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?

Q1 2016: Uphill All the Way in Puerto Rico

An analysis of 1st. Quarter 2016 economic indices

Puerto Rico is now in its tenth year of economic recession, which it started in 2006. The fiscal crisis, which has played center stage in the past administrations, has been defined by a failure to provide effective governance and leadership in response to serious economic challenges. The fiscal crisis has not gone away and the harsh tax increases have been compounded by a migration crisis. Q1 in 2016 was plagued with uncertainty, fueled by: government’s inability to pay its public debt, suppliers, reimbursements to taxpayers, fear of job losses at GDB, poor retail sales performance, and an unsympathetic US Congress intent on enforcing a Fiscal Control Board over Puerto Rico with unknown implications. Among all these uncertainties, only one thing is certain: the future will be uphill all the way and at significant political and economic cost. This issue examines the performance of our six quarterly indices, which depict an economy in trouble.

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 Compass ©

Q4 2015: No End Yet for PR’s Fiscal Crisis

How this impacts 4Q-2015 economic indicators

Several bold events occurred this quarter in Puerto Rico and the US. In October, the US Department of Treasury presented a Roadmap for Congressional Action, suggesting key measures to deal with PR’s fiscal crisis. At the end of the year and after several public hearings, Congress could not reach an agreement regarding Chapter 9, a federal fiscal control board, Medicaid funds parity for PR or other lifesavers such as the Earned Income Tax Credit or a Child Tax Credit for Puerto Rican households. Locally, the administration was dealing with liquidity strains and submitted several proposals to solve the problem. However, it appears that without federal assistance, the internal actions will fall short. The net effect of this situation is widespread pessimism and uncertainty. This current issue analyzes how these events have impacted economic indicators during 4Q 2015 and what to expect in the near future.

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?

Puerto Rico Economic Pulse ©

October 2015: Quo Vadis Puerto Rico – Part II

PR’s proposal for a fiscal & economic growth plan

On October 15, 2015, the PR House of Representatives and the Senate presented bills for the fiscal and economic recovery of PR. This call to action responds to a plan for FY2016-2022 submitted by a Working Group (WG), designated by Governor Alejandro García Padilla. The plan includes several measures and calls for a Fiscal Control Board (FCB) to be appointed by Governor Padilla but all this has not yet been approved by the PR Legislature. The task of the FCB is to approve a final detailed fiscal and economic plan by December 2015. This issue focuses on analyzing the WG’s plan and its FCB. Several questions remain unanswered throughout this process. For instance, is the underlying assumption that fixing the fiscal crisis will promote economic growth? What has been the experience of fiscal control boards in the US, such as, NYC, DC, and Detroit? Where do we stand now.

Puerto Rico Compass ©

Q3 2015: Recession’s Sharp Bite Continues

Puerto Rico’s sagging economy, 3Q-2015

It will take more than patience to free the PR economy from nine years of negative real growth. Failure to design and execute earlier in 2013 an effective economic plan explains in part our current situation and doing nothing is no option. It is important to understand if the continued declines in the 6 quarterly indices of HCCG for the PR economy are a cyclical phenomenon or a longer-lasting transition to a new, slower state. During Q3-2015, PR continued facing fiscal challenges with a shortfall of liquidity for payment of public debt service; a continued challenge with restructuring of the PR Electric Power Authority and other public debt; hearings before US Congress in an effort to present PR’s dire fiscal and economic situation to obtain some relief; a move to avert an upcoming cut in Medicaid and Medicare Advantage funds; and last minute amendments to a legislated 4% B2B service tax, among others. The prospect of a government shutdown is madness. All quarterly indices indicate nothing seems right. What is the right response?

Puerto Rico Economic Pulse ©

September 2015: Quo Vadis Puerto Rico – Part I

Past, present, and future with PR’s proposed fiscal plan

On September 10, 2015, S&P downgraded PR’s GO bonds to ‘CC’ from ‘CCC-‘, signaling an imminent default. This occurred the day after the Governor’s Working Group for the Fiscal and Economic Recovery of Puerto Rico submitted its Fiscal Restructuring Plan. It called for public debt restructurings and a Financial Control Board to close the huge $28bn financing gap forecasted thru 2020. With Puerto Rico already classified as a pariah in the municipal bond market, the financial alternatives for the government to grow the economy and address the fiscal crisis have become ever more difficult. Part I of this issue analyzes how PR arrived at this situation. Why public debt and fiscal restructuring are essential to a process of economic growth. Part II will analyze the government’s proposed fiscal Plan, measures and recommendations. We will review the experience of Financing Control Boards in other US jurisdictions and the fate of Puerto Rico if the Plan does not work. How we arrived at this point warrants a historical background.