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Puerto Rico Still on the Road to Default

By: Frank Worley-Lopez - Apr 1, 2014, 9:18 am

Español While Governor Alejandro Garcia Padilla continues to insist that the economy has turned the corner in Puerto Rico, the hard numbers do not back him up. The administration has instituted a series of austerity measures that, according to the Government Development Bank, have increased revenues and lowered the cost of government. Those actions, however, have not eliminated the budget deficit last estimated at roughly US$800 million.

To bridge the gap of shortfalls, the island recently issued US$3 billion worth of new debt to add to their already US$70 billion in existing debt. This means residents of the commonwealth have a higher debt to population ratio than that of any other jurisdiction in the United States.

Now come reports that the territory’s economy continues to shrink in ways that can only lead to more unemployment (already around 14 percent) and eventually lower tax revenue. During the first 8 months of the new fiscal year, the economy shrank by nearly 4 percent overall, and by more than 10 percent in specific areas.

From the report:

Electrical-energy production (an indicator of business activity) fell 2.2 percent in February and 3.6 percent over the eight-month period, while gasoline consumption (a reflection of the economic activity of households and individuals) fell 6.4 percent and 3.1 percent, respectively.

Cement sales, a key indicator of investment in housing construction and infrastructure, plunged 12.7 percent in February and 15.6 percent in the first eight months of the current fiscal year.

A small increase in private sector hiring was offset by fewer public sector jobs, but the rest of these statistics indicate the “Isle of Enchantment” continues to fall down the rabbit hole of economic despair. It begs the question: how will the island pay down or manage its debt, if its economy and population continue to drop?

The island’s population is falling. Unlike during the great Puerto Rican migration of the 1950s, this migration is largely middle and upper middle class professionals seeking a better life. They are in search of more pay, less crime, and less corrupt government. They and their families are the producers, the key components of the middle class engine. They include doctors and nurses who are routinely recruited by mainland states that can afford to pay much more than these professionals receive on the island. Without its most skilled workforce, the overall living standard on the island will decrease.

The dark truth behind these numbers is that Puerto Rico cannot afford to pay up on its loans without drastic and immediate change. Despite all of the opposition from labor groups, the minor changes imposed by the current government, led by the Popular Democratic Party, is piece meal at best compared to what must be done. The island must generate new jobs by lowering or eliminating regulation. It must attack internal corruption head-on, and lower crime rates significantly, in order to provide a feeling of security for its residents and to entice new business. It must take direct and immediate action to ensure that infrastructure actually works.

If Puerto Rico does not take significant action within the next two years, it won’t matter who gets elected as governor. The island will simply not be able to keep up its obligations, and that could lead to a nationwide domino effect in the municipal bond market.