Puerto Rico’s Debt Crisis: Why There’s No Quick Fix by [email protected]
Facing $70 billion in debt and a 45% poverty rate, Puerto Rico’s leaders are expected to meet with creditors soon in an effort to negotiate a debt restructuring deal. But experts caution that there is no quick fix to getting the island Commonwealth back on solid footing and allowing it to emerge from the crisis on a more sustainable path.
The root of the island’s crisis, points out Jose Villamil economist at Estudios Tecnicos, a San Juan consultancy, is that both the population and the economy of Puerto Rico have become smaller, and are projected to continue to contract. The island’s population dropped from 3.8 million in 2000, to 3.64 million in 2012 to 3.548 million in 2014, Villamil says. “By 2030 the population is now estimated to be around 2.8 million, way below … the 2000 projection of close to 4.0 million by 2020.” He adds, “There is not a general awareness of what 10 years of economic contraction means” for the Commonwealth and its population.
More than 250,000 jobs have been lost since 2006; manufacturing employment has dropped to 74,000 from a peak of 165,000 in 1996; Investment in construction is down from a high of $6.6 billion in 2004 to $4.3 billion in 2015; home foreclosures reached a record high 4,000 in 2015. “What has happened in the economy over the past five decades is a collapse of the capacity to generate growth,” Villamil notes. “The recent experience beginning in 2006 is clearly not a recession, but rather the culmination of a long process of weak economic performance.”
According to Villamil, Puerto Rico’s economic malaise refers mostly to production, since consumption has held up fairly well over the years. There are several reasons for that: the federal transfer payments that make up more than 20% of the island’s personal income, government employment, though reduced recently, remains above 20% of total employment, and a very large informal economy that is estimated to be about 28% the size of the formal economy. “These three factors sustain consumption and isolate part of the population from economic volatility but, on the other hand, do little to stimulate investment and production since consumption is mostly imported,” Villamil says.
The economy is not expected to reach 2006 real GNP levels until the next decade if present trends continue. Assuming growth rates of 1.8% in real GNP beginning in fiscal 2015, Puerto Rico will reach the 2006 level in 2023. Forecasts are for at least three more years of zero growth or contraction, so 2023 is an extremely optimistic projection, Villamil adds. “What this tells us is that the economy will have lost close to 20 years of economic evolution.”
“The recent experience beginning in 2006 is clearly not a recession, but rather the culmination of a long process of weak economic performance.”–Jose Villamil
David Lewis, a former assistant secretary of state of Puerto Rico, says that “Puerto Rico’s problem is that the rest of the world has changed to what we call ‘open market competition’ in all industries and sectors, but Puerto Rico has not.” Open market competition makes economies more efficient, more productive and more competitive, Lewis adds. “We’ve seen [elsewhere] in the Caribbean and Latin America, [countries] whose economies are structurally closer to Puerto Rico, that the [processes of creating open market economies] take 10 to 15 years. And they are very difficult and contradictory processes. So there is no quick solution, and during that period there are a lot of winners and a lot of losers.”
Puerto Rico dealing with the Debt
Puerto Rico will be unable to muddle through without restructuring its debt, according to University of Pennsylvania law professor David Arthur Skeel. “The Commonwealth is probably going to have to restructure its debt, in addition to whatever else is done to help it out. Puerto Rico’s governor and congressional representative have been pushing for access to bankruptcy, at least for its municipalities, maybe for Puerto Rico itself.”
But Puerto Rico doesn’t have either option now because the island’s municipalities were excluded from Chapter 9, the municipal provisions of the bankruptcy laws, in 1984. “There has been discussion about some sort of federal funding — some kind of bailout,” Skeel adds. “There’s also been discussion about other legislative changes such as relaxing the minimum wage requirement, which many economists on both sides of the aisle think is too high for Puerto Rico.”
In Skeel’s view, “the most plausible — almost the only plausible — strategy starts with some kind of control board to oversee Puerto Rico’s finances, as was done with New York City back in the 1970s. It’s been done with Washington, D.C. and other cities since then. In addition, I think Congress needs to give Puerto Rico’s municipalities, at least — and probably Puerto Rico itself — access to bankruptcy.” Skeel notes that “if bankruptcy isn’t made available, it’s going to be a mess. It’s already turning into a mess now. Several bond funds have sued because of defaults, so there’s already litigation against Puerto Rico. There’s really no clear process for deciding who gets what if there’s no bankruptcy option.”
“Puerto Rico’s problem is that the rest of the world has changed to what we call ‘open market competition’ in all industries and sectors, but Puerto Rico has not.”–David Lewis
Lewis, now vice president of Manchester Trade, a Washington, D.C.-based consultancy, says the only solution that people seem to agree on is a piecemeal one. In such a scenario, the government may agree to do better on tax collections, or increase some taxes to raise more money or attempt to receive bankruptcy protection, as have American states under their Chapter 9 provisions. “Such a statute would enable Puerto Rico to set up a procedure for doing the payments.”
In terms of the restructuring, there are two main pieces, Skeel says. “First, there needs to be a control board and it needs to be set up by Congress but with significant Puerto Rico involvement. And second, I think there needs to be some bankruptcy or restructuring option. In my view, if you don’t have both of those pieces — if you try to do just one of those things — what you are doing, in essence, is building half of a bridge.” He adds that Puerto Rico has to conclude that whatever is put in place is a good idea, and has to agree to it as a political matter. “They don’t have to agree to it as a legal matter. Congress has a great deal of flexibility in what they can do unilaterally, but for it to work, Puerto Rico has to be convinced that it’s right.”
A major political challenge, according to Lewis, is that even under normal situations, “that’s an uphill battle in Congress, but when you’re doing it when you’ve got some water right at your nose, and there is urgency and there are so many vested interests, everyone with a vested interest is arguing pro or con. And in an election year, I do not see that there will be a consensus in Congress to grant Puerto Rico Chapter 9 as a way out of this.” It’s not a high enough priority, he notes,