Redefining Reconstruction in Puerto Rico
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02/2020: Redefining Reconstruction in Puerto Rico

What happens when problems are never fully addressed
PR finds itself, once again, at a poignantly grave moment in its modern history. The situation is the result of at least four events that took place in the near past, the consequences of which continue to overlap until today. Each of these events has compounded the challenges produced by the others, feeding into a spiral of problems that has destroyed different layers of the Island’s socioeconomic and institutional fiber. To make matters more pressing, the current debt negotiations are, in effect, negotiations about the viability of PR’s future, not just the repayment of defaulted debt. Flimsy assumptions about the economy’s future may simply lead to further debt negotiations or even defaults down the road. A long-term permanent recovery will require sustainable economic fundamentals, otherwise, there will never be the necessary assurances to posit the type of investment that can trigger positive feedback loops of economic activity on the Island. Time is running out.

questions
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Q4/2019 At Year-end, Another Lackluster Quarter

Economic highlights of Q4-2019 economic indices for Puerto Rico
At yearend, the fourth-quarter economic lackluster performance of the PR economy in 2019 depicts weakness in construction, consumption, and more importantly, the leading index for the next quarter into the new year. Although the Banking index grew, its performance was not really due to extension of credit in areas where Puerto Rico desperately needs to rebuild. Instead, healthy net income in banking continued to depict increases in personal loans, including car loans. Overall, this mixed outturn reflects continued sluggish negative growth due to the combined effect of trickle down, limited disaster federal monies after Hurricane Maria; a less than convincing transition from former Governor Ricardo Rosello to the current administration of Governor Wanda Vazquez; and political uncertainty regarding the lack of US Government and President Trump’s trust in Puerto Rico’s competence to manage and disburse disaster funds effectively.

2019 Summary
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12/2019: Economic Events That Defined 2019

Puerto Rico’s economy facing new realities and challenges
Albeit several positives were observed in 2019, such as the first fruits of the debt restructuring process, it was also a year marked by lack of progress in getting the economy back on track. Once the tail winds from the post Hurricane Maria rebound fizzled, economic activity hit negative territory once again. To make matters more worrisome, there was no significant private sector investment through Opportunity Zones (OZ), key structural reforms remained incomplete while others, such as the pensions system, may yet bring about a severe backlash. This year also saw the formal confirmation of everyone’s worst fears—that US funds for reconstruction will be significantly less than expected at first (around $30 bn less), which, unfortunately, altogether, does not bode well for us in 2020. The economy needs to grow soon, or the assumptions made in negotiating with bondholders may have to be revisited. Something everyone will want to avoid.

Raising the Stakes of Our Economic Recovery The unintended consequences of the US-China Trade War
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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.

Rebuild Electricity
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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.

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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.

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Q4-2018: Less Than the Sum of Its Parts

Less Than the Sum of Its Parts How Puerto Rico´s Q4-2018 Economic Indices Performed

How Puerto Rico´s Q4-2018 Economic Indices Performed

The end of 2018 left a rather enigmatic picture of PR’s economy as most indices performed well in Q4 with the notable exception of the key leading indicator. It looks as if the accumulation of delays in the disbursements of reconstruction funds coupled with continuous decline in the resident population and the pending consequences of the federal government shutdown started in December—including the possibility that funds initially appropriated to PR could be reallocated to finance the President’s wall—simply worsened expectations Island-wide. At the sector level, manufacturing continued to pull its weight on the back of US demand in spite of changes to the tax code whilst banking slowed down slightly. The first $1.5 bn recently disbursed CDBG-DR funds surely bode well for economic activity over the next few quarters. It remains to be seen, however, whether these will be enough to sustain economic growth in the long-term.

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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.

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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.

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Q42017: A Shattered Economy After Hurricane Maria

Shattered EconomyAnalysis of 4th Quarter 2017 economic indices

At the end of 2017, PR exhibits a shattered economy with a broken infrastructure due the devastation of hurricane Maria on September 20, 2017. As of January 2018, more than 400,000 clients or 30% of PREPA’s clients still had no electricity. As analyzed in our previous Q3 issue, a fast recovery of electricity is a key factor in the island’s economic recovery. Other basic infrastructure, such as, water, communications, and roads continue to have problems. The lack of a fully operational and reliable infrastructure is hitting businesses as well as households. With lower demand and rising operational costs, many businesses have reached the point of no return and have closed or filed for bankruptcy. Families have chosen the option of mass migration, particularly to the USA. HCCG’s six quarterly economic indices highlight the effects of the broken infrastructure and a weak economy in the post Maria era.