Puerto Rico: An Economic Overview British Investment Mission

Conrad Condado Plaza June 9, 2010

1 Presentation Plan

Selected Economic Indicators 3 A Regional Economy of the U.S. 4 Recent Economic Performance 9 The Business Environment 13 Manufacturing Retail Internet penetration Advanced Services Mid Term Perspectives 24 Concluding Comments 25

2 Basic Economic Indicators

Selected Indicators, 1990 and 2009

Indicator 1990 2009

Gross national product $21,619 $62,759 Gross domestic product $30,604 $95,708 Personal income $21,105 $59,035 Disposable personal income $19,914 $56,099 Personal consumption expenditures $19,827 $55,565 Gross fixed domestic investment $4,771 $9,842 Construction investment $2,493 $4,409 GNP per capita ($) $6,155 $15,846 Employment (Household Survey) ('000) 963 1,168 Unemployment rate 14.3 13.4 Labor force participation rate 45.5 44.1 Population (Th) 3,512 3,961 Source: Planning Board, Statistical Appendix , 1999 and 2009.

3 Puerto Rico: a Regional Economy of the United States

Puerto Rico’s External Trade - United States Fiscal years - In millions of dollars

60,000

50,000

40,000

30,000

20,000

10,000

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Exports 21,187. 27,397. 30,535. 33,763. 41,367. 41,739. 47,647. 45,418. 46,703. 49,651. 46,324. 47,262. 43,543. Imports 13,317. 13,225. 15,136. 15,079. 15,586. 14,561. 16,503. 17,596. 19,133. 21,502. 22,662. 21,322. 19,069.

4 Puerto Rico: a Regional Economy of the United States

Transfers between the Federal Government and Puerto Rico - Total Receipts Fiscal years - In millions of dollars

16,000.0 14,989 13,925 14,000.0 12,025 12,000.0 11,352 10,451 10,551 9,818 10,087 10,000.0 9,317 8,627 8,659 7,758 8,000.0 7,399

6,000.0

4,000.0

2,000.0

0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

5 Puerto Rico: a Regional Economy of the United States

Other linkages

The financial system operates within the U.S. regulatory framework

Professional standards in fields such as engineering and medicine are those of the U.S.

There are as many Puerto Ricans in the Mainland as in the Island

Risk environment

• No political risk • No foreign exchange risk

• No legal risk

6 Puerto Rico: a Regional Economy of the United States

A remarkably stable economic environment

GNP GNP Total in current dollars Total in constant dollars

70,000.0 8,000.0

60,000.0 7,000.0

6,000.0 50,000.0 5,000.0 40,000.0 4,000.0 30,000.0 3,000.0 20,000.0 2,000.0

10,000.0 1,000.0

0.0 0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

7 Puerto Rico: a Regional Economy of the United States

Exports by Product Categories High and Low Tech Exports

($ MILLION) $60,000 52,609.6 47,540.9 $50,000

$40,000 Low Tech $30,000 High Tech 26,534.0 $20,000

8,367.8 $10,000 7,136.1 8,197.0 $- 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

8 Recent Economic Performance

Annual growth of real GNP by periods, 1970 - 2005

Average: P.R. 2.3% 4.0% 3.6% 3.4% 2.6% 2.2% 1.8% 0.7%

-1.1%

1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05 2005-09

9 Recent Economic Performance

GDP by Economic Sector Puerto Rico

2000 2009

Construction Construction Government 3% Government 2% 9% 9%

Manufacturing 45% Manufacturing 45%

Others 18% Others 21%

Services 12% Services 10%

Finance and Finance and Insurance Insurance Retail Trade Retail Trade Wholesalers Wholesalers 8% 5% 5% 6% 4% 3%

10 Recent Economic Performance

Recent Performance Underlying factors

Banking sector difficulties

Fiscal imbalances

Housing sector excess supply

Spillover from U.S. recession and global financial crisis

An obsolete institutional framework unchanged in decades

11 Recent Economic Performance

How Puerto Rico compares with other economies

Long Term Economic Growth Average 2000 - 2008

9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 70's 80's 90's 00's

East Asia & Pacific United States EMU LA & Caribbean Puerto Rico

Sources; BBVA, LatinWatch; Puerto Rico Planning Board. * GNP in the case of PR

12 The Business Environment

Major changes in the Institutional Framework

New PPP Legislation considered as one of the most advanced in the U.S.

New Permitting law that simplifies and makes the process more efficient

Tax reform underway

Labor and energy market reforms forthcoming

13 The Business Environment

Manufacturing

Exempt firms in Puerto Rico generated $18.0 billion in profits in 2008

They paid $1,370 million in taxes

Total investment in the manufacturing sector is estimated at close to $100 billion

A new incentives law approved in 2008 with very attractive incentives. Focus on strengthening local supply chains and R&D.

