puerto rico’s economy: looking...
TRANSCRIPT
1
Puerto Rico’s Economy: Looking ForwardJosé J. Villamil
June 10, 2016
2
Presentation plan
Macro Economic Overview and
Economic Forecasts for Puerto Rico
Recent Trends
Fiscal Issues Looking Forward
3 14
18 26
3
Macro Economic Overview and Economic Prospects for Puerto Rico
4
Long Term TrendsOver the past five decades: a collapse of the capacity to generate growth. The recent experience is clearly the culmination of a long process of economic decay. The following graph shows a rapidly declining rate of growth over the last six decades.
5.0%
7.0%
4.0%2.0%
2.7% 0.4%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Puerto Rico Real GNP Growth
Decade Average
Major structural transformations have resulted making useless the traditional economic tool kit for dealing with recessions. This is precisely what the recent Plan for Fiscal and Economic Growth does and for this reason is bound to be ineffective.
5
GNP & GDP: Puerto Rico & U.S.• The local economy has experienced secular deceleration in economic growth since
the mid 1970s. • Up to the late 1990s, the local economy’s cycle was significantly correlated with the
U.S business cycle. • Since then, their growth paths have diverged.• The underlying reasons leading to the U.S. recession in 2008 are fundamentally different
from those that led to the start of the P.R recession in 2006.
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
U.S. GDP
P.R. GNP
Fuentes: Junta de Planificación (2015); U.S. BEA;
6
Investment in Construction(I/GNP)
17.1%
4.6%
2.4%2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
r
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Total
Private
Public
• Investment in construction fell from nearly $7.0 billion to around $3.4 billion.
7
Private Investment in Construction
Construction Investment - Private
2005 2009 2010 2015Change
2015-2005
Housing $2,062.80 $1,099.40 $996.10 $571.40 -$1,491.40
Other $1,578.30 $823.50 $834.50 $1,316.50 -$261.80
Total $3,641.10 $1,922.90 $1,830.60 $1,887.90 -$1,753.20
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Population3,808,610
3,725,7893,686,771
3,642,2813,595,839
3,548,397
3,339,170
2000 2010 2011 2012 2013 2014 2020Sources: U.S. Census Bureau.
• According to the 2016 Community Survey, every municipality lost population with the exception of Gurabo (3.7%)and Toa Alta (0.1%).
9
PopulationChange in population by cohort 2010-2020
-162,000
-66,000
62,000 55,00083,000
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
0-19 20-39 40-59 60-69 70+
Source: U.S. Census Bureau.
It is expected that the total population in 2020 will be 3.3 million
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Migration is more prevalent among younger populationsMigrant Profile
• Out of all immigrants, 49% are less than 24 years old.
• The probability of a young person migrating is twice that of someone 40 to 54 years old.
Source: Perfil del Migrante 2013, Puerto Rico Statistics Institute.
0.5%
0.8%
1.2%
1.5%
1.8%
2.0%
2.2%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
55 a 69
70+
40 a 54
Promedio
0 a 17
18 a 24
25 a 39
Probability by Age Group
31.3%
18.1%27.1%
13.0%
7.3% 3.1%
Net MigrationBy Age Group
0 a 1718 a 2425 a 3940 a 5455 a 6970+
11
Population and Households
Sources: US Census Bureau 1970 - 2010. Estudios Técnicos, Inc. estimates for 2010-2020.
Annual Household Formation 1970-2010Historical
23,535
18,72320,640
11,521
6,686
37.2%
21.6%19.6%
9.1%4.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0
5,000
10,000
15,000
20,000
25,000
1970-1980 1980-1990 1990-2000 2000-2010 2010-2020
Cambio promedio anual Cambio % en la década
ChangeAnnual Average
Decades
Change%
Average Annual Change Percent Change
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Median Household Income, 2010Highest incomes in suburban municipalities around San Juan
• San Juan Metro Area has the highest median household income.
• Guaynabo is the most affluent community.
