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Puerto Rico: The Default Has Already Begun

By: Frank Worley-Lopez - Jun 2, 2014, 12:37 pm

EspañolPuerto Rico’s economy continues to falter. Economic activity in April 2014 was down for the 16th consecutive month, according to a report in El Vocero. The numbers reflect the harsh reality that Puerto Rico has not been able to turn the economic corner and will continue to have trouble meeting its debt obligations.

The article alleges that the government of the US territory has been withholding the release of negative economic numbers until after its meetings with investors. If true, this would further diminish the credibility of the commonwealth’s government in its dealings with rating agencies and investors. This should come as no surprise to anyone following the Puerto Rican economic crisis, since doublespeak is a regular and routine part of doing business with the current administration.

The latest information provides a bleak picture for the short-term future of the island. Cement sales are down by 17 percent for April compared to the same month last year. This is significant, since the sale of cement can be used to gauge future construction activity. Lack of new development or other work involving the use of cement, including roads, means low prospects for employment for people in that industry.

The report states 930,200 people were employed in Puerto Rico in April 2014 — a 1.5 percent decrease from April of last year, but a 0.2 percent increase from March of this year. Electric energy production is down by 2 percent, and gasoline consumption is also down by 2.1 percent for the year.

The island is at a significant crossroads, and the decisions made in the coming months will have a huge impact on the quality of life for the people of Puerto Rico and for the security of investors’ money.

While the island’s government is working to implement more changes to try to trim its size, local unions are threatening to strike yet again. All the islands public employees, except police, are unionized. Proposed changes to pension funds, for example, have already been met with union protests, strikes, and legal battles in the island’s court system. More strikes will lead to a greater interruption of public services and tarnish the already damaged image of Puerto Rico.

Puerto Rico needs radical, fundamental change in the way government does business and manages its economy. However, no such changes are on the horizon. Unless the US government intervenes in the commonwealth’s finances, I predict Puerto Rico will default on its debt, which will then lead to an even greater disaster for the Caribbean island and for the United States.

That scenario has already played out on a smaller scale. The government of Puerto Rico recently disavowed a US$230 million tax refund it owed to Doral Bank of Puerto Rico, an action which proved to be a death sentence for the troubled bank. Such is the future of the island’s economy.