Puerto Rico board says turnaround won't last without structural changes

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The Puerto Rico Oversight Board, defending its fiscal plan over objections from the local government, said structural changes will be required to sustain the economy after the benefits of hurricane disaster aid wear off.

Puerto Rico’s economy will start to rebound in the second half of 2018, though it will shrink overall by 6% to 7% for the year, Moody’s Investors Service said Monday. The fiscal Oversight Board estimates $62 billion of disaster relief funding from federal and private sources will boost the island’s economy for the next few years.

The Oversight Board was appointed under the Puerto Rico Oversight, Management and Economic Stability Act of 2016 to guide fiscal policy and the restructuring of more than $70 billion of debt. The fiscal plan it adopted in a 6-1 vote last week forecasts the commonwealth will have $6.7 billion in budget surpluses over six years before any debt service is paid.

The fiscal plan does not include debt payments, but it does put the commonwealth’s government on a footing where payments would be possible.

“A debt deal, a plan of adjustment is really possible, I believe, only if creditors have confidence that there’s going to be money out there with which to pay this,” Natalie Jaresko, executive director of Oversight Board, told reporters in a conference call Monday.

The structural reforms in the new fiscal plan are best implemented when the economy is growing, Jaresko said. "To do that in an economy that is declining is painful."

Moody’s said the rebound will be slower than other regions that have been boosted by federal disaster aid because of a continued population loss and the unreliability of the electric grid.

“We expect the economy will register growth in the range of 5%-8% in 2019 on account of reconstruction activity, as well as base effects,” the Moody’s report said. “Federal assistance will support the rebuilding effort, even though the amount and timing of funds available remains uncertain.”

Juan Lara, partner and chief economist of Advantage Business Consulting in San Juan, said his forecast is similar to Moody’s, although his covers the territory’s fiscal year that begins July 1.

Lara is is forecasting approximately 6% growth in the new fiscal year following an 8% to 10% decline in the current fiscal year.

“Most of the drop this year will be the result of business interruption in the weeks after the hurricane,” Lara said in an email.

The eventual amount of the federal reconstruction funding and the timing of when the money is released “will be the key driver of growth in the next three to five years,” Lara said. “I am personally projecting about $9 billion annually on average, resulting in economic growth of 1.5% to 2.0% per year up to 2023. There may be a cliff after that, if we don't put in place a coherent growth strategy before then.”

The Oversight Board estimates the territory’s economy will have declined by 13.2% over the current fiscal year.

The multiyear fiscal plan adopted by the Oversight Board also forecasts an economic rebound in the near term.

“The bulk of the growth that is projected for fiscal years ’19 to ’23 is generated by the federal funds, the disaster relief funds,” said Jaresko.

Gov. Ricardo Rossello last week vowed to oppose the proposed reduction in private and public sector labor benefits and public sector pensions that the Oversight Board has incorporated into its plan.

Jaresko said her board and the commonwealth’s government reached agreement on many issues, but is ready to enforce the proposed changes the governor and Legislative Assembly are refusing to adopt.

The Oversight Board’s authority over the budget process can be used as its enforcement tool, she said.

Jaresko also indicated a willingness to continue negotiations.

The board wants the territory to end its employment protections that make it more difficult for private and public sector employers to fire workers by establishing the at-will employment system that’s common on the U.S. mainland. It also wants guaranteed vacation days and severance reduced and automatic Christmas bonuses eliminated.

“I cannot underline enough, that without beginning the structural reforms you have no chance an ending up at growth levels once the federal funding starts petering away,” Jaresko said.

Unless all the reforms are enacted the Oversight Board would be forced to order spending reductions that would result in a loss of government services, she said. Those services are needed to stem the flight of businesses and drop in population as people continue to move off the island.

“This fiscal plan still only puts us at a little bit less than 1% annual growth in the out years,” Jaresko said. “So it’s not like it’s got a lot of cushion to it. Puerto Rico really needs to take bold moves. It needs to do them now and let them work their way through the economy.”

Jaresko said she envisions having the plan confirmed by the federal bankruptcy court in the next year to 18 months.

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