• Inequality in income distribution is both a social and geographicproblem.
13
Annual Real GNP Growth for PR and its Forecast
(2004-2019)
• The Government’s role is no longer that of stimulating the economy. Its recent actions lead the economy in the opposite direction. The International Monetary Fund (IMF) projects contractions in the economy until 2021.
2.7%
1.9%
0.5%
-1.2%
-2.9%
-3.8% -3.6%
-1.7%
0.5%
-0.1%
-1.7%
-0.6%
-2.2%-2.8%
-3.3%
-1.7%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
14
Recent Trends
15
Employment94
8.14 98
9.17
993.
231,
004.
361,
017.
141,
021.
111,
003.
541,
011.
741,
036.
291,
053.
281,
051.
191,
036.
131,
024.
2499
6.03
943.
2692
3.59
931.
3093
7.16
916.
8190
6.23
800.0
850.0
900.0
950.0
1,000.0
1,050.0
1,100.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Negociado Estadísticas del Trabajo. División Estadísticas sobre Empleo
Non Farm Salaried EmploymentTotal, 1996-2015 (in thousand)
Unemployment Rate1996-2015
13.8
%13
.1%
13.6
%12
.5%
11.0
%10
.5%
12.0
%12
.1%
11.4
%10
.6%
11.0
%10
.6%
11.2
% 13.7
% 16.3
%16
.2%
15.2
%14
.0%
14.3
%13
.0%
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
In April 2016, Non Farm Salaried Employmentin Puerto Rico was 894,300.
The unemployment rate in April 2016 was 11.4%.
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Employment
Employment Rate1996-2015
Private Employment1996-2015 - thousands
Source: Negociado Estadísticas del Trabajo. División Estadísticas sobre Empleo
41.3
%41
.6%
41.2
%41
.0%
41.1
%40
.6%
40.3
%40
.9%
41.2
%42
.0%
43.3
%43
.5%
41.4
%39
.3%
36.9
%35
.8%
35.4
%35
.3%
34.7
%34
.7%
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
657
679 68
972
0 739
726
710 72
3 742
747
744
734
714
676
664
665 68
168
167
367
7
600
620
640
660
680
700
720
740
760
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
In April 2016 the employment rate was 35.9.
Private employment in April 2016 was 661,800.
17
Sales of New Housing Units
Number of Units
13,419
10,746 9,762
4,576 3,635
4,870 3,586 3,134
2,203 2,345
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Fuente: CSAR, Estudios Técnicos, Inc.
By PriceCSAR 2015
3%6%
19%
20%21%
18%
13%$50,000-$69,999
$70,000-$89,999
$90,000-$104,999
$105,000-$124,999
$125,000-$149,999
$150,000-$199,999
$200,000-$299,999
$300,000 o más
Sales in the first five months of 2016 averaged 200 units per month.
18
Fiscal Issues
19
Total Government Debt and as % of GNP
$37,
434
$40,
268
$43,
136
$46,
183 $53,
393
$58,
415
$62,
206
$64,
279
$69,
948
$70,
043
$71,
435
$72,
204
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Total Debt As % of GNP
Millions
20
Fiscal Deficits
From 2001 to 2013, accumulated Budget deficits exceeded $20 billion, during this same period $42 billion in debt was issued, half of which went to cover budget deficits.
$463
.9
$1,6
71.6
$201
.3 $937
.6
$1,0
13.0
$1,8
55.8
$844
.6
$965
.0
$3,1
80.1
$2,6
51.9
$2,4
64.7 $3,2
98.6
$1,3
22.8
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Fiscal Years -- 2001 to 2013
Sources: Office of Management and Budget (2015). Budget Petition (various years). Office of Management and Budget (2015). Approved Budget Fiscal 2015. The fiscal 2015 statistic corresponds to the estimated cash flow deficit upon the fiscal year's closing (May 20, 2015).
(millions of $)
21
Why the fiscal crisis?
