Puerto Rico Economic Pulse ©

August 2015: Deep Cuts to Medicare Advantage

On the consequences for PR’s health care system

In 2010, President Obama expanded healthcare in the US through the Affordable Care Act. Since April 2014, more than 7 million have signed up for private coverage, thereby reducing the number of uninsured in the US to its lowest level since 2008 and significantly raising payments. To reign in the expenses, Obamacare lowered Medicare spending by $716 billion from 2013 to 2022. Of this, $156 billion comes from Medicare Advantage (MA), which lets the elderly use public money to buy private health plans. Private insurers passed along the extra subsidy to consumers in the form of additional benefits or lower fees. Obamacare sought to bring private payments in line with traditional Medicare. But now, Medicare Advantage has become increasingly popular with about three in ten Medicare beneficiaries enrolled in a private plan in the US. In contrast, this proportion is about seven in ten in PR. Insurers argued that Obamacare’s cuts would force them to raise prices or cut benefits. CMS raised payments for the states but cut 11% for PR in 2016. Find out the consequences of this decision.

Puerto Rico Economic Pulse ©

July 2015: PR’s Future is Nearing Its Hour of Truth

The Island’s economic prospects are being reshaped by the day

A series of rapidly developing events are drastically—but not unexpectedly—reshaping PR’s development and growth possibilities. In all likelihood, the end result of the ongoing negotiations will impose strict limitations to the government’s ability to play an active role in the economy, a dramatic shift from its historical role. As a result and for the first time in PR’s modern economic history, the market will largely and freely drive economic activity in the Island. This may not be all that bad. In fact, the emerging landscape should be populated by competitive albeit small businesses, some of which will supply foreign markets. Furthermore, the economy will tend to reallocate its resources to those areas in which it can produce with competitive—and comparative—advantages and it is in this sense, that the current crisis is nurturing future opportunities. The road for the next decade may be bumpy but rewarding.

Puerto Rico Compass ©

Q2 2015: Casualties of PR’s Economic Recession

A snapshot in Q2-2015

The six quarterly indices for the Puerto Rico economy have one thing in common: they are all in negative territory. The Construction index in particular continues to pull down economic recovery in the near future. Other indicators reflect consumer’s lack of confidence in a labor market that continues struggling, a suspect deflationary environment awaiting the impact of a higher SUT tax effective July 1, 2015, and a financial sector that continues downsizing. Thus the island is “not poised for a growth spurt once the fiscal cliff and payment of public debt are normalized.” Some moves in the leading index may be promising, particularly as oil prices continue to tumble and interest rates remain low. The private sector jobs have not been able to neutralize the reduction and attrition in government jobs. Housing sales are flat and do not spur new construction in the near term. Compared to the US and some of its regions, Puerto Rico’s economy continues to struggle and international financial markets are not inclined to lend to the once frequent and desirable municipal bond issuer.

Puerto Rico Economic Pulse ©

June 2015: Puerto Rico’s Troubled Decade Ahead

Despite coming adjustments, opportunities will emerge

The public discussion surrounding the government’s attempt to overhaul PR’s tax system coupled with fresh indications that some agencies are on the brink of insolvency is quickly shifting the economic prospects for the next decade. Regrettably, the current situation risks intensifying the ongoing migration wave which, were it to materialize, could lead to a long-lasting plateau. As it stands, population and public finances are the economy’s two most fundamental issues. To grasp this, we take a look at the unfolding long-term scenarios within the current public policy context. Next month’s issue of Pulse will follow this up by examining an alternative scenario, where public policy undergoes a significant turnaround starting in 2017. Whatever the specific outcome nonetheless, one thing is clear: economic activity will not recover without first correcting its misaligned fundamentals.

Puerto Rico Economic Pulse ©

May 2015: The PR Budget: Averting Doomsday?

An analysis of the FY2016 General Fund Budget Proposal

Governor García-Padilla submitted his fiscal year 2016 central government budget request for $9,800 million and a consolidated budget for $28,820 million in spending to the PR legislature on May 20, 2015. Both budgets involve a 2.5% increase over fiscal 2015. The Governor’s proposal relies on new and higher taxes, approved on May 29, 2015. Despite fierce opposition from some members of the incumbent and opposing political parties, Act 72 imposed an 11.5% enlarged SUT plus a megastore tax, effective July 1. However, according to the president of the Government Development Bank “…it is likely that the Treasury will not have the necessary liquidity to operate during the first quarter of fiscal 2016. The lack of cash on hand to operate the central government is exacerbated since at present the GDB does not have enough liquidity to finance the Commonwealth”. How did we get here?

