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Este informe no está disponible en español. CARIBBEAN BUSINESS Puerto Rico’s Top Business Leaders Predict What’s In Store For The Local Economy This Year By FRANCISCO JAVIER CIMADEVILLA January 22, 2004 Hallelujah! Sales are up; hotels are booked; construction is back in gear; manufacturing production lines are open; and businesses are starting to rehire. Is the economic recovery finally here for good? It’s here. It’s been three years in the making, but the much-awaited start of the economic recovery is finally here. After two years of dashed hopes for most local industries, with the notable exception of the banking and finance industries, businesspeople on the island are starting to sense the sweet smell of recovery. Sales are up slightly; hotels are booked; public and private construction projects are slowly cranking up again; and manufacturing companies are starting to staff up. Add to that the gleeful expectation of the economic bonanza that typically comes with an election year, and you’ll know why most businesspeople interviewed by CARIBBEAN BUSINESS for this story are confident 2004 will be a good year for Puerto Rico’s economy. Local economists agree, most of them pinning growth this year at between 3% and 4%. "The U.S. economy has shown considerable growth in the past few quarters," said Mohinder Bhatia, president of Puerto Rico Management & Economic Consultants. "It is expected that in calendar year 2004, the U.S. economy will grow at about 4%. If that materializes, which it probably will, the economy of Puerto Rico should grow at about 3% to 3.5%," said Bhatia. Estudios Tecnicos’ Jose J. Villamil agrees. "In calendar 2004, we should see economic growth of more than 3%. Our projection for fiscal 2004 [ends June 30, 2004] is 2.9% to 3%. But for fiscal 2005, half of which falls in calendar 2004 [fiscal 2005 starts July 1, 2004], we are projecting growth of 3.3%. So our estimate for calendar 2004 is somewhat more than 3%," said Villamil. "I think the consensus among local economists is that we’re going to have a positive year," said H. Calero Consulting President Heidi Calero. "Our growth projection for fiscal 2004 is between 2.6% and 2.7%." The rest of calendar 2004, according to Calero, will get a boost from the fact that it’s an election year. "Of course, we would all love to see growth rates of 4% or 5%, but that’s nowhere on the horizon for Puerto Rico," said Calero. Bhatia points to four major elements to fuel the local economy’s recovery this year: the strengthening manufacturing industry stateside, stronger demand for Puerto Rico’s tourism product, stable interest rates for the rest of the year, and moderate growth in the flow of federal funds to the island. "The U.S. manufacturing industry has picked up considerably in the past few months," Bhatia said. He notes that as Puerto Rico’s economy depends heavily on the manufacturing industry–it accounts for approximately 42% of the island’s gross domestic product–the strengthening of the industry stateside, after years of waning, will give the local economy a boost. "In our case, we will grow because a big chunk of our manufacturing industry is made up of the pharmaceutical, chemical, and electronics sectors. These three are moving ahead, particularly the pharmaceutical sector," said Bhatia. He adds that although the pharmaceutical sector initially saw the Medicare bill recently approved by Congress as a dark cloud looming on the horizon, instead of holding the line on drug prices, the Medicare bill that was finally passed will actually help pharmaceutical companies. "Pharmaceutical companies in Puerto Rico will benefit from this legislation," he said. On the tourism front, Bhatia notes that occupancy rates in December were fairly high and that this trend should hold up for the next three months or so. "These days, U.S. mainland tourists are less willing to go to Europe and more willing to come to Puerto Rico because the restrictions are much fewer," he said. "[Because of the heightened security for international travel] they push you around, whereas for domestic travel–and Puerto Rico is considered a domestic destination–they don’t hassle you so much." According to Bhatia, even though tourism represents merely 2.5% of value added to national income, equivalent to gross national product, its contribution to the economy this year will be positive. He also emphasizes the importance of Federal Reserve Chairman Alan Greenspan’s recent statements that he intends to keep interest rates pretty much where they are now. "This will have a positive effect on the construction industry and on businesses’ capital expenditures on equipment and machinery," said Bhatia. Finally, Bhatia points to the importance of federal funds to the local economy. "I don’t see any reduction in the flow of federal funds transfers to the island. On the contrary, they should grow anywhere between 3% and 5% this year," he said. Villamil warns that, despite the positive news, the economic-growth numbers indicate Puerto Rico’s economy still isn’t growing as fast as it should. "The U.S. economy is estimated to grow at about 3.5% this year. That means we are still growing at a slower pace. This isn’t good," he said. "It means our economy isn’t converging with the U.S. economy–i.e., we aren’t getting nearer to the average income of the U.S. economy." Vicente Feliciano, managing partner of