Puerto Rico experts, participants discuss its future

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The third of three stories marking the anniversary of PROMESA.

The future of Puerto Rico is cloudy. The economy has been in decline for all but two years since 2006, the government is loaded with debt, much of it in default, and competing forces are litigating its future.

For the territory to improve, sources said the Oversight Board and the local government should act differently in the next in the next few years to put it on solid footing.

“The Puerto Rican leadership needs to develop a working plan rooted in community needs that places all interests into a workable context," said Tom Sanzillo, director of finance at Institute for Energy Economics and Financial Analysis.

Puerto Rico Oversight Board Member Andrew Biggs
Puerto Rico Oversight Board Member Andrew Biggs said he was pessimistic about Puerto Rico's long-term future.

“The bondholders must end their insistence on unrealistically high levels of repayment of legacy debt. Their continued pressure for repayment plans that bear no relationship to Puerto Rico’s economic reality is an impediment to fiscal solvency, sound economic growth, and political consensus,” Sanzillo said.

Center for Popular Democracy Co-director of Community Dignity Campaigns Lopez Varona said the board “should be abolished. The board was created, and has acted, as a representative of the bondholders. As part of our demands on recovery and reconstruction efforts, we believe that there are models of community that can be implemented to make sure that resources are used in an equitable and proper manner.

“Legislation should also be passed to protect pension holders, rectify labor cuts, and labor incentives such as increases in the minimum wage should be implemented,” Lopez Varona said.

All observers think governing bodies have to change their behavior, but they differ on the shape of that change.

Puerto Rico Oversight Board Executive Directory Natalie Jaresko said she hoped for greater collaboration with the local government. With this the two sides could finish the debt restructuring, assure the sustainability of budgets, and put in place mechanisms so that there will be fiscal sustainability in the future including timely Comprehensive Annual Financial Reports and budget controls.

Center for a New Economy Public Policy Director Sergio Marxuach said the local government has to come to realize the board actually exists and it needs to engage with the board.

The board, on the other hand, shouldn’t be too aggressive with the local government and should try to negotiate with it, he said.

Banco Popular Chief Financial Officer Carlos Vazquez also agreed: “A better environment of cooperation between the board and the local government would speed up the process and would make it significantly less costly for the people of Puerto Rico, as both sides would save millions of dollars in legal and advisory fees as well as significant time, which is now being spent in legal proceedings.”

Advantage Business Consulting President Vicente Feliciano said the board and local government should collaborate on areas of agreement until the November elections. After that there will be more opportunity for the local government to compromise on disagreements with the board.

Others called for policy changes.

University of Puerto Rico Professor José Colón said the island had a fundamental problem of not having an economic model. Without this, “we will get nowhere.”

The board and “local government should put out updated audited financials, a receiver should be appointed for PREPA, and a ‘grand bargain’ [in the debt restructuring] should be hatched out as soon as possible,”T&T Capital Management Chief Executive Officer Tim Travis said.

“The board needs to drive things like the development of reliable and timely data regarding the commonwealth and its economy and government finances ... The board should be more assertive in the policy arena, pushing Congress to do things like provide something similar to [the historic] Section 936 [tax exemption for the island],” said Muni Credit News Publisher Joseph Krist.

H. Calero Consulting Group President Heidie Calero also said the board and local government has to lobby Congress. With COVID-19 and the U.S.-China trade wars, there is an opportunity for the pharmaceutical sector in Puerto Rico to bridge this gap in the health chain supply under the American flag and at relatively lower costs. Puerto Rico needs to make a convincing case before U.S. Congress and President Trump or whoever is the president of the U.S. in 2021.”

She and Marxuach agreed with Colón on the importance of developing an economic plan.

Additionally, Calero called for “true educational reform.”

Jubilee USA Network Executive Director Eric LeCompte also focused on the island’s children, saying that budgets must reduce the high child poverty rate on the island.

Many said the future was unclear.

Marxuach said the uncertainty stemmed from Title III bankruptcy Judge Laura Taylor Swain’s decisions in some of the bankruptcies, the lack of clarity as to when a COVID-19 vaccine will be developed, how fast the local economy rebounds from the current downturn, and how fast federal funds flow to rebuild the island.

Marxuach said the uncertainty led to one of the Center for a New Economy’s concerns with the board’s five-year fiscal plan. “It will probably be useless in six months.”