Puerto Rico Economic Pulse ©

April 2015: An Economy Under Siege

Review of Global, US & PR economies in FY 2014 and forecasts from 2015 to 2017

Now, more than ever, business, households, and financial institutions, among others, require an assessment of the current state of the Puerto Rico economy. Our economy must measure its performance and the risks it faces now and in the immediate future within the context of global and US economies. Going into the 8th year of negative economic growth and fiscal distress, we face the greatest challenge yet: being accountable for the sad state of our internal affairs. Public debt is 104% of GNP, the liquidity of the Government Development Bank (GDB), PR’s fiscal agent is dangerously low, credit ratings of General Obligation Bonds (GO’s) and of key public corporations in charge of main utility services, such as electricity, water, ports, highways, and health are now at “junk” investment grade. Investment for growth is very low. The Governor has proposed a major overhaul of the tax system with lower income tax rates and a new VAT consumption tax. This Pulse provides a snapshot of main sectors, forecast, risks, and challenges ahead thru 2017.

Puerto Rico Compass ©

Q1 2015: Is Consumption Puerto Rico’s Lifeline?

A review of economic indices Q1-2015

Recently released data showed that real GNP in Puerto Rico fell -0.9% in fiscal year 2014. This result was more or less in line with the consensus forecast, and it represents a continuation of a recession, which started in 2007 and has lasted now 8 years. The underlying details of the six quarterly economic indices for Q1-2015 were mixed, however. The good news is that growth in the leading index reflects the impact of cheap oil prices with lower gasoline and electricity prices expected to continue in coming months. In addition, consumption of goods and services was less negative than the previous quarter. On the other hand, construction continued in negative territory with -7.6 percent on a year-ago basis. Banking and manufacturing have not improved and continue in negative territory. Overall, the economic indices for Q1 this year reflect the poor performance of the economy and the uncertainty generated by an upcoming overhaul of PR’s tax system with a proposed VAT tax of 16%. At time of publishing this issue, the Legislature had defeated this bill.

Puerto Rico Economic Pulse ©

March 2015: Oil & PR Liquidity: A Dangerous Strategy

The risks to pull out from the near term abyss are huge

The Government’s delicate financial position has deteriorated significantly since January 2015. Delays in approving a tax increase on oil imports—against which the PR Highway and Transportation Authority (PRHTA) would issue bonds to service its debt with the Government Development Bank (GDB)—have led to onerous terms for the Commonwealth. Furthermore, the storm set-off by the proposed tax reform, unrelated to the tax hike on oil-related products, has increased uncertainty across the board and possibly tilted the Island’s fragile socioeconomic balance in the wrong direction. Unfortunately, the problem is even more delicate. Recent revisions to employment data meant that economic activity has been even slower than initially thought, perhaps resulting in yet another contraction in GNP. Inflation entered negative territory with the General Fund having at one point only $10 million in its coffers. This issue analyzes the economic and financial risks this is creating.

Puerto Rico Economic Pulse ©

February 2015: Proposed Tax Reform: A Swinging Pendulum

Highlights and potential impacts on the PR economy

Why the need to overhaul PR’s tax system now? Is there a convincing case for this tax policy reform to support a recovery in PR’s economic growth? The current tax reform calls for a Value Added Tax (VAT) to replace the current Sales and Use Tax (SUT) while overhauling the current income tax system and generating “adequate” revenues. The proposed VAT to be implemented effective January 2016 calls for a temporary increase in SUT from 7% to 16% on April 2015. A new source of revenues would enable other taxes, such as income taxes for certain brackets, to be abolished. Businesses would be subject to a higher yet flat corporate income tax rate as well as capital and dividend gains. Consumption patterns between income brackets can differ and a complex regressivity mechanism for lower income groups is not yet clear. Employment effects could be larger since smaller firms may have layoffs, ultimately worsening the situation on the island.

Puerto Rico Economic Pulse ©

January 2015: Does PR Need a Different Consumption Tax?

Pros and cons of the proposed Value-Added Tax

Much has been said and speculated about the proposal to replace the current sales tax with a new value-added tax. The arguments for and against it have so far filled media outlets, sometimes with contradictory facts and figures. Moreover, the very nature of the VAT makes it a more complicated and technically involved scheme than the current sales tax. As a result, much of the public conversation so far has been clouded with commentaries that contribute very little analysis regarding the practical consequences that the proposed VAT would bring to businesses, individuals, and municipalities. In addition, there are a number of technical issues regarding the implementation of the proposed tax structure that have not been properly addressed yet either. To help bridge this gap, this issue of the Pulse takes an in-depth look at some of the consequences of implementing a VAT in PR. Anticipated consequences range from uncertainty to high inflation to lower than expected fiscal revenues.