Advantage Business Consulting, agrees. "To the extent the U.S. economy increases the income gap with Puerto Rico, we will continue to have a problem of brain drain because of more-attractive opportunities on the U.S. mainland," he said. According to Feliciano, part of the reason the local economy is lagging behind the national economy, at least in the short term, is that since local consumers and businesses aren’t within the federal tax system, they won’t get a windfall from President Bush’s federal tax cuts. Nor has the island benefited from the multibillion-dollar increase in federal defense spending that has gotten the U.S. economy into high gear. What the local economy does seem to have in common with the overall national economy is fairly strong consumer confidence. "Last year, retail sales was one of the two sectors, along with tourism, that showed stronger growth," said Villamil. According to him, retail sales are expected to increase 5.1% to 5.5% this year. Other sectors that Villamil projects will be strong performers in 2004 are finance, insurance & real estate, tourism, transportation & communications, and public services. Where the jobs are "People in general still have a wait-and-see attitude," said Douglass Hachenburg of Watson Wyatt, a national human resources consulting firm. "I can’t say there have been major upswings in hiring in any industry yet, with the exception perhaps of the pharmaceutical sector. "There has been quite a bit of physical expansion in the pharmaceutical and related biotechnology sectors, and even some in medical devices," added Hachenburg. "As some of those physical expansions move into production mode and start undertaking the strategic role designed for them, they will move into hiring people to actually man those operations. Indeed, some of that hiring has already been going on to ramp up and begin production. "Nevertheless, people will still be cautious about salary budgets for this year," said Hachenburg. "Practices in recent years have been rather conservative in terms of base pay, so we will continue to see pay tied to the employee’s performance as a variable component. That’s a trend we expect will continue." Other than that, Hachenburg predicts the construction industry will see quite a bit of hiring this year. "Those are temporary but critical [jobs] because they mean money directly into people’s pockets, which is the key to getting out of the economic predicament," he said. Bhatia agrees. "The government of Puerto Rico is trying to push the construction sector. This is done every election year, and it’s going to be no different this year. Hopefully, doña Sila would like to help the Popular Democratic Party by perking up the construction sector and creating 15,000 to 20,000 more jobs in this area. I think that would be a very positive contribution to the economy of Puerto Rico this year," said Bhatia. Banking on recovery The consensus among top executives in Puerto Rico’s financial industry is that positive news out of the U.S. mainland economy will lead to a banner year locally in 2004. "The New Year has been ushered in by a host of good economic news on the U.S. mainland, which bodes well for Puerto Rico," said Antonio Uguina, president of Banco Bilbao Vizcaya Argentaria (BBVA) of Puerto Rico. "Stock markets are looking better than at any other time in the past three years; the U.S. labor market is finally firming up; and indicators of U.S. manufacturing activity posted record gains in December. These are all signs that the U.S. economic recovery is underway. A stronger economy in 2004 should yield faster growth in loans and deposits, contributing to the overall economic recovery." "Election-year spending and a more productive manufacturing industry should keep the stateside economy growing at about 4% in 2004, and Puerto Rico should keep pace," said Jose E. Fernandez, chairman, president & CEO of Oriental Financial Group. "With job growth lagging behind economic growth in the U.S. and no sign of significant inflation, the Federal Reserve isn’t likely to raise interest rates for some time, a positive factor for the U.S. mainland and Puerto Rico economies." Miguel Ferrer, president & CEO of UBS of Puerto Rico Inc., concurs. "Puerto Rico’s economy will continue to experience a dramatic improvement," he said. "The New Year has the makings of a solid year, given the strength of the past two quarters in the U.S. economy," said Ramon Prats, president of R-G Premier Bank. "The stock market has appreciated and consumer confidence has improved greatly. Loan delinquencies should go down and an expansion in the consumer areas should finally materialize." Richard Carrion, chairman, president & CEO of Popular Inc., said, "The economy continues to experience a positive development. Yet it still isn’t clear what kinds of capital investments are being made by companies in areas such as telecommunications and personal computers, commonly considered economic locomotives." Victor Galan, chairman, president & CEO of R&G Financial Corp., believes Puerto Rico can expect growth in the areas of finance, construction, tourism, manufacturing, agriculture, and commerce in general. "The year 2003 and its developments have set the stage for general economic growth in 2004. A Dow Jones index of 10,000, a recent annualized U.S. gross domestic product growth over 5%, the Federal Reserve’s emphasis on no immediately foreseeable increase in short-term