The economy of the Commonwealth of Puerto Rico is beginning to stabilize, according to an industry report from Sterne Agee released today. Analysts Todd L. Hagerman and Robert Greene make the case that a number of economic indicators point towards a bottoming in the commonwealth’s recession and the possibility of an impending return to growth.
Puerto Rico economic doldrums
The economy of Puerto Rico 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. The report projects an overall 4.8% decline in EAI for Puerto Rico for 2013, but also makes the argument there is a chance of a return to growth for 2014.
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Light at the end of the tunnel
Hagerman and Greene out that the Puerto Rico Economic Activity Index showed a positive month-over-month growth rate for the first since October ’12. Furthermore, monthly leading economic indicators such as the economic activity index (EAI) also held steady.
Of perhaps the greatest import, employment data has started to turn positive, with total employment at a four-month high. The analysts emphasize it is also very good news that the largest gains in employment derive from private sector growth.
As a final caveat, Hagerman and Greene point out that it will take at least a few more months to get a true picture of the state of Puerto Rico’s economy. “Our outlook suggests that the true strength/weakness of Puerto Rico is unlikely to emerge until at least mid-2014 given the distortions built in to the 2012 data (election year political spending) and the continuing adjustments to the budget reform enacted in July’13.”
Puerto Rico banks a Buy
Based on their earlier-than-expected return to growth scenario, Hagerman and Greene give several of the beaten-up Puerto Rican banks a Buy rating. “Given our more optimistic outlook for the prospects of the budget reform and a relatively low probability of a government debt default, we continue to reiterate our BUY ratings on each of the heavily discounted Puerto Rico banks: BPOP, FBP OFG.”