CNE: Puerto Rico economy dealing with 3 ‘systemic shocks’
Puerto Rico’s short term economic performance is “overshadowed by a large cloud of uncertainty,” as the island’s government concurrently addresses the impacts of three systemic shocks: the COVID-19 pandemic; Hurricane María; and the central government’s bankruptcy, said Sergio Marxuach, Center for a New Economy’s Policy Director and Editor of the think tank’s publication: The CNE Review.
In the analysis, Marxuach emphasized that each of these processes generates its own set of risks, which oftentimes can interact in complex ways.
“For example, the implementation of fiscal measures to balance the budget could affect the capacity of the state to manage complex projects, while supply chain bottlenecks and inflation due to the COVID-19 pandemic may delay Hurricane Maria’s reconstruction efforts,” said Marxuach.
At a deeper level, however, the analysis concludes that “it is worrisome that economic growth in the short term depends mostly on receiving federal transfers that we do not control. We worry that these expenditures will have a temporary positive impact on the economy that may set back efforts to develop a medium/long-term economic strategy or plan for Puerto Rico.”
Marxuach said it’s important to avoid that trap and to stay focused on addressing the structural factors that are the root cause of Puerto Rico’s long-term economic stagnation.
The three systemic shocks that the Puerto Rican economy is recovering from can be broken down as follows:
The COVID-19 pandemic, which has adversely affected economic activity since the spring of 2020, is still an ongoing, developing event.
“We really don’t know what the recovery from a global pandemic looks like, how long it will take, or which long-term structural shifts will flow from it,” he said.
“In the short term, the COVID-19 pandemic is the most significant source of economic risk and uncertainty. Eventually, though, we can expect the COVID-19 virus to reach a sort of equilibrium with its human hosts. Until then, we will continue to see significant economic disruptions, recurring demand-supply imbalances, and periodic shipping logjams, with many governments continuously tightening and loosening restrictions on business and economic activity as the virus continues to wax and wane in accordance with its own evolutionary logic,” said Marxuach.
Four years after Hurricane María wreaked havoc on the island and generated some $90 billion in damages, the pace of reconstruction remains slow — while Congress has allocated $64 billion for disaster relief and recovery operations in the island, as of June 30, 2021, only $18.6 billion, or approximately 29%, has been spent.
“Furthermore, some of the most important work — refurbishing and modernizing the electric grid; rebuilding schools, housing, roads, bridges, and healthcare facilities; and undertaking mitigation activities to increase resiliency and reduce the risk exposure of vulnerable populations — has not yet begun,” said Marxuach.
The main risk regarding the Hurricane María reconstruction could be the creation of a false sense of complacency as the economy begins to grow when the federal money starts to flow,” he said.
“It would be a mistake to believe that our economic problems will be over once the disbursement of federal reconstruction funding begins in earnest for at least two reasons,” he added.
First, all that economic activity will be financed with federal funds transferred to Puerto Rico’s government instead of locally generated resources.
“It may be easy to forget that once the good times are rolling and erroneously believe the reconstruction is driven by the strengthening of the Puerto Rican economy, when in fact it is powered by Congressional largesse,” he said.
Second, the reconstruction process, by its nature, is designed to rebuild and repair what was damaged or destroyed by Hurricane María.
“In that sense, its main objective is to restore Puerto Rico’s capital endowment to its pre-hurricane state. The reconstruction of damaged or lost assets does not constitute a net addition to the island’s long-term productive capacity,” said Marxuach in the analysis.
Finally, the government of Puerto Rico is entering a critical phase of its debt restructuring process as ballots will be soon sent to creditors so they can vote on the Plan of Adjustment negotiated by the Fiscal Oversight and Management Board.
“The POA has, among other things, to follow the Fiscal Plan for the central government and be found by the court to be feasible and in the best interests of the creditors. If certified by the court, Puerto Rico’s bankruptcy will be officially over and the POA will govern Puerto Rico’s fiscal policy for the next 25 years,” said Marxuach.