San Juan, Puerto Rico (Tuesday, May 19, 2020) —The economic crisis faced by Puerto Rico in the grip of the COVID-19 pandemic requires forceful action on the part of the government and the Financial Oversight and Management Board, says Espacios Abiertos.
“When we analyze the international context and the situation of Puerto Rico in the light of the economic projections contained in the most recent fiscal plan, published by the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) on May 3, it becomes clear that the austerity policies proposed in all the fiscal plans certified so far have contributed to a worsening of the current crisis and, in the final analysis, the unsustainability of the public debt,” announced economist and Espacios Abiertos Senior Public Policy Analyst, Daniel Santamaría Ots.
Given this new situation, Santamaría Ots recommended that in fiscal year 2020-21, all possible resources within the budget of the government’s General Fund, in addition to those federal funds sent to the island for dealing with this crisis, be invested in making the island economy more robust and meeting its citizens’ most pressing needs — all with the purpose of overcoming the health and financial crisis created by the pandemic.
To that effect, the economist proposed that the creditors of Puerto Rico’s public debt immediately be asked to grant a moratorium or “standstill” of no less than one year, which would entail a suspension of all current payments. He insisted that this action is needed until a clearer picture can be had of the local and worldwide economic situation. Further recommendations by Espacios Abiertos are that an analysis of the sustainability of the public debt be carried out and published, to include the long-term effects of the pandemic; that austerity measures be eliminated once and for all as the guiding principle of the island’s public policies; that the audited financial statements for 2017, 2018, and 2019 be completed and published; and that a realistic and plausible macroeconomic plan be developed.
“In Puerto Rico, we should consider implementation of the kinds of relief measures for debt payments that are being promoted internationally by various groups of creditors in the private sector and by governments and multilateral organizations in different parts of the world. Economic stimulus packages and monetary policy are being combined with moratoria on the repayment of public debt to provide the fiscal space needed for dealing with the COVID-19 crisis. Puerto Rico needs a moratorium that will not further worsen the General Fund situation and needs, too, a halt to the austerity measures that are doing such great harm to the economy. Given this new pandemic scenario, we should analyze the sustainability of the public debt with integration of a macroeconomic plan and updating of the audited financial statements that will allow us to go to the capital markets in the future with guarantees,” the debt specialist went on.
According to Santamaría Ots, supranational bodies such as the International Monetary Fund (IMF) and the World Bank (WB) agree that the current crisis, known now as the “great lockdown,” will lead to the greatest economic slowdown since the Great Depression of 1930. He noted that the government’s new fiscal plan states that the current crisis presents an unprecedented risk scenario for Puerto Rico and points toward unsustainable public debt payments.
The economist noted that “the new fiscal plan presents projections of declines in the real Gross National Product (real GNP) of -3.8% for fiscal year 2020 and -7.8% for fiscal year 2021.” He also stressed that according to the new fiscal plan, “once the structural reforms and austerity measures are implemented, Puerto Rico will face primary fiscal deficits as early as 2030, rather than 2039 as had been projected in the February 2020 fiscal plan.”
He noted also that the government developed its new economic projections on the basis of three scenarios for the period from 2020 to 2025. The first, and most optimistic, projection suggests a lower impact from the crisis, which would lead to an average surplus of $502 million in each fiscal year. The second, “baseline,” scenario, assumes that the crisis will cause a larger impact, which will generate an average primary fiscal surplus of $32 million. The third, or “downside,” projection, would lead to an annual average deficit of $578 million in each fiscal year through 2025.
At this point, with three different financial scenarios, the government’s fiscal plan (as set forth in the plan’s exhibits 28 and 32) proposes three different projections as to possible primary fiscal surpluses or deficits between 2020 and 2025. These scenarios allowed Espacios Abiertos (EA) to estimate the cuts to the debt on the General Obligations (GO) bonds that would be needed:
- “Upside,” or optimistic scenario: EA proposes a 90% haircut, in which the present value of the central government’s debt payments after restructuration would range from $3.588 billion to $3.993 billion.
- Baseline scenario: EA proposes a 99% haircut, in which the present value of the central government’s debt payments after restructuration would range from $229 million to $254 million.
- Downside scenario: EA proposes a 100% haircut, in which the present value of the central government’s debt payments after restructuration would be $0.
The economist pointed out that Espacios Abiertos had long anticipated a debt scenario like the one Puerto Rico is currently facing. The effect of the pandemic is that that scenario has occurred earlier than we had projected. In January of 2018, the organization presented a study co-authored by Martín Guzmán, now the Minister of Finance for Argentina; Joseph E. Stiglitz, Nobel laureate in Economics; and Pablo Gluzmann, economics researcher at the University of La Plata, with a later, post-Maria update in May of 2019. The study, published in the juried journal National Bureau of Economic Research (NBER), concluded that in order for Puerto Rico to face a sustainable repayment of its debt, that debt, of some $72.2 billion, should be cut approximately eighty to ninety percent. Santamaría Ots recalled that to date, two restructurings have been carried out under PROMESA: the first was of the COFINA bonds, under Title III, which left a final debt balance of $12.02 billion; the second was of the Government Development Bank (BGF) bonds, under Title VI, leaving a final debt balance of $2.60 billion.
In February of 2020, the Financial Oversight and Management Board (Board) presented a Plan of Adjustment for all central government debt pending restructuring; the plan proposed to reduce the $35 billion debt on General Obligation (GO) bonds by 59%, to a final value of $14.48 billion. Santamaría Ots insisted that given the current crisis and after the numbers projected by the government in the new plan, the proposal is simply not feasible.
“We recommend that the next step be a tacit recognition of the impossibility of repaying the debt and that in this pandemic environment, there be imposed a moratorium of at least one year, an elimination of the austerity policies, a restructuring taking into account an analysis of the sustainability of the debt, that analysis to include the effects of COVID-19, the development of a macroeconomic plan, and the completion and publication of audited financial statements for the most recent fiscal years,” the economist concluded.
To see the press summary and the complete analysis, go to:
Comunicado de prensa [EN-PDF]: https://bit.ly/2ZieQYP
Resumen para prensa [EN-PDF]: https://bit.ly/2z0kEvG
Informe[EN-PDF]: https://bit.ly/2LEYoKh
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Contacts:
Maricelis Rivera Santos, Lic. R-1031 Aurora Rivera Arguinzoni:
787-615-2876 787-342-4241
maricelisrivera@accessallservices.com aurorarivera@accessallservices.com
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Espacios Abiertos is an independent non-profit organization, created in 2014, which promotes government transparency and accountability in public affairs and public funds. We encourage civic participation in oversight and decision-making in order to create an open society that is also more just and equitable for every person in Puerto Rico.