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

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.

PR Needs to Be Rebuilt Once and For All
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01/20 Puerto Rico Needs to Be Rebuilt Once and For All

January’s earthquake, if anything, marked a point of no return
Almost two and half years after the devastation caused by Hurricane Maria, PR faces yet another major reconstruction task, albeit this time, mostly constrained to its southern shores. The geographical limitation, however, does not make it any easier as the combination of unpreparedness, lack of any substantial domestic emergency funds and ongoing austerity measures creates a very real and dangerous scenario. Depending on federal approval for reconstruction funds is almost the same as depending on international aid for reconstruction and, in this sense, PR’s recovery looks a lot closer to El Salvador’s than the one that took place in Chile. Moreover, it is by now abundantly clear that we can ill afford another botched reconstruction effort as a second mass migration is likely to ensue. To avoid it, we will need investments that can trigger virtuous cycles of economic activity, not just short-term construction-related projects. Otherwise, we could remain stuck in our current predicament for a long time to come.

 

2019 Summary
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • • • 0 Comments

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.

Can PR create the conditions for local investors to return?
By H. Calero Consulting Group Puerto Rico Economic Pulse© • • 0 Comments

09/2019: The Long Road to Repatriate PR’s Capital

Can PR create the conditions for local investors to return?

Long before the onset of PR’s current debacle, the economy used to generate consistent savings that in part justified its status as an attractive investment destination. In effect, personal savings ranged between 8% to 15% of personal income during the 1980s (the golden years for S.936 companies) and 1990s (the golden years of construction), most of which were channeled towards financial investment on the Island. Fast forward 15 years and those same assets under management are now almost entirely outside PR, the majority of them under tight institutional restrictions on questions such as geography, risk and return. Despite this, there is still a window of opportunity if the government is able to develop an investment plan articulated through the Opportunity Zones (OZ) initiative. Such a repatriation of capital requires an active risk-mitigation role from the government and, above all, allowing the economy to expand through stimulus rather than austerity. The final decision will have long lasting implications.

The Dire Reality of Most Municipalities The case of Puerto Rico´s municipalities in times of austerity
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08/2019 The Dire Reality of Most Municipalities: The case of Puerto Rico´s municipalities in times of austerity

The days of business as usual for PR’s 78 municipalities are long gone. What started as sluggish economic growth back in the early 2000s mutated into a full-blown crisis that now includes the highest emigration wave since the 1950s, negative yearly average investment growth since 2010, a default on $72bn of public debt, $49bn in unfunded retirement liabilities, the imposition of a Financial Oversight Board (FOB) and, most importantly, the continued contraction of central government subsidies to the municipalities. In early May 2019, the FOB approved a statute to certify the sustainability of each municipality’s budget. The possibility of lengthy red-tape disbursements for federal reconstruction funds may be the last nails on the coffin of many local governments. Find out why PR’s municipalities face financial distress and what needs to be done. The solution lies in viable regional economic development strategies, which have yet to see the light of day.

An Alluring Goal or an Undesirable Result? On Puerto Rico’s long-term economic sustainability
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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
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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.

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
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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.