Puerto Rico Economic Pulse ©

Aug 2016: Aging & Migration Watch

How the PR economy could perform with these trends
As PROMESA with its Fiscal Control Board prepares to fix the island’s fiscal and hopefully economic problems, it is wise to assess the effects of aging and migration on the PR economy. Several years ago, PR Pulse addressed the issue of migration and a few months ago, we analyzed the impact of aging and lower population in Puerto Rico. Today, we combine both trends to assess the magnitude of their potential effects on the labor market and the island economy. Europe as well as many US states are experiencing substantial growth in the size of their older population. PR has joined the aging movement. Population aging and current migration have detrimental effects on our economic growth. Much of the older population growth was predetermined by lower fertility rates but now migration plays a key role in this population shift. Find out how these trends strike a further blow to economic growth in PR.

Puerto Rico Economic Pulse ©

July 2016: Can PR’s Budget Adjust to the New Norm?

10 years after the government shutdown

Fiscal budgets everywhere seek to balance the basic needs of the population with the resources available to the government. In PR’s case, the fiscal challenges are even starker as meeting its current debt obligations—without any viable economic alternative to back it up—will continue to drive up migration, thus further contracting economic activity and the current tax base. In this sense, the Commonwealth is facing a dire chicken and egg problem.  Stopping the population drainage will require positive economic prospects, yet to materialize. Not meeting its debt obligations will feed more uncertainty to the business community and certainly continue to deny the island access to capital markets, necessary to promote economic growth and development. All this makes it difficult to further reduce outward migration. Meanwhile, the government will need to continue to adjust its spending pattern to the prevailing socio-demographic profile of the resident population, a task easier said than done.

Puerto Rico Economic Pulse ©

June 2016: Brexit and the Emergence of Discontent

Implications of newly found political and economic aversion

The results of the recent referendum on whether the UK wished to withdraw from the European Union (EU)—Brexit—sent world public opinion on a tail spin as the Leave option unexpectedly won by a margin of 52% to 48%. The following morning, David Cameron’s—the UK’s prime minister and the number one advocate to Remain in the EU—resigned and this further fueled speculations regarding the future of one of the world’s most influential nations. Since then, not only is everyone trying to make sense of the, until very recently, unthinkable but has also taken situational analysis to the next level.  That long forgotten “what-if” scenario is now a palpable reality. Going forward, several developments must take place for Brexit to materialize as a permanent fixture of the UK’s relationship with the EU—and the rest of the world. None of them are straight forward but in the end, there will be lessons for everyone, including us in Puerto Rico.

Puerto Rico Economic Pulse ©

May 2015: Sharing the Pain with Debtors

Analysis of recommended PR fiscal budget in FY 2017

With total public debt of around 101% of GNP in FY2016, an extremely high figure for Puerto Rico, the question is not whether the government should cut its budget deficit but by how much and how to cut wisely. To bond markets’ consternation, Governor Alejandro García Padilla announced to the world last year the island could not pay its public debt and would likely default on its debt service payments. Fiscal policy must be driven by reason, responsible policymaking, and cost-benefit-based analysis of government’s spending priorities. After 10 years, PR’s economic growth is still negative; private and public investment is at its nadir; retired public workers expect full pensions and reliable health coverage; and US Congress threatens to impose a unilateral Fiscal Control Board to regain fiscal discipline and ensure public debt is paid. Will the recommended budget protect Puerto Ricans from various risks: unemployment, destitution, illness, and lack of education? What will it take to recover a growth path in the island?

Puerto Rico Economic Pulse ©

April 2016: PR Stretched to the Limit

Review of Global, US & PR economies in FY 2015 plus forecasts from 2016 to 2018

The past few weeks have seen an unprecedented spike in uncertainty over the Island’s long-term prospects. The combination of a pending default on public debt, political wrangling both in Washington and San Juan, and continuous negative news about the economy has opened the door to short-term politics and the prospects of a full-blown crisis. Ultimately, the economy will adjust to the existing reality on the ground however unpleasant this may be with the real test only just beginning. The policy and institutional framework will have to be rebuilt pretty much from scratch as constrained budgets, lower economic activity, lower population, and impoverished consumers are here to stay, at least for a while. Striking the right balance will require a significant amount of creativity and courage but the alternative is definitely more daunting. Coming to grips with the hard facts that public debt is a debt we all must pay is only the beginning. What will it take to chart a path to solvency and growth in PR?

