An Alluring Goal or an Undesirable Result? On Puerto Rico’s long-term economic sustainability
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • 0 Comments

07/19 An Alluring Goal or an Undesirable Result? – On Puerto Rico’s long-term economic sustainability

Straightening out PR’s public finances—which by now is a legal obligation rather than a lofty public policy objective—has exposed a myriad of nefarious economic dynamics. For years, these were masked by indirect subsidies, such as those afforded under Section 936, but most of all, through the use of affordable and attractive cheap debt. In fact, the perverse dynamic of using debt to cover the gap in recurrent expenditures—done by all administrations—ended up normalizing the unthinkable: debt was simply redefined to be “extra constitutional” whenever the constitution forbade it. Unfortunately, regaining our long-lost economic sustainability will require further adjustments that could deepen the current socioeconomic and demographic spiral. By chasing an elusive goal, we might end up facing a curse yet to be materialized. With 30% of the population expected to be over 65 by 2040, missing the target this time around is simply not an option.

Raising the Stakes of Our Economic Recovery The unintended consequences of the US-China Trade War
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • 0 Comments

06/19: Raising the Stakes of Our Economic Recovery – The unintended consequences of the US-China Trade War

With a potential disruption to world GDP of around $600 bn by 2021—in the full trade war scenario—the stakes of the US-China row could not be higher. For the US, the problems (tariffs are only the surface) were years in the making, which is why President Trump enjoys (rare) bipartisan support on the issue. On the other side of the Pacific, China found a niche, a model of authoritarian capitalism, that no longer seeks to accommodate the West´s values or its international architecture. In fact, it seems content to project its influence outside its domestic borders, in the best traditions of the West. For PR, the spat will mean a shift in the structure and dynamics of prices, including costlier construction costs, and increased risks of a delayed economic recovery. Worse yet, it can jeopardize the viability of recently renegotiated debt repayments. These risks imply that economic policy will need to be flexible so as not to be caught off guard once again.

By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • 0 Comments

04/19 & 05/19: It’s—Again—the Economy!!! A forecast that defies imagination

The story of the PR economy is a “gripping whodunit”. Real economic growth for FY2018 reflects a record low -4.7% and a much worse revised growth of -3.0% for FY2017. Since 1948, the Island had never experienced such negative growth. Can we revert this course and reignite growth? Is there a political will to do so? How likely is engaging in aggressive fiscal policy when the bulk of public debt has not been renegotiated and financial markets are not too keen on lending bankrupt PR? Will growth take place without a plan and with austerity measures imposed by a US Congress-mandated fiscal board, which views its role as steward of fiscal discipline and not growth? The biggest threat to the Island’s recovery after Hurricane Maria is not only economic reconstruction and vision, but the acceleration of a declining, yet aging population. This issue of PR Economic Pulse analyzes the historical performance of our economy plus forecasts and risks for 2019 thru 2022.

Puerto Rico Electricity
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • 0 Comments

03/2019: The Unfinished Business of Redoing PREPA – Above all, it needs to figure out how it can operate in PR´s future

The privatization of the PR Electricity Power Authority (PREPA) has become a rallying cry for many over the last few years. With it, a consensus has slowly emerged that the company’s shortfalls can only be addressed by the private sector and this will generate much-needed liquidity for the Commonwealth. A closer look, however, reveals that the situation is more complex than meets the eye. Chief amongst the unresolved challenges are PREPA’s future operating model and the lack of an optimization process to determine the company’s investment priorities. Whether we like it not, PR’s systemic risks will remain elevated for some time, most of which will be impossible to mitigate. In consequence, PREPA will have to adapt constantly to changing conditions on the ground, making the need for operational flexibility and the ability to quickly change priorities all the more pressing. Final success—or failure—will largely depend on this and not simply on a change of ownership.

Rebuild Electricity
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • 0 Comments

02/2019: The Uphill Fight to Rebuild Electricity – Overhaul and proposed reforms for PR’s energy sector

Puerto Rico urgently needs an overhaul of its energy sector. For decades, the Puerto Rico Electricity Authority (PREPA), an inefficient and obsolete behemoth, has piled up debt, fueled fiscal woes, and become a hindrance to economic development. Most stakeholders, public and private, advocate privatization as the best choice to put PREPA to rest. However, a year and a half after hurricane María, we still have a myriad of conflicting policies, fragmented efforts, and some proposals butting heads, instead of a clear path forward. Sweet promises abound, driven by wishful thinking, instead of rationality. Privatization is already in motion, but it still lacks the appropriate regulatory framework. This issue analyzes the local energy sector and reviews proposed reform options.