14 The Business Environment Manufacturing

Recent expansions and new investments since 2005

Abbott Amgen Guidant Janssen IPR Canóvanas, Medtronic Lilly del Caribe, $250 Ortho, $400 million $440 $1.2 $43 million, $96.2 million million billion 115,000 sq ft. plant million $52 million

Adchem Shering Infotech, Pratt & Honeywell Merck $60 Las Piedras, Pharma Whitney $5.8 million million $28 million $50 million $8 million $22 million Mayagüez

15 The Business Environment

Retail

World-renowned retailers operate in PR and many have their highest revenue stores here

16 The Business Environment

Retail

Top 20 Shopping Centers in Puerto Rico 2009 (by square footage) Location of Plaza Las Américas 2,358,000 Top Shopping Centers Mayaguez Mall 1,100,000 1,092,103 Bayamón 4 Caguas 2 Plaza Centro I, II Shopping Center 980,000 Carolina 3 Los Colobos I,II,III Shopping Center 800,200 Guaynabo 1 683,000 Hatillo 1 Plaza del Sol 673,654 Humacao 1 673,261 Mayagüez 2 Ponce 2 River Side Town Center 648,401 San Juan 2 Parque Escorial 636,340 Toa Baja 1 578,220 Yauco 1 Western Plaza 572,112 569,109 Plaza Río Hondo 549,953 Montehiedra Town Center 546,000 Ponce Town Center 506,000 Santa Rosa Mall 474,370 Yauco Plaza I, II, III 450,000 Rexville Towne Center 450,000 Plaza Palma Real 441,495

- 500,000 1,000,000 1,500,000 2,000,000 2,500,000

17 The Business Environment

Retail

Shopping Centers Sales per square foot 2007 $480 $466 $460

$440

$420 $406 $400

$380

$360 Puerto Rico Estados Unidos

Source: International Council of Shopping Centers. 18 Connectivity: Internet Access

Changes in Internet penetration 2005-2010

50% 45% 45% 1,510,738 40% 38% users 12+ 35% 35% 33% 30% 25% 9.3% 20% Annual 15% Average 10% Growth Rate 5% 0% 2005 2006 2008 2010

19 Connectivity: Internet Access

Internet Penetration by Family Income

90.0% 85.7% 80.0% 80.0% 72.1% 72.7% 68.4% 71.4% 70.0% The median income of 61.6% 60.0% Internet users is 46.3% 50.0% $26,818 as compared 40.0% to the general 30.0% 27.5% 20.2% 20.0% population ($16,543) 10.0% 0.0% Less than $14,999 $15,000 to $30,000 $30,000 to $49,999 $50,000 to $74,999 $75,000 or more

2008 2010

20 Advanced Services as an Area of Opportunity

Education

• Puerto Rico universities have expanded abroad

• Puerto Rico provides educational services to students in the region

• Private and public universities have excellent programs in engineering, medicine and science

Health • Important competitive advantages have been identified in areas such as orthopedics, cardiovascular surgery and oncology, among others

• Integrating IT and health services is an area of opportunity

• Rapid aging of the population presents major opportunities for development of new technology intensive services

21 Advanced Services as an Area of Opportunity

Construction Related Services

• Management of complex construction projects is a capability of the construction sector • Puerto Rican firms have exported construction management services to various countries • There is particular expertise in infrastructure related construction

Knowledge Intensive Business Services*

• Design and engineering • Environmental services • Financial services • Communications • Validation • IT

*The KIBS concept was originally used by Ian Miles of Manchester University in the UK

22 Advanced Services as an Area of Opportunity

Green Economics

• Manufacturing of new products • Operation of alternative energy systems • Maintenance of new energy systems • Training services

23 Mid Term Perspectives

GNP Growth 2006-2012 Forecast 1.8%

0.5% 0.4%

-1.2%

-2.8% -3.4% -3.7% 2006 2007 2008 2009 2010 2011 2012

Source: Puerto Rico Planning Board (2009) Apéndice Estadístico 2008, Table 3; PB data January 2010; Estudios Técnicos, Inc.

24 Concluding Comments

• Puerto Rico is a risk free and business friendly environment. • Major institutional reforms are underway. • The economy will experience faster growth beginning in fiscal 2011/2012. • The island is well positioned to become a knowledge based economy. • Four major projects -Roosevelt Roads, San Juan Waterfront, Science City and Port of the Americas- will generate significant investment opportunities. • New PPP legislation will stimulate new investment in diverse areas: roads, school construction and maintenance, port and airport facilities, energy and water supply, as well as certain services.

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