labor markets and changing demographics impact pension systems negatively. These systems were planned for younger populations as are many of the social programs.
200,000 100,000 0 100,000 200,000
0- 45- 9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980+
2000Female
Male
200,000 100,000 0 100,000 200,000
0- 45- 9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980+
2010Female
Male
150,000 50,000 50,000 150,000
0- 45- 9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980+
2020Female
Male
150,000100,000 50,000 0 50,000 100,000150,000200,000
0- 45- 9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980+
2025Female
Male
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TOPICSThe Economy
María
Beyond Reconstruction
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Cost of Damages of Hurricane María
Concept Impact Maria (Lower Bound) Impact Maria (Upper Bound)
Infrastructure Damage $15,506 $19,553
Electric $1,450 $1,800
Water $60 $75
Transportation $100 $120
Housing & Other Structures $13,496 $16,991
Communications $400 $567
Economic Damages $15,303 $19,169
Agricultural Output $116 $145
Government $1,487 $1,858
Lost Business Activ ity $13,700 $17,166
Cost of Reconstruction $23,025 $28,850
Total $53,834 $67,572Sources: US Federal Emergency Management Agency (1999). Plan de Acción Presidencial Para la Recuperación a Largo Plazo de Puerto Rico. PR Planning Board (2001). Impacto Económico del Huracán Georges 1999 . Acev edo, S. (2016). Gone With the Wind: Est imat ing Hurricane Climate Change Costs in the Caribbean [Working Paper]. Retriev ed from the International Monetary Fund Database. 1Represents lost rev enue from stoppages in serv ice, estimated by multiplying a $30 monthly av erage telephone bill by 2 months, and multiplying said subtotal by the affected consumers. 2According to the PR Planning Board, room-nights lost by tourism cancellations were offset by increased room nights from additional assistance personnel. 3Estimated by assuming partial damages worth 10% of the median household v alue, and a
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Federal Funds
There is still uncertainty concerning amounts, disbursements and uses of these funds. A previous estimate of $62 billion is closer to reality.
Source BillionFEMA Public Assistance $48.8 CDBG $20.0FEMA Individual Assistance $3.2 Private Insurance $8.0 Other Federal Funding $5.0 Total $82.1 Source: Certified Fiscal Plan of the Commonwealth. These funds will be disbursed over a ten year period.
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TOPICSThe Economy
María
Beyond Reconstruction
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There is no one specific route for reconstructing an economy that has suffered both economic contraction and severe loss of population. There are, however, initiatives that are common to many of these success stories:
Ireland
Finland
Pittsburgh
• high value added service economy based on
technology and innovation
• mobilizing society’s stakeholders in support of
an agreed upon vision
Finland
• Committee for the Future as a
permanent fixture in the policymaking
system
Ireland
• Social Partnership
both played a key role in the reconstruction of their economies
The experiences examined and the challenges faced by Puerto Rico will require improved foresight and planning capacity, making risk management part of the economic policy decision making process and making network creation and participation a core concern.
MAIN ACTIONS
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The implementation of austerity measures by the Oversight Board responds to a traditional structural adjustment program which is centered on the supply side of the equation; however, an alternative approach must be adopted that incorporates the conditions inherent in a smaller economy with a smaller population:
Outward orientation
Strengthening Internal linkages
Mobilizing stakeholder integration
Long term vision
Innovation driven development
Strong emphasis on core
competences
Effective management of the economy’s
openness
Strategic competence
Network creation as a key
competence
MAIN ACTIONS
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Structural ReformsPuerto Rico’s serious structural problems require major reforms of various systems that impact development, including those related to the size, efficiency and functions of government. The new DMO and Invest Puerto Rico are major positive steps,
A major such reform relates to the tax system. In the World Bank’s Paying Taxes 2017 report, Puerto Rico is ranked 161 in terms of the Total Tax Rate, that includes compliance costs. Ireland is 4, Singapore is 5 and some of our neighbors such as the Dominican Republic (149) and Costa Rica (60) are better ranked
Taking into account global trends in tax system reforms and Puerto Rico’s present needs, Puerto Rico’s tax system should:
• Significantly reduce compliance costs
• Move from an income to a consumption base
• Eliminate capital gains taxes in certain activities
• Expense investments in productive activities
• Integrate the Incentives Code with the tax system reform
• Establish the grounds for eventually moving to a VAT system
• Be comprehensive, i.e., incorporate all taxes, including municipal ones
A recently approved tax reform for Puerto Rico does not meet the above criteria.
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Post Reconstruction Development
• An open economy such as Puerto Rico’s needs to incorporate risk management as part of its economic policy making process due to the extensive risk profile that characterizes a small and very open economic system.
• The high risk profile integrates external factors such as technological, geopolitical, market changes and, of course, changes in U.S. social, economic and fiscal policies. Strengthening foresight capacity is essential in understanding and minimizing risks.
• A long term vision is essential for guiding strategic decisions and structural reforms.
