Puerto Rico Economic Pulse ©

Dec 2016: A Bag of Shocking Economic News

Puerto Rico changed its course in 2016
Change hit Puerto Rico abruptly and hard as its fiscal crisis unfolded and rolled out public debt default with limited or no access to traditional financial markets. Badly needed investment in infrastructure stalled and the economic recession is now in its 11th year. This time the US told the Island there would be no bailout. Instead, Congress approved PROMESA with an oversight fiscal board that has almost omnipotent powers even over elected local politicians. It is not hard to find many in favor of the Board who hope it can trigger badly needed structural reforms in taxes, health, education, labor, pension systems, and government, among others. But, this hard medicine that produced upheaval in the past can also lead to rebellious mood in the year ahead. The dramatic election of Donald Trump promises a rollback of Obamacare and an inward-looking America. This Pulse reviews the forces of change in PR in 2016 that will shape its economic future.

Puerto Rico Economic Pulse ©

Nov 2016: Reality Check for Puerto Rico’s Fiscal Plan

Success will depend on the premises it makes
The government’s latest version of its fiscal and economic growth plan has come under close scrutiny since being submitted to the Financial Oversight & Management Control Board (FOMCB) for PR.  Some critics have pointed to its lack of policy specifics while others have scorned the fact that it does not contain a debt sustainability analysis while resting on additional federal funding. The PR fiscal plan (FP) has various technical points and assumptions that have also been singled out. The plan’s viability, regardless of the gaps, will ultimately depend on the validity of its assumptions. Policy makers must find a way to boost PR’s long-term potential output first but the appointed board may want to restructure public debt obligation first. Growing the economy will ensure that the future roadmap rests on credible future income flows. This edition of the Pulse takes a look at the fundamental assumptions behind the fiscal plan.

Puerto Rico Economic Pulse ©

Oct 2016 – One More Time: Puerto Rico’s Agenda

Election 2016 – Analysis of Economic Platforms
On November 8th, 2016, Puerto Ricans will face a stark choice between six governor candidacies, consisting of 4 political parties and 2 independent candidates. According to recent polls, independent candidates are attracting 22% of voters. Still, Ricardo Rossello from the NPP and David Bernier from the PDP are leading the polls to be the next Governor of PR. However, with the recent approval of a US Congress mandated Fiscal Control Board for PR, most people consider the elected governor and the legislature will have limited powers and areas of influence. Under these circumstances, the next four years will be tough for the new government and the people of PR. Economic issues include recession, outmigration, debt payments, retirement and health time bombs, and a harsh relation with the Fiscal Control Board. Voters in PR will have to analyze carefully the various platforms of these candidates and determine if some of these measures are economically unfeasible, not fiscally prudent, unclear; or depict lack of organization and cohesion, among other flaws. Can you judge who might be the better candidate for PR?

Puerto Rico Economic Pulse ©

Sep 2016: Urgency of Now for Credit Cooperatives

An important component of Puerto Rico’s Financial Sector

Believers of the credit-union movement talk of a “social mission”: to serve communities. As of March 2016, credit unions in the Island had 976,550 members with $8.7 billion in total assets. Earnings are returned to members in the form of better interest rates and dividends. Traditionally, credit unions have offered higher rates than banks to savers and lower rates to borrowers. During this financial and current economic crisis in PR, most credit unions have been more resilient than banks. They have been able to compete with banks and small loan companies who complain loudly about credit unions’ exemption from local income tax. Though credit unions may pay no taxes, neither have they needed taxpayers’ money for bailouts, until now. Many credit unions, which purchased PR bonds (currently rated as junk) are facing tough challenges with their capital requirements. Its regulator COSSEC has been considering a “bailout” type of proposal for these credit unions. Will it be enough without endangering their regulartor COSSEC? Find out in this Pulse.

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?