Spending Cuts, Demographics to Weaken Puerto Rico's Long Term Growth

• Over the coming decade, Puerto Rico is likely to see a short-term peak in economic growth, fueled by federal aid inflows and a rebound from the COVID-19 pandemic, which will fade as structural headwinds return to the fore. 
• Fitch Solutions expects that an influx of federal aid will fuel a return to growth in Puerto Rico, stimulating both private demand and the construction industry as the island continues to rebuild from hurricanes Irma and Maria, which hit in September 2017, and a series of earthquakes in early 2020. 
• After a 3.2% contraction in FY2020 (July 2019-June 2020) due to COVID-19, growth is forecast to eventually return to positive territory by FY22 as federal aid arrives and the rollout of vaccines allows domestic activity to recover. Growth of 1.8% is anticipated from FY2022 to FY2025. 
• However, as federal aid declines in the years thereafter the impact of fiscal austerity, a poor operational environment and a shrinking labour force will weigh on Puerto Rico’s economic growth. 
• Notwithstanding, the agency also notes a number of positive trends, including the likely resolution of Puerto Rico’s bankruptcy, growth in the pharmaceutical and tourism sectors and a series of economic reforms which could boost the territory’s long-term upside.

(Source: Fitch Solutions)