Puerto Rico’s November economics data reveals early signs of stabilization of the Commonwealth’s economy, according to an industry report from Sterne Agee.
Todd L. Hagerman and Robert Greene of Sterne Agee point out for the first time since November 2012, the Puerto Rico’s EAI posted its third consecutive positive month-over-month growth rate.
Month/month encouraging, year/year challenging
Sterne Agee analysts point out that while the Commonwealth’s economy remains weak and the Economic Activity Index remains down from a year ago, the relative stability in Puerto Rico’s economic indicators in recent months should help to allay fears of an accelerating decline in the underlying economy.
The analysts note the Puerto Rico Government Development Bank (GDB) EAI advanced 10 bps from October, though this represents a 5.7% year/year decline from November 2012 levels.
Thus, Sterne Agee analysts believe that while the third consecutive month of positive month/month growth remains encouraging, Puerto Rico’s year/year comparisons remain challenging.
In its December report, Sterne Agee analysts pointed out that Puerto Rico’s economy has been laboring through a recessionary environment for eight years now, and has seen the yields on its bonds soar, but there are signs the worm is turning.
Regulatory comfort
Todd L. Hagerman and Robert Greene of Sterne Agee point out BPOP has formally requested the repayment of its TARP, together with its draw down of its ownership in EVERTEC. Moreover, the analysts believe BPOP appears to be in the final stages of repaying its $935 million of TART trust-preferreds.
The analysts note OFG too has recently announced a 33% increase in its quarterly dividend to $0.08 per share. The analysts believe the implicit regulatory approvals surrounding these capital actions offer a degree of comfort with the current Puerto Rican economic climate.
It may be recalled that last month Moody’s Corporation Investors Service had put Puerto Rico’s general obligation rating, currently at Baa3, on a review that may lead to a downgrade. The rating agency cited weakening liquidity, increasing reliance on external short-term debt and constrained market access, within the context of a weakened and now sluggish economy.
Strength / Weakness of Puerto Rico
Sterne Agee analysts point out that the true strength / weakness of Puerto Rico is unlikely to emerge until at least mid-2014 given the distortions built into the 2012 data consequent to election year political spending. The analysts also note the budget reform initiatives towards new corporate and consumption taxes. However, they believe the recessive impact of an overall higher tax regime will take time for the Commonwealth’s economy to adjust before ultimately creating a more stable investment environment.
Todd L. Hagerman and Robert Greene of Sterne Agee believe despite the monthly volatility, Puerto Rico’s banking sector has largely budgeted for a very conservative economic scenario, with expectations for an economic contraction through 2014.
Considering the analysts’ more optimistic outlook for the prospects of the budget reform and a relatively low probability of a government debt default, they continue to reiterate their Buy ratings on each of the heavily discounting Puerto Rico banks such as BPOP, FBP and OFG.