• Sustained development incorporates a number of objectives and integrated approaches to what we call development infrastructures:
Objectives
o Flexibility
o Productivity
o Sustainability
o Pluralism
o Constancy
o Innovation
Infrastructures
o Physical
o Social
o Environmental
o Institutional
o Cultural
o Knowledge
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The Development Infrastructures & Social ObjectivesINFRASTRUCTURES Flexibility Productivity Sustainability Pluralism Constancy Innovation
Physical Integrated planning and descentralization
Emphasis on connectiv ity
Focus on renewable energy and
descentralized initiatives
Iniciativas locales
Stimulate local initiatives (acueductos
comunitarios)Long range planning
Integrating AI in infrastructure planning
and execution
Social Descentralization of social programs
Strengthen STEM programs in education
Training programs that integrate social and
env ironmental concerns
Integrated housing and social serv ice
programs
Improve efficiency and descentralized
delivery
Create an R&D entity for innovation in social
serv ices
EnvironmentalCommunity
involvement in env ironmental policies
New energy sources and better land use
planning
Include the env ironment in the
Fiscal Plan
Better and more accesible information
Create non government
env ironmental policy entity
Strengthen university R&D capabilities
InstitutionalConsolidate processes,
deregulate and re-regulate
An investment focused tax system
Adequate and balanced laws and
regulations
Consider social infrastructure as a development tool
Minimize political intervention in
government activ ities
Needed a public policy on innovation
that covers all infrastructure areas
Cultural Stimulate institutional learning
Culture as an economic sector
A change of v ision:Culture as
consumptionCulture as investment
Strengthen support for community iniatives
Increase intervention in cultural policy by non government
entities
Needed a public policy on innovation
that covers all infrastructure areas
Knowledge Reduce market entry obstacles
Improve technology transfer capacities (Fundación Chile)
Work towards an autonomous
innovation system
Improve access by SMEs to new technologies
Strengthen K-12 educational system
and R&D infrastructure
Needed a public policy on innovation
that covers all infrastructure areas
OBJECTIVES
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NEEDS & OPPORTUNITIESINFRASTRUCTURES
PhysicalDistributed generating
systems
Industrial Microgrids
Regional airport management and
maintenanceLogistics facilities
Roosevelt Roads and Port of the
Americas
Road system Improvements and extensions
Social Integrating IT & Health Services
New approaches to delivery of educational
services
New social programs for a
changed demography
Housing for the Elderly
Improved delivery channels for
health services
Strengthen the non profit sector
Environmental Solid waste disposal systems
Waste to energy systems
Environmentally sound agro-
industrial initiatives
Management and Maintenance of Public Beaches
and Nature Reserves
Eco-tourism and Eco-lodge
development
Increased use of non fossil fuel
sources
InstitutionalImprovements in
government management
systems
Brownfield P3’s and privatization of government
services
Decentralization and a regional
structure
Centralized Handling of
Federal Programs and Funds
Medical tourism
Introducing AI and Data Analytics in
Government Operations
Cultural Stimulating the creative economy
Incentivized the film Industry
Integrate cultural programs and
tourism
Renovation of Town Centers
Incorporating the diaspora
Cultural Corridor in Santurce
Knowledge Improve connectivity
New R&D and clinical testing
facilities
Value chain completion
Integrating IT with Health services
Implement STEM Curriculum in the
Public School System
Internal and External Network
Creation
= short term = mid term = long term
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Some sector perspectives
• Manufacturing will continue to be a key sector, but it will be a very different activity, one in which the boundary between manufacturing and services will disappear to a large extent.
• Agro industry will almost certainly grow in the coming years and it will be technology driven to a significant extent.
• Advanced services will become the leading driver of economic growth not only as inputs in other sectors but as an export sector.
• The health sector will experience major changes due to a hanging demographic profile. It faces serious challenges with respect to funding.
• The educational system has been hard hot by the demographic transition to a smaller and older population and both public and private educational systems will have to transform themselves to face the new demographics.
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Going Forward
Downside• The impact of the federal tax reform 2017
• Delays in receiving and allocating, as well as mismanagement, of federal funds
• Continuing risks from atmospheric events
• Continued out migration
• Delay in assuring a stable and resilient energy grid
• Increased interest rates and petroleum prices
Upside• Federal funds flow to Puerto Rico as scheduled
• The new CRRO becomes an efficient manager of federal funds
• The Government of Puerto Rico succeeds in securing amendments to the TCJA
• Successfully implementing an energy system that is both stable and resilient
• Right-sizing of Government occurs and fiscal stability is achieved
• Both the DMO and Invest Puerto Rico become effective promoters
In the short term Puerto Rico’s prospects depend more than anything else on the amount of federal funding. Mid and long term prospects depend on local initiatives and particularly on a carefully crafted vision and the accompanying strategies. Underestimating the complexity of returning Puerto Rico to a sustained development path would be a serious mistake.
Prospects for sustained growth face both downside and upside risks, some of which are:
