Moody’s Analytics projects 17% to 19.6% Puerto Rico economic decline

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Moody’s Analytics is projecting the Puerto Rico economy will contract in a range of 17% to 19.6% from early 2019 to late 2028.

The projection came in a report by Moody’s Analytics Economist Bernard Yaros, “The Economics of Puerto Rico’s Post-Maria Recovery.”

The projection is far more pessimistic than the projections of Puerto Rico Oversight Board and Puerto Rico economic consultant Estudios Técnicos.

Yaros made projections for three scenarios. All three assume that Puerto Rico will receive at least $62 billion in disaster relief over the next 10 years.

The first scenario assumes that the island receives an additional $31 billion in hurricane-related aid over the next 10 years. The federal government would provide most of this money.

In August Puerto Rico Gov. Ricardo Rosselló presented the “Economic and Disaster Recovery Plan” to the U.S. Congress. It would cost a total of $139 billion over 10 years, most of it from the federal government.

Yaros says that of this total, $45 billion is expected to come from Puerto Rico itself, the private sector, and charitable foundations. He finds this unrealistic and his first scenario assumes a total of just $93 billion in aid.

The second scenario assumes that Puerto Rico follows the fiscal plan that the board approved in June.

The third scenario assumes the passage of the Puerto Rico Economic Empowerment Act of 2018 in Congress. Senators Orrin Hatch (R-Utah) and Marco Rubio (R-Fla.) introduced the bill in May.

The bill would cut payroll taxes in half. It would also extend the federal tax credit to Puerto Rican families to those with one or two children. Currently, only families with three or more children are eligible.

Yaros expects gross domestic product to go up until early 2019. It would go up about three extra percentage points in the first scenario than in the others. After the economy peaked in inflation-adjusted terms in early 2009, Yaros expects it would decline at least through late 2028, when his study ends.

He expects inflation-adjusted GDP to decline from early 2019 by about 18.6% in the first scenario, 17% in the second scenario, and about 19.6% in the third scenario.

His projections are much more pessimistic than the board’s projections of island gross domestic product. In its June fiscal plan, it presented projections for nominal movements in GDP.

The board isn’t absolutely clear about its projections for inflation beyond fiscal year 2023. However, it is clear that the board expects substantial real economic growth in fiscal years 2019 and 2020, followed by rates around 2% for the following two years. From fiscal years 2025 to fiscal year 2030 the board projects a contraction, with the worst year being around fiscal year 2027, with a real decline of about 1.6%. After fiscal year 2030 the board is projecting real growth rates of about 0.75%.

Estudios Técnicos released “Balance of the Economy Post-Hurricane Maria” on Sept. 19. It projected that the island’s economy will grow 5.3% in 2019, 4.7% in 2020, 1% in 2021, 0.8% in 2022, and 1.5% in each year from 2023 through 2026. From 2018 to 2026 the consulting firm is projecting a 19.3% growth in real economic output.

When asked about the differences of his study’s projection to that of the board and the consulting firm, Yaros said he couldn’t comment on the latter because he hadn’t seen it.

Regarding the board’s projection he said he had taken a different approach to three of the board’s sets of structural reforms: the first to ease business, the second on human capital and welfare reforms, and the third for lowering the cost of electricity. These are only factored into the second scenario.

He said he believed, unlike the board, that most of the positive impact of these reforms wouldn’t be felt until the second and third decades of their existence. Yaros said that he believed the board’s austerity measures would have a more powerful and immediate impacts than the structural reforms will have in the coming decade.

The austerity measures would hurt the economy more than the structural reforms will help in the next 10 years, he said. The resulting tough times would be expected to lead to more migration and this would, in turn, contribute to a further economic contraction.

Finally, he said that it was unclear if the board would succeed in fully implementing these reforms as fast as it expects.

Taken together, Yaros said these are the reasons his projections for the island in the second scenario are more pessimistic than those of the board.

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