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Analysis: Mistaken assumptions on recovery funds could stump P.R.’s future growth

The Financial Oversight and Management Board for Puerto Rico’s admission that there will be significantly less federal recovery money flowing into the island could stump the island’s future growth and debt restructuring talks, an analysis by the H. Calero Consulting firm stated.

Recently, the Oversight Board confirmed that the island would get about $30 billion less than the amount expected to recover from Hurricane María’s devastation in 2017. That announcement not only “erodes the Oversight Board’s credibility as a guarantor of good fiscal practices,” but is also a setback to economic growth, the analysis noted.

The austerity measures implemented by the Oversight Board since its establishment in 2016 has lead to contracted public spending by an annual average of 1.3% through Fiscal 2018.

“Rather than fixing the island’s economic woes, [the Oversight Board’s plan] revealed the nature of its fundamental problem: lack of economic growth with no clear economic development strategy,” the analysis firm said.

“To make matters worse, in negotiating with the various holders of public debt, the Oversight Board repeatedly made assumptions regarding economic growth that are not close to the initial outlook,” the firm stated in its internal publication, “Pulse.”

The government’s Fiscal Plan, certified by the Oversight Board in May 2019, forecast a 4% economic turnaround this year, to reach near-zero growth in 2020.

“The reasons cited are many — population decline, lack of success in structural reforms, reduced disaster funds, to name a few — but the point remains. The Oversight Board’s overriding authority over fiscal matters has not been used to foster economic development or growth, in spite of a changing productive landscape,” H. Calero Consulting concluded.

The conditions of the adjustment plan were two-fold: to reduce the government’s public debt from $72 billion to $38 billion and reduce annual debt service to 9% of government revenues.

However, “to achieve a balanced budget, the plan pushed for several structural reforms, non-financial fiscal measures and, after a year into its mandate, assumed an influx of disaster relief funds that have failed to materialize,” the analysis noted.

The regulatory body’s admission in October that Puerto Rico would receive about 43% in relief funds from the U.S. government “reveals the fragile vision under which negotiations took place.”

“On a larger scale, the Oversight Board bet that the government would be able — and willing — to implement bitter changes in a short amount of time; something that for better or worse has clearly not materialized,” the firm added in its analysis.

While the Oversight Board was “too optimistic” in its assumptions, “political upheaval, both locally and at the federal level, also saw billions in federal funds delayed or at risk of ever being delivered. This created an additional and more significant risk: negotiating debt haircuts based on flawed assumptions and underestimated difficulties that could be false sooner than later,” the firm stated.”

Recommended reforms ‘politically poisonous’
Furthermore, H. Calero’s analysis also concluded that most of the Oversight Board’s “recommended structural reforms have proven to be politically poisonous,” while the Commonwealth government and the Legislature have gone on about keeping it business as usual.

The firm predicted that the reduction in reconstruction funds “will have a direct impact in the eventual success of the fiscal plan. The reduction could end up costing more than $13 billion in tax revenues from 2019 until 2037.”

For the most part, federal funds have been frozen due to concerns over misuse and corruption by Puerto Rico government officials.

“If finally released, infrastructure investment should increase, albeit not at the same pace that was initially estimated,” the firm noted.

One potential light at the end of the tunnel is investments associated with Opportunity Zones in Puerto Rico, as they offer federal and local tax breaks that could prove attractive to outside investors in areas such as real estate and infrastructure projects.

The Opportunity Zones initiative “is an attractive proposition for Puerto Rico, particularly given the amount of investment that already flows toward the island, and the local capital that is invested abroad,” the firm said, establishing the figure at more than $24.4 billion in Fiscal 2017.

“Unfortunately, the local government’s political difficulties have led to discussions of changing other areas of the law rather than concentrating on rebuilding the economy,” H. Calero Consulting concluded.

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This story was written by our staff based on a press release.

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