interest rates, and an election year expected to generate capital investments should be a well-earned recipe for growth in 2004," said Carlos Garcia, president of Santander Securities and senior vice president & chief operating officer of Santander BanCorp. "Puerto Rico should benefit from the strong U.S. mainland rebound in economic growth, since it has been proved that the Puerto Rico economy lags behind the stateside economy," said Angel Alvarez, chairman, president & CEO of First BanCorp. "Election-year events and the Federal Reserve’s commitment to keep monetary policy highly stimulated will ensure growth. The risk lies in strong oil prices, which act as a tax hike." 80° and sunny Local tourism industry executives are confident 2004 will be a good year. "The first quarter looks positive," said Jose Campos, general manager of the Caribe Hilton, which this year will invest $4 million in major improvements. Over at the Wyndham Old San Juan Hotel & Casino, General Manager Helen P. Bayne is optimistic since January got off to a promising start: The occupancy rate for the month should reach the high 70s, she said. With nearly 50 new tourism projects in the pipeline, either at the preliminary planning stage or close to beginning construction, and many others on the verge of materializing, the Tourism Co. has its work cut out for it. It will seek to ensure these ventures reach a successful completion, as they will boost the island’s current inventory of 12,325 rooms, a necessary component to developing the convention market once the convention center in Isla Grande kicks into action in 2005. Construction of the center is reportedly proceeding at full speed. Among the projects slated to open in the next few months are Sol Melia’s 490-room Paradisus Puerto Rico and the 125-room Caguas Hampton Inn Hotel. The 686-room Condado Trio project has a November opening date, but construction is still in a preliminary phase. The Tourism Co. has budgeted $28 million this fiscal year (up $2 million over the previous year) to market the island, especially in secondary markets such as Boston, Los Angeles, Chicago, and Dallas, without forgetting the Northeast, Puerto Rico’s primary source of tourists, according to Executive Director Jose Suarez. The thrust will combine direct marketing, promotions, press, and television ads. Suarez says the leisure market is strong, but group business, hurt by the downward economy, which forced businesses to cut back on their spending, continues to diminish. However, he expects groups to return as the economy shapes up. Nevertheless, if demand for Puerto Rico as a tourist destination were to get stronger, hotels could consider raising their rates. "Higher rates mean higher profits," said Suarez. Hotel occupancy levels in 2003 rose 3% over the previous year, and Suarez expects a moderate increase for 2004. Still being made in Puerto Rico Manufacturing industry executives are cautiously optimistic about the growth prospects for the local industry this year. Although Puerto Rico Economic Development & Commerce Secretary Milton Segarra recognizes that it will be practically impossible to get the U.S. Congress to approve an amendment to Internal Revenue Service Section 956, he says the administration will now concentrate on other efforts to revitalize the island’s economy. "During 2004, there will be more public-works activity as a result of what wasn’t done in previous years," said Puerto Rico Manufacturers Association President Manuel Cidre. "In addition, as the U.S. economy improves, Puerto Rico’s consumers will benefit. "But there won’t be any great surprises in the manufacturing industry," added Cidre. "The worst that could happen already did in 2001 and 2002, and now we have finally adjusted to [the new economic reality]. We still have to be alert, however, to events that can affect us negatively." Cidre says Puerto Rico must adopt legislation that attracts new businesses to the island. "If Puerto Rico doesn’t begin to look for ways to incentivize private corporations’ investment in Puerto Rico, we will lose business not only to competitors such as the Dominican Republic, Singapore, and Ireland," said Cidre. "Now, our real competitors are U.S. states, which are looking for ways to strengthen their economies." Agustin Marquez, executive director of the Pharmaceutical Industry Association (PIA) of Puerto Rico, is hopeful about the New Year because of the continuing expansions by the island’s pharmaceutical companies, which account for 25% of the manufacturing industry’s work force of approximately 120,000. "We feel confident because of the number of expansion projects in the pharmaceutical sector," said Marquez. "PIA members are also looking forward to the approval of the new clinical-trials tax credit, which we believe will be an opportunity to promote R&D as a new pharmaceutical-manufacturing sector in Puerto Rico and to strengthen the network between the island’s scientists and the pharmaceutical manufacturing industry at the national and international levels." Jorge Rodriguez, general manager of Solectron, which operates as a contract manufacturer for major corporations on the island such as Hewlett-Packard Inc., is upbeat. "We already have some positive indicators for 2004," he said. "We are looking at more job contracts for the first quarter, which is usually a slow period in the electronics sector. And for our contract manufacturing