Puerto Rico Economic Pulse ©

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 ©

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 ©

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.

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.

Puerto Rico Economic Pulse ©

08/18: Code of Conduct – Fiscal Oversight Board

Insights into the fiscal discipline of PROMESA staff in Puerto Rico

Code of Conduct – Fiscal Oversight Board Puerto RicoPuerto Rico’s fiscal and economic crisis has thrust people into unlikely roles. On June 2016, President Barack Obama signed the legislation Puerto Rico Oversight Management, & Economic Stability Act to address Puerto Rico’s economic crisis. The Act established a 7-member oversight board with an Executive Director and staff to, among other things, provide Puerto Rico with tools to impose discipline over its finances, meet is obligations, and restore confidence in its institutions. The Board has sweeping powers over the Island and its staff has a significant and increasing budget, paid by PR taxpayers, to execute those powers. After the devastation of Hurricane Maria on September 2017, the economic reconstruction of the Island becomes even more important for PR to meet its fiscal and debt obligations. Is the entity in charge of balancing fiscal budgets and controlling expenses in PR applying these same principles to its expenses? It is in this context that this issue analyzes how the administrative staff of the Fiscal Board stacks against results.

Puerto Rico Economic Pulse ©

07/18: A New Incentives Code: Problem or Solution?

Proposed incentives may hurt or benefit PR’s economic sectors
A New Incentives Code: Problem or Solution?PR is once again at a crossroads. This time, however, with a much more critical end-game. The combination of continued public-debt negotiations—with no easy-fix in sight—and an uneven reconstruction effort have transformed what otherwise would be normal processes into make-or-break events. Nearly everything—from fiscal budgets to public officials’ salaries—has become contentious. The recently proposed incentives code adds yet another layer of complexity to this conundrum. Long gone are the days where public policy “only” had to ensure that the Island remained attractive to Foreign Direct Investment (FDI) vis-à-vis other jurisdictions. Now, incentives need to balance the Island’s multi-level economic reconstruction needs with its changing sociodemographic fundamentals. This issue examines the impact of the proposed incentives measures on key economic sectors and its desirability in its drafted form.

Puerto Rico Economic Pulse ©

06/2018: In Search of Better Ways for Puerto Rico

In Search of Better Ways for PROn labor reform and job creation options

Puerto Rico desperately needs new sources of jobs, but the labor reform proposed by the Puerto Rico Federal Oversight and Management Board (FOMB) has not been convincing. By requesting an end to long-standing employee benefits, like Law 80, FOMB intended to align the local labor market with that of the US and allegedly remove what is seen as an impediment for higher labor participation, job creation, and economic recovery, in general. However, the proposed labor reform set forth by FOMB seems to draw a lot from the Bible of the International Monetary Fund (IMF) but misses critical points of the very particular economy of Puerto Rico. In fact, we could wind up in a worse situation. This issue of Pulse analyzes some myths regarding Puerto Rico’s labor market and suggests better alternatives to incentivize jobs in the Island’s labor market.

04/2018: A New Privatization Model for PREPA

Competition can support Puerto Rico’s future

PrivatizationThe aftermath of hurricanes Irma and Maria essentially sealed PR Electric Power Authority’s (PREPA) fate, at least in its current legal form. The magnitude of the physical destruction experienced both by its generation capacity and its distribution networks renewed historical calls for its privatization. That possibility now seems irreversible, particularly given the Fiscal Oversight Board’s (FOB) drive to impose austerity across the public sector and the government’s market-friendliness inclination. However, not all privatization processes are the same and, by extension, not all lead to the same outcome. This issue of Pulse presents a novel approach to privatization—one based on the controlled introduction of competition in regional markets. The approach described herein has been successfully applied elsewhere. More importantly, it is designed to align electricity generation with PR’s changing socioeconomic landscape at zero cost to the government, consumers and businesses. Sometimes, privatization does work.

Puerto Rico Economic Pulse ©

03/2018: Tic-Tac-Toe – Game Changer

Hurricane Maria changed Puerto Rico’s economic forecast

Tic-Tac_ToeDespite geopolitical tensions between the US and North Korea, most of the world and the US posted gains in real economic growth during FY2017. On November 2016, President Trump was elected in the US and Governor Rosello was elected in PR. A lot has happened since then: a US Congress mandated oversight fiscal board with ample powers over the Island; two hurricanes in September 2017 that left destruction and devastation in an economy already in economic depression; destruction of infrastructure, and a flurry of reforms and fiscal plans. Economic recovery in PR will take many years; require billons of disaster monies; and a transformation of our economy towards other key sectors, besides manufacturing. Governance has become more complex with clashes between the PR Government and the Oversight Fiscal Board. The impossible occurred when bankruptcy proceedings for PR under Title III of PROMESA began in May 2017. Find out how Tic-Tac-Toe impacts Puerto Rico’s economic outlook.

Puerto Rico Economic Pulse ©

02/2018: Out With the Old, In With the New – Part II

The Government’s Revised Fiscal Plan stumbles on assumptions

Out with the Old In with the NewEconomic modeling is both science and art. Failure to take this seriously leads to wrong decision-making scenarios in PR. If that was acceptable in the past, it is not at present. Old ways relied on a relatively stable population to forecast growth and fiscal revenues. As per the revised fiscal plan, this appears not to be the case. Old ways relied on government revenues forecasted, in many cases, as trend of past collections. Now, these revenues must be tied to demographics and economic growth in the aftermath of hurricane Maria. Old ways relied on GNP growth forecasts by the PR Planning Board. Now, the forecasts in the fiscal plan need to use a coherent economic model of PR’s economy rather than mere assumptions with irreconcilable results. This issue questions the assumptions and results of the most recently revised Central Government Fiscal Plan.