Puerto Rico Economic Pulse ©

March 2016: A Clear and Present Danger

Analysis of the proposed Federal Oversight Board for PR

Chairman Rob Bishop of the US House Committee on Natural Resources submitted a draft bill on March 29, 2016 to “establish an Oversight Board to assist the Government of PR, including its instrumentalities, in managing its public finances, and for other purposes.” The bill grants broad powers to a 5 member Board, charged with the task of proposing necessary reforms to solve PR’s fiscal crisis. It will audit the central government and its corporations; create efficiencies, and reforms with transparent fiscal plans and balanced budgets while improving services; and facilitate a court supervised debt restructuring if voluntary agreements are not achieved (but not under the umbrella of Chapter 9 since that would imply “a bailout of PR on the backs of US taxpayers”.) Why does PR need a fiscal board? Will the Board be subject to the claims of numerous bondholders all requesting priority in their debt payments? Or, will it be accompanied by a package of federal assistance to stabilize the Commonwealth’s liquidity problems and set out a roadmap for economic growth?

Puerto Rico Economic Pulse ©

February 2016: Can PR Remain a Going Concern?

Analysis of recent financial and economic events

On February 2nd, 2016, the PR Department of Treasury released a draft of the FY 2014 unaudited Commonwealth of PR Basic Financial Statements. Management’s Letter indicated “The risks and uncertainties facing the Commonwealth, together with other factors described in the basic financial statements, have led management to conclude that there is substantial doubt as to the ability of the Primary Government …to continue as a going concern..” Furthermore, “if the Commonwealth’s financial condition does not improve, … [it] will not be able to honor all of its obligations as they come due while at the same time providing essential government services.” This shocking statement discloses a long history of deficit financing during the past decade. Since the announcement that PR’s public debt was not payable, the island has had no access to the bond market and its liquidity problems have worsened. This issue presents an analysis of current fiscal problems and government’s proposal, which does not address the real causes of our fiscal problems.

Puerto Rico Economic Pulse ©

January 2016: China’s Foothold in Latin America & Caribbean

Where and what are China’s investments

Since 1980, China’s economic policy was to become one of the top three economies in the world. As of 2015, China ranked second in GDP with an $11.4 trillion economy, behind the $18 trillion US GDP. Although the Chinese economy currently faces the onset of a permanent slowdown (5% today compared with its past double-digit real economic growth), that still represents more economic output than in 2007. And because the Chinese economy is so much larger now, we have seen growing amounts of investment flowing from China into Latin America and the Caribbean (LAC). Most of these investments have been in infrastructure and undertaken by Chinese state-owned firms. How much have they invested in LAC? Is the Caribbean soon to become a beachhead for China? China is now moving its economy from export and investment-led growth to domestic consumption and service-led sectors. Will this change represent positive or negative effects for the global economy, and for LAC in particular? Jamaica, Trinidad, Nicaragua, and Peru, among others, have benefitted from Chinese investments, then why not Puerto Rico?

Puerto Rico Economic Pulse ©

December 2015: What if Questions for the PR Economy

Great expectations amidst irreconcilable conflicts

As 2015 nears its end and a new year is about to start, it is time for reflection. The fundamental structure of the PR economy is changing. While the contribution of services to output is on the rise, investment and productivity remain flat or even declining, wealth is not accumulating, and growth and inflation continue declining. Meanwhile, globalization has increased co-dependence in the global economy: a rising number of countries can influence the world’s economic performance and its financial stability. With no investment nor prevention of outward migration, the PR economy is in the middle of a “lost decade”. Puerto Rico struggles with slow to negative growth, a sizeable external debt, capital outflows and lack of badly needed investment. Unfavorable demographics, inflexible labor markets, and a rising outward migration pose the biggest threats to our economy. The shortcut to recovery requires orderly debt restructuring and investments faster than expected. The PR economy is weak with a continued trade-off between sustained growth and debt deflation spiral. What will it take for PR to regain economic growth? What if…?

Puerto Rico Economic Pulse ©

November 2015: Of Sun & Sand – Is it Enough?

Challenges facing the tourism sector in Puerto Rico

November 13th terrorist attacks in Paris had a negative impact on tourism. French hotels and restaurants reported a major impact. These events highlight the need for protection from disruption to business and leisure travellers. The 2015 Global Summit in Madrid looked at how companies and destinations go on to reinvent their products, businesses and ways of working, to emerge stronger and more resilient to meet future challenges head on. Realizing these opportunities will require businesses and governments to adopt deeper levels of connectivity, openness, and trust in years to come. Today, travellers are more demanding and make their voice heard around the world, positively or negatively in minutes; and millions of new jobs in the industry will demand people skills and talent. What can PR learn from these new challenges? How do we compare with our Caribbean neighbors? Is PR ready?