projects, the work stands pretty much solid. None of us is out of the [economic] hole yet, but the tendency is for our clients to be losing less money, and that gives me some reassurance." Several manufacturing companies have announced new expansions or will finish expansions and product transfers in 2004. In Juncos, Medtronic Med-Rel Inc. just announced a new $50 million expansion to its soon-to-be inaugurated $35 million plant, increasing the size of the operation from 102,000 square feet to 120,000 square feet and adding 200 jobs to its current work force of 400. Before the end of 2003, Amgen doubled its $400 million biotechnology-plant expansion, also in Juncos, adding another 500,000 square feet and 200 jobs. By 2005, Amgen will provide more than 1,000 jobs. Abbott Laboratories’ $350 million biotechnology plant is scheduled to be completed on time and on budget by October 2004, with a work force of 200. The new 310,000-square-foot operation will bring to Puerto Rico the production of Humira, a treatment for rheumatoid arthritis. A $20 million expansion to Abbott’s Humacao contract manufacturing operations will create 20 to 25 jobs and round out Humira’s start-to-end manufacturing process in Puerto Rico. Gurabo’s Johnson & Johnson (J&J) Janssen-Ortho LLC pharmaceutical drug manufacturing facility will be working on a $250 million expansion that will create 125 jobs by the time it is ready in 2006. In addition, J&J’s Ortho Pharmaceuticals plant in Manati is undergoing a $45 million expansion that will add 30 new jobs over the next two years and consolidate the company’s oral-contraceptive manufacturing operations. Construction on Eli Lilly’s $450 million biotechnology plant in Carolina is slated to be finished in late 2004 or early 2005, when the federal regulatory validation process could start; operations could then begin in 2006. The current pharmaceutical facility in Carolina will undergo a $175 million expansion for a fill-and-finish facility, the final stage for pipeline products such as Symbyax, PKC, Cymbalta, and Yentreve, which are pending regulatory approval. Eli Lilly is also building a new $125 million state-of-the-art bulk manufacturing facility in Mayaguez to produce Strattera, a new nonstimulant-treatment for attention deficit disorder, expanding the complex’s work force from 300 to 450. Advertising bonanza With the election year expected to raise advertising billings by $20 million, local advertising insiders are predicting double-digit growth for the industry in 2004. Advertisers in Puerto Rico now spend about $700 million a year through advertising agencies and another $300 million directly from businesses to media without going through an advertising agency. The local advertising industry is reported to have grown 3% in 2003, and executives from some of the major agencies on the island are projecting 10% average growth this year. Many, however, hope to do even better. "Our expectations for 2004 are high; we are looking closely not only at the indicators of a healthy economic recovery but also at the positive attitude of business owners and consumers," said Fernando Mendoza, vice president & general manager of Premier Euro RSCG. With the U.S. stock market climbing and expectations of a 3% to 4% increase in the island’s gross domestic product, local advertising executives and their clients feel confident in their hope for a year of further recovery. "Our business is tight, and signs point to a positive year," said Carmen Cedre, general manager of FCB Worldwide (P.R.) Inc. "In our case, we strive to achieve a percentage of growth for our clients that is more than the growth of the economy," said Jaime Fortuño, general manager of Lopito, Ileana & Howie Inc. "We have to remember that our clients are our health." An election year is seen as a tremendous growth opportunity for advertising agencies and their clients, even those not involved in the political process. "Politics, like everything else, follows a cycle. We expect to see a boost this election year, but we haven’t seen anything to lead us to believe it will be substantially more than in the previous election year," said Fortuño. Without a doubt, political campaigns are going to raise billings within the advertising industry. It is estimated that services related to political campaigns will bring in $20 million this year. The political activity is likely to prompt the use of a wider variety of advertising media. "Given that this is an election year, the media and advertising pipeline will be full, which will lead secondary and alternative media to benefit along with the principal media [television, radio, press]," said Mendoza. The political year will affect not only the advertising industry but the whole economy. "Politics is a centrifugal force in that it generates more activity from all the products that are consumed as a consequence of these events," said Ramiro Millan, president of BBDO Puerto Rico. "It is an injection of money not only for the agency involved but also for all those products; people buy new clothes and shoes to wear to their meetings where they enjoy food, drinks, and other products." CARIBBEAN BUSINESS Associate Editor Marialba Martinez, Staff Reporters Lorraine Blasor and Luis Ramos, and Supplements Writer Rossie Cortes contributed to this story. This Caribbean Business article appears courtesy of Casiano Communications.
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