Economic Analysis - Surplus To Remain Sizeable In Coming Years - JUNE 2017


BMI View : Weak internal demand will see Puerto Rico ' s current account remain in surplus in the years ahead. Additionally, low investor interest in Puerto Rican assets will see the territory's negative net international position shrink relative to GDP.

Puerto Rico will maintain a sizeable current account surplus in the years ahead, as the territory's deep economic contraction will continue to suppress import demand. In line with our view that fiscal austerity will likely keep Puerto Rico in recession through 2020, we expect that the collapse in domestic demand will see the territory's goods and services trade deficit continue to narrow, while transfers from the US government remain robust. After reaching 12.3% of GDP in 2016, we forecast the surplus to reach 12.9% in 2017 and 14.5% in 2018, narrowing thereafter.

Surplus Driven By Falling Imports, Unilateral Transfers
Puerto Rico - Current Account Breakdown
Source: FAFAA, BMI

Collapse In Domestic Demand To Support Current Account Surplus

Puerto Rico's goods trade surplus will widen in the years ahead, as the territory's ongoing economic recession will weigh on import demand. Real GNP has fallen 14.2% since 2007, compounded by a continuing outmigration of residents to the mainland US, and we expect that significant fiscal austerity will keep the economy in contraction through 2020 ( see 'Restructuring Will Keep Economy In Recession', August 9 2016). This will continue to constrain consumer purchasing power, weighing on import demand. Additionally, as the economy and public services deteriorate, migration from Puerto Rico to the US will accelerate, further diminishing domestic demand.

Economic Activity Unlikely To Turn Positive Soon
Puerto Rico - Economic Activity Index
Source: FAFAA, BMI

Exports will rise in the next two years on higher demand from the US, which receives more than 80.0% of all Puerto Rican shipments abroad ( see ' Growth To Pick Up, But Miracles Unlikely ' , January 10). However weak investment, population decline and poor infrastructure will suppress export growth moving forward. That said, the goods trade surplus will remain large in spite of weak exports given the continued collapse in import demand.

US The Driver Of Demand For Exports
Puerto Rico - Goods Exports, USDmn
Source: FAFAA, BMI

Puerto Rico's sizeable services trade deficit will keep the overall goods and services trade in deficit for the foreseeable future. The deficit reached USD33.1bn in 2016, or 47.3% of nominal GDP, largely due to income on investments. Given that Puerto Rican investments abroad will remain minimal over the coming years, we expect the services deficit to remain wide moving forward .

Rising Poverty Will Draw Federal Transfers

Unilateral transfers from the US will offer additional support to Puerto Rico's current account. In 2016, the US federal government sent USD16.4bn to Puerto Rico, and we expect this number to climb in the years ahead as the poverty rate in the territory increases. The bulk of transfers are made up of Social Security, Medicare and SNAP funds, the latter two of which have increased in line with the rising poverty rate in Puerto Rico. We note that Medicare funds are granted under the Affordable Care Act, which has come under significant scrutiny in Washington. The repeal of these funds would reduce Puerto Rico's current account surplus, though given uncertainty over healthcare policy in the US we have not yet factored it into our forecasts.

Investment Will Continue To Decline

Puerto Rico's ongoing economic crisis will see investment into the territory continue trending downwards in the years ahead. Given a weak domestic market, shrinking labour pool and uncompetitive operational costs, the stock of long-term investment into Puerto Rico declined 26.0% between 2011 and 2016. As this trend continues in the years ahead, Puerto Rico's net international investment position will narrow from a deficit of 26.1% of GDP figure recorded in 2016. However, while this shift in Puerto Rico's balance of payments position is an improvement in the short-term, it reflects substantial weakness in the territory's economic growth outlook in the next several years.

Negative NIIP Will Continue To Shrink
Puerto Rico - Net International Investment Position, USDmn
Source: FAFAA, BMI