Going into its eighth year of negative growth, Puerto Rico needs to become accountable for its “sad state” of internal affairs and make a number of necessary decisions to recover growth in fiscal years to come and put an end to the prevailing sense of crisis, said economist firm H. Calero Consulting Group in the most recent edition of its internal publication “Pulse.”
Most pressing is the need to approve the proposed tax reform — one that sets the stage for a major overhaul with lower income tax rates and a new value-added tax consumption tax system — a government reform with recurrent expenses in line with revenue, and a realistic central government budget for 2016.
Aside from those short-term fixes, the island also needs long-term changes, which include shifting to competitiveness as the focus of its industrial and government policies.
“Priorities should be determined with gradual reforms for growth, labor, health, and education, among others. We need fiscal consolidation and measures to address lingering financial stability concerns. Restructuring of public corporations and the central government is inevitable,” the firm said.
The current administration is “dealing with the biggest fiscal mess in the island’s history,” and has no room for postponing tough decisions, the firm said. Fiscal years 2015 and 2016 will require “deep government reforms,” especially to address the $72 billion in public debt that represents 104 percent of the Gross National Product.
Public corporations account for nearly half, or 48.7 percent of that public debt, with three of them — the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct and Sewer Authority and the Highways and Transportation Authority carrying a combined $20 billion of that total.
“Not so long ago, the bonds of these corporations had credit ratings of excellent investment grade. Today, all of them have been classified as ‘junk’ with a negative outlook,” the firm noted. The government also has to deal with deficit financing, which peaked at $2.8 billion in 2009, and is expected to reach $700 million in 2015.
Economic trends ahead
In its analysis, H. Calero Consulting predicted that most advanced economies will “grow modestly” and other developing economies are also likely to experience slower economic growth.
The outlook for the U.S. mainland shows GDP growth of 2.6 percent in Fiscal 2015, 2.8 percent in Fiscal 2016, and 2.7 percent in Fiscal 2017, with low inflation rates.
But Puerto Rico’s numbers, based on the firm’s macroeconomic model used to forecast principal macroeconomic variables, estimate negative growth of –1.5 percent and a pessimistic scenario of –2.6 percent for Fiscal 2015, -3.3 percent base and a pessimistic scenario of -4.3 percent in Fiscal 2016 and -2.7 percent base and a pessimistic scenario of -3.7 percent in Fiscal 2017.
“We have considered the most probable scenarios regarding the exogenous forces that affect macroeconomic variables in Puerto Rico. Our forecast also includes the potential approval of changes to Puerto Rico’s tax system towards lower personal income tax rates but with a new consumption tax based on a value added tax of at least 14 percent in Fiscal 2015,” the firm explained.
“Over the past two years, our macro model has been relatively accurate with adeviation of only +/- 0.1 percent of the final GNP growth posted in year 1 of the forecast,” the firm noted.
The firm’s model predicts reductions in federal, unilateral transfers from the U.S. mainland, an increase in local taxes that will reduce disposable income and further incentivize outward migration of young professionals. It also predicts a continued shrinking of the labor force participation rate, resulting in a lower unemployment rate.
“Back in the 1950’s, Puerto Rico faced the debate ‘to spend or invest.’ Back then, we made the right decision: invest. We need to return to an uphill path of growth and prosperity that will take years but the results will be worthwhile,” the firm concluded.