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Local business executives look forward to a mild but certain economic upturn in 2002, trusting the year will bring strengthened consumer confidence, higher revenues, and a return to profitability.

By Francisco Javier Cimadevilla

January 24, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Slowly but surely: While stateside and local economists almost unanimously predict a low-gear recovery this year, it won’t be peaches and cream in 2002.

Gently. Mildly. Softly. Just as it started–before its more dramatic free-fall in December 2000–the economic recession that has afflicted the stateside and local economies throughout most of 2001 will leave us this year.

Exactly when is still a matter of debate. But almost unanimously, local business executives and economists interviewed by CARIBBEAN BUSINESS are looking forward to an economic recovery and an improved business climate in 2002.

But it will not be a stellar year. In fact, many believe the that first signs of a recovery will not be felt until the second half of the year and any growth will be only moderate.

Moreover, in an economy so dependent on the government, such as Puerto Rico’s, the tightness of the commonwealth’s budget during the rest of fiscal 2002 (ends June 30) and, in all likelihood, throughout fiscal 2003 (July 1, 2002 through June 30, 2003), will spell trouble for thousands of government employees and hundreds of companies for whom government procurement is an important part of their businesses.

Still, in the wake of the slowdown-turned-recession experienced last year, the outlook in 2002 is indeed welcome news.

Last year saw the brunt of an economic slowdown that first reared its ugly head in November 2000. As the year progressed, continued erosion in the stateside economy and a local government administration, unable to get its act together to jump-start local business activity put an end to years of moderate but consistent growth.

Then, just as the U.S. mainland economy started to show signs of recovery, Sept. 11 stopped it in its tracks, sending it in a tailspin with immediate repercussions on the island.

Miraculously, four months later, the economy seems to be picking up where it left off. In recent weeks there have been signs that the U.S. mainland economy is stabilizing after huge job losses in the months immediately after the terrorist attacks. Consumer spending is continuing to rise, helped by substantial declines in energy prices. Across the U.S. mainland, expenditures on new office buildings, roads, public-works projects and homes have been increasing after Sept. 11. And with the significant rebound in the growth of American workers’ productivity the specter of inflation remains a distant danger.

"To be sure, a great deal of real economic pain has been felt over the past year and a half," Federal Reserve Chairman Alan Greenspan declared earlier this month. "[But] if the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a relatively mild downturn."

Gimme a U

Just as surely, however, the recovery shaping up for the year will also be relatively mild. It’s what economists call a "U" as opposed to a "V-shaped" recovery, in reference to the softer shape of the upturn.

For example, the consensus estimate of the 55 economists who participated in The Wall Street Journal’s recent economic-forecasting survey calls for real gross domestic product-adjusted for inflation–to rise at an annual rate of just 0.87% during the first quarter and 2.14% during the second quarter, picking up momentum during the second half of the year, with growth rising to 3.6%.

Puerto Rico’s economy presents a similar scenario. "We don’t see a recovery until the latter part of calendar 2002. So for fiscal year 2002 (ends June 30) we’ll be in recession," Estudios Tecnicos’ Juan Lara told CARIBBEAN BUSINESS. For fiscal year 2002 (July 1, 2001 through June 30, 2002) Estudios Tecnicos forecasts real GNP growth at only 0.6%.

But the picture for the rest of the year, which includes the first six months of fiscal year 2003, is much rosier. Estudios Tecnicos pins real economic growth next fiscal year at 3.3%.

"If you average the last six months of fiscal 2002 and the first six month of fiscal 2003, you end up with real economic growth for the 12 months of calendar year 2002 of about 2.0%," said Lara. "This has been a brief and mild recession–which is surprising given the length and strength of the economic expansion that preceded it–that will be followed by a prompt recovery."

Other economists agree. "I’m an optimist. I believe that things will pick up," said Advantage Business Consulting Manager Vicente Feliciano. "You have an early sign in Christmas retail sales which, although not great, were much better than originally expected."

A dark cloud in the local economic horizon could be the relatively tight budget situation facing the local government administration. Faced with a $560 million budget deficit this year, the administration has been making end meets by tapping non-recurrent revenue sources, a questionable practice that could have adverse fiscal effects down the road.

