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?

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?