PUERTO RICO HERALD: In The Shadow Of Disaster

Puerto Rico’s economy and businesses managed to escape last week’s terrorist attacks on the nation relatively unharmed. Will we be able to clear the dark cloud hovering above the U.S. economy in the aftermath of the tragedy?

It was another kind of Black Tuesday for Wall Street last week. This one hit much harder on Main Street across the country. Including Puerto Rico.

But material losses were also staggering, certainly in the tens of billions of dollars. The financial, insurance, and airline industries are certain to suffer the biggest hit.

Yet it is the emotional and psychological toll of last week’s terrorist attacks on New York and Washington D.C. and their real, short-, medium-, and long-term effects on consumer and investor confidence that most worries economists and business people.

While the immediate toll on Puerto Rico’s economy of last week’s tragedy appears to be marginal, the medium to long-term outlook is clouded by the possibility of a recession in the U.S. economy and the effect on consumer and investor confidence of a long, protracted, and uncertain military engagement abroad.

"If investors perceive this as a single incident, its effect on the island’s economy will be minimal," economist Jose Alameda told CARIBBEAN BUSINESS. "But if it’s perceived as permanent, if there’s uncertainty regarding more terrorist attacks and people become afraid of flying, then it would create a bigger problem, bringing the U.S. faster into a recession. And if the U. S. goes into a recession, so will we."

For most economic sectors in Puerto Rico, with the notable exception of tourism and the securities industry, the week itself was mild, compared to the disruptions typically caused by natural disasters, such as the familiar hurricane.

Banks weathered the storm with characteristic aplomb. "There was not an emergency," Puerto Rico Banking Association Executive Vice President Arturo Carrion told CARIBBEAN BUSINESS.

Well capitalized and well managed, the island’s banking sector had the necessary resources to go through the week without facing a liquidity crunch. Still, the Government Development Bank promptly made available more than $400 million in credit lines to local banks, just in case. "It did give our institutions an additional option to help avoid any problems," said Carrion.

As occurred elsewhere across the country, the local securities industry withstood the losses of commissions unearned during four days of no trading in the stock market–the longest since World War I.

Although traffic at shopping malls was somewhat dwindled, the week was uneventful for a retail sector already battling a sales slump. Even air service interruptions did not affect the supply of fresh foods at local supermarkets. "Retailers have plenty of inventory," said Goya President Frank Unanue.

Likewise, manufacturing production kept a steady pace in an industry with sufficient inventory of manufacturing inputs to overcome much longer disruptions.

It was the tourism and travel sector that sustained the biggest impact by far. With the airport closed, stranded passengers across the country, unable to reach the island and cancellations of future trips pouring in, last week wasn’t a pretty picture for the local tourism industry.

"Business is dead. We are full of cancellations and now what are we supposed to sell?" said travel agency Markets & More’s Bernice Cordero.

Worse yet, hopes of big gains in the upcoming high tourism season went up in smoke with the blast.

Already late for this year, Puerto Rico’s brand new destination campaign will have to be postponed further. The New York area is Puerto Rico tourism’s bread and butter. Running beautiful T.V. ads luring New Yorkers to get on a plane to Puerto Rico this winter might even backfire. "Right now it could be a waste of money. We must wait until the country is ready to move on," said Puerto Rico Hotel & Tourism Association President Reinhard Werthner.

American Airlines’ local Managing Director Enrique Cruz disagrees. "No later than 30 days from now, the island’s tourism executives should be ready to launch the destination promotion, full speed ahead," he said. Many others in the tourism industry concurred saying that while overseas travel by Americans will drop, Puerto Rico retains the advantage of being a nearby, safe, domestic destination.

"There’s no denying the short-term effects are going to be devastating for the tourism industry. After any airline incident, consumers suffer a fear factor over flying for a while," tour and travel expert Esther Cohen said.

PRHTA Executive Vice President Erin Benitez agrees. "Our industry is a nervous one. Tourism is the first thing affected when people are feeling insecure. We will definitely feel an immediate short-term impact."

Other than the very clear effects last week’s national emergency will have in the travel and tourism sector locally, performance by other economic sectors in Puerto Rico will depend on what on how the U.S. economy absorbs the aftershock. And there’s no unanimous opinion on that.

