Puerto Rico’s total outstanding public debt is slightly more than its gross national product, with $61.79 billion of overall debt inching above its fiscal 2009 gross national product of $61.70 billion, according to an independent report released this week.
The Center for the New Economy, a nonpartisan think tank that analyzes fiscal policy issues in Puerto Rico, reports that the total public debt to GNP ratio is 100.15%. Commonwealth-backed debt, extra-constitutional debt, outstanding bonds of independent authorities, and municipal debt totaled roughly $61.79 billion as of June 30, compared to an estimated $61.70 billion of GNP that the island produced in fiscal 2009.
Puerto Rico’s Planning Board, which reviews the commonwealth’s fiscal health and helps craft long-term economic goals, calculates the island’s GNP.
“It should be cause for concern,” Sergio Marxuach, CNE’s policy director, said in a telephone interview. “This is certainly not sustainable over the long term.”
Unfortunately for Puerto Rico, it was already in the midst of its own economic recession, fiscal crisis and high debt levels before the U.S. economy contracted last year. The commonwealth has been wrestling with structural deficits for several years.
That leaves Gov. Luis Fortuño and his administration balancing the need to decrease the size and cost of government while at the same time aiding its local economy through spending and easing taxes.
“It so happens that this recession coincided with the fiscal crisis in the government of Puerto Rico,” Marxuach said. “So, on the one hand you have to increase taxes and cut expenditures to balance the deficit and on the other, in order to stimulate the economy, you should lower taxes and increase spending. So the administration right now is caught in a very difficult situation. You have to balance those two things and I think unfortunately for the short term, the outlook is still negative in terms of restoring growth in Puerto Rico. I hope by the end of next year things start turning around.”
While Marxuach pointed to the island’s 16.5% unemployment rate, local banks that are not lending in any significant way, and decreasing housing and vehicle sales, Carlos Garcia, president of the Government Development Bank for Puerto Rico, said other economic indicators show that the island is starting to come back from the brink. He said energy and gasoline consumption increased in July while sales of cement saw a slower rate of decline than in prior months.
In addition, the Planning Board projects that Puerto Rico’s GNP will show a positive growth of 0.7% in fiscal 2010, which began July 1. The board calculates that the GNP contracted by 5.5% in fiscal 2009.
Marxuach called the 0.7% projection is “highly optimistic” considering the 16.5% unemployment rate that would increase even further if the government moves forward with another round of layoffs. If the administration reduces its workforce by another 40,000, he said Puerto Rico’s unemployment rate would surge to 19.5%.
Conversely, Garcia said the Planning Board estimates takes into account the anticipated jolt the island will receive through the American Recovery and Reinvestment Act and the commonwealth’s own $500 million local stimulus plan.
“The reason for the expected slight growth is due to the significant amount of investment,” Garcia said in an interview. “Puerto Rico has already been able to achieve allocated funds in the federal stimulus of over $6 billion and we’re calibrating every month the money we expect to be expended, and we’re revising it on a monthly basis. We’re expecting that in October, November and December, we should be getting some significant inroads in terms of that money and that is what it reflects.”
In addition to federal stimulus funds, Puerto Rico is moving ahead with infusing private capital into its infrastructure, and officials aim to have three public-private projects underway by June.
The newly formed Puerto Rico Public Private Partnerships Authority will spearhead P3 projects on the island, and will consider 30 developments, including upgrades and improvements in transportation, renewable energy, and clean water. The GDB will host a P3 conference in San Juan on Oct. 15 and Oct. 16 to educate and inform prospective investors.
“What we want is to try to have as least three of those projects already running by the first half of next year — whichever are the three that can move the fastest and whichever are the three that create the greatest interest of investors,” Garcia said.
More private investment on the island would assist Puerto Rico once the federal stimulus funds are gone and help alleviate the need for public borrowing to support capital projects.
Jose Perez-Riera, secretary of the Department of Economic Development and Commerce, said making the island’s permitting process less cumbersome and more expedient will assist in creating more business growth. The House passed a bill to reform the current permitting system and officials expect the Senate to take up the measure in September.
Like Garcia, Perez-Riera attributes the slight GNP uptick to stimulus funds, but expects the administration’s overall economic reform initiatives and faster permitting process will aid Puerto Rico once the federal stimulus spigot is closed.
“Obviously [the stimulus] doesn’t fix the problem long term, it just creates an environment where people start doing business and are re-engaging in the economy,” he said. “What we need to do is to make sure that we take advantage of that wave that we’re going to be receiving so that we do the reforms that have to take place, so that once that money has cycled through the economy we’re in a position to maintain that growth.”