By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • • • 0 Comments

01/2019: The Banking Sector’s Current Impasse

Remaking Puerto Rico's Banking SectorThe remaking of PR’s economic landscape will reshape banks
The last fifteen years witnessed a remaking of PR’s banking sector that continues to unfold. The process has been largely uneven as consolidations, the bursting of a real estate bubble, an economic depression, population decline, and the default of public debt have all had a direct impact on the sector’s core capabilities and operations. In response to this, banks were forced to retrench their activities, mitigate risk, and become risk-averse. This, understandably, has resulted in a more passive sector, one that, in the future, stands to react rather than lead the creation of new economic opportunities. In this sense, unless the recovery funds are managed to create the right incentives for them to remain on the Island, the banks will simply not leverage capital to jumpstart much needed economic growth, or support development, regardless of continued interest rate hikes. The stakes at the moment could not be higher. PR must get it right this time.

Puerto Rico Economic Pulse ©
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • 0 Comments

12/2018: 2018 – A Year of Lost Opportunities

Lost OpportunitiesSerious challenges continue to estrange the economic outlook everywhere
2018 came in on the heels of a devastating last three months in 2017, with the anticipation that it would finally bring the opportunities that PR needed to debunk its economic malaise. Yet, 12 months later we are about to exit it with basically more questions than answers and an almost universal dismay with the ongoing situation. To make matters more unsettling, we continue to lack consensus—and with it a sense of collective purpose—on what needs to be done in the best interest of PR, its people and the holders of the Commonwealth´s defaulted debt. Matters elsewhere have not helped either as the accumulation of tension and disruption continued unabated throughout the year. The US-China trade war and the accompanying political instability in the developed world stand to leave unintended consequences on the Island sooner rather than later. Businesses will need to focus on risk mitigation at all levels in 2019 as PR continues its painfully slow reconstruction process, hoping for the best but, certainly, preparing for the unexpected.

Puerto Rico Economic Pulse ©
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • • • 0 Comments

11/2018: A Plan with More Questions Than Answers

Opportunity Zones may just provide a much-needed response
Puerto Rico Opportunity Zones MapThe latest Federal Oversight Board’s (FOB) certified fiscal plan (October 2018) reveals a coherent, but dangerously limited understanding of PR’s present economic situation. In effect, it provides a one track-logic, based on reform and austerity measures, expected to yield the necessary cash flows to both repay the renegotiated public debt and achieve economic self-sustainability. Unfortunately, the problem is not so simple. Sustainable debt repayment requires a viable expansion of the Island’s tax base, which, in turn, requires long-term sustainability of economic activity. On a more fundamental level, the attainment of these goals requires economic development and growth. In this sense, the Opportunity Zones (OZ) initiative is a definite step in the right direction that could provide what the plan lacks. It remains to be seen however, particularly given PR’s dismal record of execution and operationalizing such initiatives, whether OZ can channel the investment capital that PR badly needs now.

Puerto Rico Economic Pulse ©
By H. Calero Consulting Group Puerto Rico Economic Pulse© • 0 Comments

10/2018: The Making of the Next Crisis at COFINA

The making of the next crisisA weak economy may make the recent agreement unviable
Two recent events have rattled the prospects for a sustainable solution to PR´s debt restructuring process. First, the Fiscal Oversight Board (FOB) filed three key documents to legally enshrine the debt restructuring agreement with COFINA bond holders. A few days later, the same entity published a new version of its Fiscal Plan (the sixth in 2018). What emerged, however, was an indirect confirmation of the risks that await PR. On the one hand, the agreement establishes a haircut of 7% for senior debt and 44% for junior debt (where most local bond holders fall). The new Fiscal Plan, on the other hand, bluntly stated that the economy is expected to run out of growth by 2023—with negative or near-zero growth from then on. In other words, according to the FOB, the economy will be severely constrained to meet its obligations under the debt restructuring agreement in five years-time. What it did not say was that, as it stands, it sets the way to a new default.

By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • 0 Comments

09/2018: A Landmark Institution in Distress

UPR Río PiedrasFewer students and less money will shape UPR’s future

The University of Puerto Rico (UPR), one of the Island’s longest serving, and most respected institution is facing a dire process of retrenchment. Realities on the ground simply caught up. The combination of a contracting population and stagnant personal income over the past 15 years (as well as several strikes) led to a slow decline in enrollment. The ongoing fiscal crisis is just the last straw on a long process of deterioration as debt restructuring stands now to override—for some time—any other consideration. The stakes, however, could not be higher with a reduction of over $200 mn. in its FY18 budget and its own debt restructuring to sort out, the UPR now risks losing its academic accreditation and, with that, access to Pell grants. Without these, enrollment could end up unraveling. Whatever the final outcome, this is the story of the inevitable.