• Upcoming debt service payments in July, 2016 of $2.0 billion. Default is almost inevitable.
• Puerto Rico’s economy stopped having endogenous capacity to promote growth in the seventies.
• Four factors covered up this condition: federal transfers, Section 936, a large underground economy and government expenditures.
• Between 2001 and 2012, $42 billion in new debt was issued and this permitted the Administrations to “kick the can down the road”…until we came to a dead end in 2013.
• By 2001, S&P had already signaled concerned and Moody’s in 2004, both with negative outlooks.
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Since January 2013, not acting quickly has made a difference and hasgreatly reduced the Government’s room for maneuver.
Some specifics
The GDB loan to ACT for $2.0 billion was clearly a problem in January 2013,yet the Bill to deal with the problem was submitted in November, 2014 whenthe GDB’s liquidity situation had deteriorated significantly.
The tax reform process that should have begun in 2013, did not commenceuntil mid-2014 and was not ready until early in 2015.
Dealing with the debt issue and the financial markets did not begin in earnestuntil 2015, although some initial initiatives did take place.
The local Financial Supervisory Board, created by Law last year, should havebeen put in place much earlier and, in fact, the Governor announced itscreation a number of months before submitting the needed legislation.
What could have been done differently?
23
Options for the debt issue
Moratorium on principal payments
GO bondholders have offered to postpone principal payments for five years and make an investment of $750 million. COFINA bondholders proposed that during fiscal 2017 no IVU/IVA receipts need be deposited in the COFINA Trust, generating in excess of $500 million in cash flow and reduced payments until 2021. A group of Cooperatives has made a proposal with some of the above conditions and using the point of entry price not faced value for negotiations.
Superbond
GDB has proposed issuing a new bond to substitute for existing debt with a haircut of 40%, extended maturities and including some specific conditions for local bondholders.
24
HR 5278
• The Bill approved by the House Committee on Natural Resources has yet to be adopted by the full House. If approved it will then move to the Senate. Amendments are certain to be made before full approval by Congress. Full approval before July 1st. is doubtful.
• If it were approved and becomes Law before that date, the July 1st. default would not be avoided, but no litigation would occur against the government.
• HR 5278 was unavoidable given the incompetent management of Puerto Rico’s finances for many years. It could have been avoided if:
o Early in 2013 the debt and liquidity problem had been addressed
o A well designed tax reform put in place in early 2014
o The Gross Receipts Tax not been eliminated in December, 2014
o The Administration hadn’t waited almost two years to submit legislation on the PRHTA loan from GDB
o The Legislature had approved the Bill as submitted, making it possible to deal with the GDB’s liquidity problem
o The possibility for a moratorium on principal payments had not been discarded outright.
25
HR 5278 (cont.)
• The Fiscal Control Board has one primary objective and that is to assure payment of the Government’s bonds. This means almost certainly a severe austerity program that will push back Puerto Rico’s economic recovery and could stimulate further out-migration by impacting social programs.
• The debt restructuring process is so cumbersome and requires that so many conditions be met, that it is unlikely that it will occur within the time framework outlined in the Bill.
• Title III, Section 314 includes the conditions necessary for an adjustment of government debt. It makes clear that the Plan of Adjustment must be “in the best interest of the creditors…”. Only the Board is authorized to put together a Plan of Adjustment, and submit the Plan to the Federal District Court.
• There is no local “Plan B” for the various distinct variations in results that the Board’s orientation could generate.
26
Looking Forward
27
No one expects housing to reachthe same level of sales that itenjoyed in 2006, 13,000 new units.Likely levels will be nearer the 2014level of some 2,200 units for theforeseeable future.
Much of the construction industry,for example, is not only smaller,but has disappeared completely.Reviving the industry will requiremajor structural measures notmarginal ones.
The banking sector now hasroughly 40% fewer assets than in itspeak year of 2005, although it isnow profitable.
250,000 jobs lost since 2005 andmajor shifts in the labor markethave taken place.