Announcement of a fiscal year 2003 budget is not expected until next month when the governor offers her State of the Commonwealth address to a joint session of the Legislature. But with a slow economy in 2001, tax revenues could be expected to come in low, possibly forcing budget cuts that could affect government payroll and procurement.

Surprisingly, tax collections for the first five months of fiscal 2002 (July through November 2001) came in stronger than expected, more than 4% above collections for the same period in 2000.

Still, "this year, government is not going to be the sector carrying the economy," said Feliciano. "Most likely, it’s going to be tourism, which already shows some recovery likely to be stronger later in the year, construction–including, of course, government construction–and high-tech manufacturing."

But even a tight current budget should not deter government expenditures in capital improvements, a.k.a., government construction, for which the money is raised in the bond market, not through tax collections. Taking advantage of prevailing low interest rates, the Government Development Bank has raised billions of dollars in the bond market in the last few months. When put to work on construction projects this year, they are expected to have a significant multiplying effect.

In fact, all signs indicate that 2002 will be a good year for the local construction industry. Low interest rates, high demand for housing, stable energy prices, faster permit processing, and billions in public and private sector investment will help the local construction industry maintain its role as a backbone of the island’s economy.

Estudios Tecnicos projects that real growth in construction expenditures–both private and government–in fiscal year 2003 will be a healthy 8%, compared to the modest 1.5% growth forecast for fiscal 2002, with total investment in construction in fiscal 2003 (begins July 1, 2002) to reach $8.325 billion.

"In real terms, the island’s investment in construction will not grow during the current fiscal year, but is expected to bounce back beginning in fiscal year 2003," Estudios Tecnicos President Jose Villamil told CARIBBEAN BUSINESS.

For FY 2003, residential construction investment will amount to $2.484 billion, commercial & industrial to $4.408 billion, and public works to $1.431 billion.

The high number of private sector construction projects (mostly housing) in the pipeline will continue to sustain the industry, while public sector (infrastructure) projects will contribute as well, although not as in years past.

Tourism and retail to rebound

In Puerto Rico as well as other Caribbean islands, the tourism industry is bouncing back sooner than expected, with hotel occupancy rates steadily increasing since Sept. 11, but profitability throughout the year will remain an issue because customers are aware it’s a buyer’s market, with hotels offering the lowest rates in years.

"The month of January is stronger than we had forecasted," said Reinhard Werthner, general manager of The Westin Rio Mar Beach Resort & Country Club, referring to the fact that most hoteliers had to redo their original 2002 projections after Sept. 11 basing them on the worst-case scenario. "However, customers are negotiating room rates."

With rising occupancy being generated in part by discounted rates, hotels’ profitability remains a question.

"Bookings are not filling hotel rooms now," Ralph Taylor, president of the Caribbean Hotel Association said, adding that the outlook through March is a tough one. "But we are optimistic that an increase in economic movement and, thus, in travel will be evident by the second or third quarter of this year."

Despite a 5.1% drop in occupancy reported so far in fiscal 2002 at local hotels and paradores, hoteliers say it’s not so bad considering the circumstances.

"We are heading in the right direction," said Puerto Rico Hotel and Tourism Association President Rick Newman. "The month of January was above expectations and although advance bookings are behind for February compared to last year, short notice bookings should push up those numbers."

Optimism is also shared in the retail industry prompting many retailers to continue previously planned expansions.

"Oil prices have decreased and this helps consumers have more money in their pockets. Also, the Fed has cut interest rates drastically, which stimulates consumer spending and commercial activities. Another factor that could prove to help improve the economy is the stabilization of the stock market," said Jorge Fournier, executive vice president of Commercial Centers Management Inc.

Atilano Cordero Badillo, president of Empresas Cordero Badillo and Grande Supermarkets, said he has faith that the supermarket industry will also continue its positive performance.

Meanwhile, this year the supermarket industry will continue to see consolidations as Wal-Mart acquires Amigo and White Rose purchases a major stake in Grande Supermarkets.

Also to benefit from strengthened consumer confidence this year will be the auto industry. In fact, the events of Sept. 11 didn’t stop the local industry from surpassing the 120,000 new vehicle sales mark, which surprised many experts. Now, the majority of them are predicting a great 2002–on par or slightly above last year’s numbers.