Because of this, everyone should consider introducing contingency bonds — bonds paid on the basis of economic activity, Marxuach said.

José Villamil, Chairman of Estudios Técnicos, agreed as to the uncertainty of the island’s economic future. Federal Hurricanes Maria and Irma reconstruction assistance and the use of the funds “are the main factor on economic performance in the next three to five years.”

Vazquez and Calero agreed the future was unclear.

“All we can hope for is for continued progress in economic matters (budget management, debt restructuring and structural improvement in the government), as well as the evolution of an economic plan/model that will be able to propel Puerto Rico to sustainable and continued economic activity,” Vazquez said.

Travis agreed the future was uncertain but said that, “What happens in bankruptcy, will greatly impact the Puerto Rico economy. Instead of focusing on removing as much debt as possible and bailing out an incredibly corrupt government, Puerto Rico should embrace opportunity and do everything it can to attract business. It should honor as many of its obligations as possible, upgrade the utility, and seek out offshored manufacturing.”

“If [the Puerto Rican people] don’t do this, I think Puerto Rico will languish and struggle to attract a quarter of the potential business they could,” Travis said. “They will remain highly reliant on the mainland and the Federal government, and will struggle to have any access to capital markets, meaning the infrastructure will remain dilapidated.

Muni Credit News Publisher Joseph Krist
Muni Credit News Publisher Joseph Krist said Puerto Rico needed to release more timely financial information.

Travis said he thought the local government would lose its case concerning Highways and Transportation Authority revenues either in the District Court or, if not there, in the Appeals court. This would open the door to a “Grand Bargain” on the GO, HTA, and Puerto Rico Electric Power Authority debt. He said he didn’t think there’d be an overall debt settlement before there was a ruling on the HTA debt.

Like Travis, Cate Long, Puerto Rico commentator, said there was a danger the government will fail to regain an ability to borrow. “The likelihood that credit rating agencies will assign ratings [in the next five years] seems pretty low since Puerto Rico refuses to disclose their audited financials. This means that Puerto Rico will have limited access to the retail municipal market since brokerages cannot put clients into unrated debt.

“Maybe Puerto Rico will be permanently exiled from the municipal market and trade as a sovereign credit in competition with other Caribbean issuers,” Long said.

Villamil was also pessimistic about the future: “We anticipate an economy at least until 2024-25 that will grow very, very slowly.”

Villamil said November’s gubernatorial election probably wouldn’t change much. All the major party candidates except one are “fairly conservative not in an ideological sense only, but also in terms of being cautious and not focused on the needed structural transformations that the island’s situation calls for.”

The one exception is San Juan Mayor Carmen Yulín Cruz but she doesn’t have a chance to be elected, Villamil said.

“I do not foresee any significant changes in how government and the legislature operates regardless of which party wins in November,” Villamil said. “This, of course, is not a welcome development.”

Puerto Rico Attorney John Mudd agreed. His assessment of the next five years was: “Disaster, since the politicians do not want to make any changes in the way they do business.”

University of Puerto Rico Professor Emilio Pantojas, referring to the two main political parties in Puerto Rico, said New Progressive Party and Popular Democratic Party “governments are corrupt. They use federal moneys as patronage or business opportunities for their followers. See what happened with the [contracts for the] COVID-19 tests. There are no good results to be expected. The debt is simply not payable.”

Yet one observer was optimistic about the future. Feliciano said, “I am cautiously optimistic. A proper debt restructuring should be approved by Judge Swain sometime in 2021. After this, moderate economic growth should resume.

“The bankruptcy process consumes enormous quantities of management attention, which is a scarce commodity in the government of Puerto Rico. It is also very expensive,” Feliciano said.

However, Feliciano is in the minority. More participants and observers are pessimistic. On May 27 Board Member Andrew Biggs wrote on Twitter, “Although structural reforms could bring huge economic benefits to the people of Puerto Rico, the politicians aren’t willing to bear the (smaller & shorter-term) political costs. I wish it were different, but Puerto Rico 20 years from now will likely be very similar to today.”

Correction: A quote in an earlier version of this story should have been attributed to Tim Travis, chief executive officer of T & T Capital Management rather than to José Villamil, chairman of Estudios Técnico.

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