Business Monitor International on Puerto Rico - May 2011

POLITICAL RISK - Budget Increase On Fiscal Health

Puerto Rican Governor Luis Fortuño has announced a US$110mn boost to spending in the budget for GY2012 (beginning in July 2011), the first expenditure increase in over two years. The higher spending is predicated on a rise in projected revenues, based on improving economic conditions as the island emerges from five years of recession. The areas set to benefit from increase expenditure are public security, health and education, and could in our view mitigate some of the anger over aggressive fiscal austerity measures introduced by the Fortuño administration.
Puerto Rico scores 64.0 in our short-term political risk ratings.

ECONOMIC RISK - Sales Taxes Indicate Consumer Strength

Sales tax revenue in March was 8.8% higher than in the same period in 2011, following 4.5% and 3.1% y-o-y increases in January and February, respectively. In our view this indicates that the economic recovery in Puerto Rico is finally gaining traction as unemployment comes down and consumer purchasing power increases. Moreover, we believe these positive readings reflect the boost to private spending generated by Fortuño's cuts to personal taxation levels in late 2010, suggesting that both private consumption and sales tax revenues should continue to tick up through 2011.

Puerto Rico scores 59.4 in our short-term economic risk ratings.

BUSINESS ENVIRONMENT - EPA Tourism Agreement

The US Environmental Protection Agency (EPA) has signed a memorandum of understanding with the Puerto Rican Tourism Agency to promote sustainable tourism practices. The EPA agreement is the first of its kind, and in our view should enhance Puerto Rico's green credentials, boosting its nascent eco-tourism industry. Expanding and diversifying the industry is a key facet of the administration's structural economic reforms. As such, a number of ongoing infrastructure upgrades - including a planned new airport - combined with the EPA agreement should allow the sector to contribute positively to the island's economic recovery in the coming years.

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