A major impact of a shrinkingpopulation and economy is onphysical infrastructure planning,with excess capacitydeveloping in some of themajor infrastructures, PREPA, forexample, but also theDepartment of Education.
The Restructuring ProcessSome Numbers
28
Long term prospects
• Obviously, moving the economy back to a path of high growth rates will not be easy given the erosion of human, economic, financial and social capital and the need to reconstitute an institutional framework that is not functional with present and prospective economic and social needs.
• Economic culture has become a defensive culture related to the fact that the economy has become a market share economy.
• In the public sphere, the political system has become what Acemoglu and Robinson (Why Nations Fail) call an “extractive” political system, one in which maintaining itself in power takes precedence over resolving society’s problems. Further the political system has become an economic sector and the political class an economic class.
• Turning around the cultural context reflected in the above, particularly with respect to the political system, will take time and leadership, most likely from Civil Society.
• An open economy that has shrunk and in which its institutional framework has been severely weakened faces greater risks from external shocks. This requires that risk management assume a central role in economic policymaking.
29
Long term prospects (cont.)• There is a need to focus on those structures that can be transformed in a relatively short
period and that can be instrumental in breaking the negative spiral that has characterized the economy.
• Puerto Rico’s approach to development policies has been characterized for decades by a short term operational bias. Given the risk environment for the Island, the absence of resources and the structural deficiencies that have resulted from the prolonged and deep economic contraction, the change to a strategy and risk based decision-making approach is essential in order to minimize the Island’s risk profile and advance medium and long term economic perspectives.
30
Major structural ruptures have resulted in the Island’s demographics(including size, age composition and geographic distribution), itseconomic structure, labor markets, government and even the spatialdistribution of economic activities.
Even culture, understood as the set of norms that regulates everyday life,including economic aspects, will have been impacted.
Reconstructing the various “infrastructures” (physical, institutional, social,cultural, etc.) that have been impacted by the prolonged interplay of ashrinking economy and population is a much more difficult task thanputting in place market correction initiatives.
Long term prospects (cont.)
31
What can we expect?• The U. S. Economy will grow but at a slower rate in the next two years.
• It is reasonable to assume that austerity will prevail over stimulus and that certain programs will be eliminated or downsized.
• The Global economy will reflect mixed performance with the advanced economies growing at modest rates in the next two years and the BRICS slowing down. Latin America’s growth will almost certainly continue but at much slower rates. Brazil, the largest regional economy is in a deep recession and faces increased turmoil.
• Overall, oil prices will remain at historically low levels for this and the following year, but a modest increase is to be expected.
• China’s economic presence will partially substitute that of the U.S. in the Middle East, Africa and Latin America, although its recent difficulties will impact Chinese expansion abroad.
• The practice of U.S. firms finding better tax environments will continue, but legal efforts to stop the “inversion” process will almost certainly be adopted. The CFC’s are threatened by proposed changes to the U.S. tax code.
• The risk of an increase in the Fed’s interest rate has been reduced by recent performance of the labor market.
32
What can we expect?In Puerto Rico:
• Continued fiscal difficulties with the threat of a major default in July, 2016, now almost certain, without HR5278.
• A prolonged period of litigation is foreseen, with one case already in Federal court questioning the legality of the “clawback”. The GDB has still to present a truly new negotiating position, preferring the “superbond” offer with minor recent modifications.
• PDP candidate for Governor, David Bernier, has presented a proposal for a five year moratorium on principal payments, guarantying the payment of interest. The rationale for the measure is that it will permit a sufficient timeframe for negotiating a permanent agreement on the public debt.
• With respect to the tax system, a suspension of the VAT has been legislated, as well as freezing the B2B tax on services at 4.0%.
• High energy costs will remain for the foreseeable future, even with low petroleum prices, and may increase as a result of debt negotiations and expected petroleum price increases.
• The 2016 elections will take precedence in defining policy initiatives.
