Financial conditions for consumers are worsening, Estudios Técnicos says

By The Star Staff

The Consumer Financial Fragility Index (IFFC by its initials in Spanish) compiled by economic research firm Estudios Técnicos Inc. (ETI) reveals a worsening in consumers’ financial condition beginning in the first quarter of 2023, as the index increased from 35% to 49% in the third quarter of 2024.

Economist Leslie Adames, director of ETI’s Economic Analysis and Policy Division, highlighted that “consumers in Puerto Rico transitioned from an environment of extreme financial fragility during 2000 to moderate financial fragility in recent years. The index peaked at 78% in the second quarter of 2020 but significantly improved in subsequent quarters, averaging 39% between the first quarter of 2021 and the third quarter of 2023.”

Adames attributed the decrease in consumer financial fragility over that period to the injection of over $16 billion in federal fiscal stimulus funds during the COVID-19 pandemic, labor market recovery, and the stabilization of consumer loan delinquency rates. The latter was supported by channeling part of the non-recurring federal stimulus funds to pay off non-current debts.

The IFFC considers five variables in measuring consumers’ financial position: average delinquency rate on consumer loans, average delinquency rate on mortgage loans, unemployment rate, personal bankruptcies, and annual inflation-adjusted worker income. The index ranges from 0-25 (low financial fragility), 26-50 (moderate financial fragility), 51-75 (high financial fragility), and 76-100 (extreme financial fragility).

Adames noted that the IFFC has deteriorated in the past four quarters, exceeding the 40% average for the first quarter of 2021 to the third quarter of 2023. The index averaged 50% over the past four quarters, with the most recent value being 49% for the third quarter. The trend results from consumers facing difficulties repaying loans to local financial institutions.

Consumer loans (cards, personal loans and autos) in delinquency (30 to 89 days past due) at commercial banks rose from 2.74% in Q1 2024 to 3.12% in Q3 2024. Average delinquency rates for each loan type have surpassed pre-pandemic levels from Q4 2019. For instance, the consumer loan portfolio was at 3.33% in Q3 2024 versus 2.98% in Q4 2019, credit card loans at 2.51% versus 1.87%, and auto loans at 3.52% versus 3.00%. Additionally, accumulated bankruptcies climbed from 2,138 in the third quarter of 2023 to 2,777 during the same period in 2024.

Despite favorable labor market conditions and private sector worker income growth surpassing inflation, the observed trend in other index components remains concerning due to significant risks in 2025. The depletion of excess consumer liquidity from federal stimulus measures and rising indebtedness, particularly in credit cards, raise concerns. Considering the prevailing market interest rates, these factors may significantly impact consumer financial fragility.

Adames said “we must monitor developments in 2025 closely, including the rate increase policy proposed by President-elect Donald Trump, the potential approval of LUMA’s rate adjustment request, and the outcome of the Electric Power Authority’s debt restructuring, along with its implications for electricity costs.”