Conventional wisdom has it that a blow of this magnitude on an economy already struggling on the brink of a recession spells disaster. "The U.S. mainland is very close to a recession, and probably will slip into one with these events, but here in Puerto Rico, I don’t think it will come to that," said Estudios Tecnicos President Jose J. Villamil. "Our economy has buffers which will prevent us from going into a recession," said Villamil referring to the ability of the local underground economy and the $17 billion-a-year influx of federal funds to prop up the island’s formal economy.

Others are not pessimistic. Instead of going into a recession, recovery of the U.S. economy might be at hand. "The U.S. dollar is still very strong, which means there’s pretty good international confidence in the U.S. and the U.S. economy," Popular Securities President Kenneth McGrath told CARIBBEAN BUSINESS on Friday. "The decision by Congress to inject a very significant amount of money into the economy because of the disaster means federal and defense spending will be up, having a fiscal stimulus to the economy that wasn’t there before," said McGrath.

Congress approved an initial $40 billion emergency spending bill Friday, to provide the aid package to help with rescue and cleanup efforts underway at the World Trade Center in New York and at the Pentagon in Virginia. It is expected that Congress will increase recovery and military spending substantially above that amount in the next few weeks.

"After [Hurricane] Georges hit the island, people worried about the economy going south, and what happened was that $4 billion in federal aid were injected into the local economy, really helping it," recalled McGrath. "The same thing is going to happen in the States."

"The U.S. financial system remains strong and solid, despite the economy experiencing a weakening process over the past year," Oriental Financial Services Corp. Executive Vice President & Principal Jose R. Fernandez said. "The Fed has done an excellent job in reducing interest rates, and we expect more reductions, which will inject additional liquidity into the system and help the economy get out of the slump."

Indeed, one hour before the start of trading on Monday, the Federal Reserve announced a further reduction in short term interest rates of one-half of a percent, or 50 basis points.

It is expected that in the first few days and possibly weeks, we will see a big drop in the stock market. Much of that will be initial panic selling and professional traders bringing the market down to then scoop up low price stocks. A few weeks later, the market will probably reach or even pass the levels of the period prior to the attack.

Banco Popular Senior Executive Vice President David Chafey said that Federal Reserve interest rate cuts should benefit not only the banking sector, but also the rest of the economy and boost consumer confidence.

While the initial strain of the stateside economy to recover will also be felt in Puerto Rico, according to Chafey, the unity and resolve of people and institutions to recover may actually help accelerate the economy’s recover from the current slowdown.

Unsavory as they are in every other respect, wars, at least historically, typically bring about a boost to the economy. The big question remains, what will be the effect of the war declared on the U.S. last Tuesday, a war which President Bush convincingly declared the U.S. intends to fight and win. Part of the reason for the ensuing economic uncertainty is, of course, that as oft repeated this week by the President and every other government official, this will be a different kind of war. What kind? No one really knows yet.

What is predictable, given the likely intended area of engagement, is that energy prices will be affected. According to Diversified Petroleum Industries Inc. President Antonio Cruz, if there’s a war, gas prices could increase up to 10% to 15% reminding us that during the Persian Gulf War, prices increased more than 40% because the conflict affected distribution chains from oil production areas. "If there is major conflict, we would depend mostly on the fuel coming from Venezuela. It all depends whether those distribution lines are open or blocked," said Cruz.

Texaco de Puerto Rico Marketing Manager Candido Rivera advises consumers to be alert to the behavior of the market. "For now, I think we all have to wait and see what happens," he said.

And some of what should happen is the infusion of a considerable dosage of confidence to the business and consumer markets. Government and economic leaders stateside spent the latter part of the week doing just that.

"The Fed’s expressions bring confidence to the business sector," said Villamil. "I think the Puerto Rico government must make a strong statement as well, not because the response is going to make an objective difference, but because it will generate a climate of confidence, which is what local investors, business people, and consumers need to hear right now."

This Caribbean Business article appears courtesy of Casiano Communications.
For further information please contact www.casiano.com

CARIBBEAN BUSINESS

In The Shadow Of Disaster

Black Tuesday: While economic impact last week was marginal, island’s tourism and travel industries emerge as big time losers.

BY Francisco Javier Cimadevilla