"This year is expected to be as good as or better than last year continuing the trend of more-than-120,000 vehicle sales for the past three years," said Bob Weldon, president of Toyota de Puerto Rico, distributors of Toyota–the No. 1 brand on the island last year–and Lexus vehicles. "In our case, we expect a sales boost due to the introduction of new vehicles."

Weldon also predicts that dealership facilities expansions and updates are likely to go forward.

Sales are also expected to rise in 2002 because fleet purchases by the car rental industry–postponed after Sept. 11–will resume this year.

"We expect increased vehicle fleet sales to car rental companies this year. These were postponed last year due to the decline in tourist visits to the island. The local government should also be increasing its fleets, now that this administration is in its second year in power," said William Wynne, district manager for Puerto Rico and the U.S. Virgin Islands of Ford Motor Co.

Last year’s winners will repeat

One of the industries that performed well last year despite the economic slowdown, telecommunications, is certain to continue to reap the benefits of an ever growing local market.

"In a time of slowed economic growth, companies will be working to increase productivity and efficiency, thereby reducing expenses. This is an opportunity for telecommunications companies–if they can show how their services meet these needs," said Kari Jordan, president & CEO Islanet Inc, local telecommunications company. "An example would be shifting employees from working out of the office into their homes, reducing rent, and using high-speed data connections and virtual private networks to facilitate this."

Jordan also predicted that new companies and services would enter the local market this year.

"Existing companies, like cable TV companies, will enter the high-speed Internet market, and new companies will resell or build networks to provide business and residential high-speed Internet. We will also see Voice over Internet Protocol (VoIP) become a reality for many rather than just the technocrats," she said.

According to Jordan, it will not all be smooth sailing. Wireless rates will stabilize, but carrier network quality may continue to suffer.

"Local telecommunications in Puerto Rico are right now at a crucial moment. Puerto Rico still has some progress to achieve in areas like broadband, or high-speed connections, and VoIP," said Victoria Medina, general manager for TLD Puerto Rico. "Regulation and the deployment of new technology will have to move at the same speed the market requires."

"We expect the wireless market to continue its growth until reaching a penetration of more than 40% by the end of the year. We also expect people to shift into text messages instead of voice," said Claudio Hidalgo, general manager of MoviStar.

"This year [2002] will bring the next evolutionary step in wireless data, with exciting data applications for consumers and more sophisticated ones for businesses," said Raul Burgos, general manager for SunCom AT&T-Puerto Rico. "This year we will also see another generation of handsets with more data capabilities, among them entertainment and information features such as FM radio and MP3 within the same unit."

As a considerable number of wireless carriers strive to gain market share, it’s not inconceivable that some may merge, particularly now that changes in Federal Communications Commission (FCC) regulations have made such mergers easier from a technological standpoint.

"With the spectrum cap being lifted by the FCC, we will see more mergers, acquisitions, and consolidations from various companies in the industry," said Burgos.

Another winner last year, banking, is likely to repeat.

Bankers consulted by CARIBBEAN BUSINESS recognize that topping record-breaking growth rates achieved in 2001 won’t be easy. But they say several factors point to 2002 as shaping up to be another good year for the industry.

BBVA Puerto Rico President Antonio Uguina, for one, is among industry leaders expecting the Federal Reserve to make one more interest rate cut next week. He expects interest rates will not begin to rise until economic recovery clearly takes hold.

Even when interest rates on Fed funds do start to rise again, R&G Financial Chairman of the Board Victor Galan expects rates to remain "comparatively and favorably low" throughout most of 2002.

"We see strong mortgage production in 2002," Galan said, though he cautioned that permitting delays by the new administration early in 2001 might have some effect this year.

Meanwhile, Doral Financial Corp. Chairman of the Board & CEO Salomon Levis also expects strong activity in mortgage lending for new housing as well as refinancing will continue well into the next year.

"In fact, based on past experience, when a higher interest rate scenario does come about, it could actually increase the proportion of mortgage production of refinanced loans, because higher borrowing costs for personal and auto loans, credit cards, and other credit make the lower mortgage interest rates more attractive to consumers in terms of cost and the added tax advantage," Levis said.

Increasing investments in technology will also be a part of the intensely competitive commercial and mortgage-banking scenario, the bankers indicated.

This Caribbean Business article appears courtesy of Casiano Communications.
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