Pandemic demands ‘extraordinary measures’ to handle economic crisis

The economic crisis Puerto Rico is facing while in the grip of the COVID-19 pandemic requires forceful action on the part of the government and Financial Oversight and Management Board for Puerto Rico, according to nonprofit Espacios Abiertos.

“When we analyze the international context and Puerto Rico’s situation in light of the economic projections contained in the most recent fiscal plan, published by the Fiscal Agency and Financial Advisory Authority on May 3, it becomes clear that the austerity policies proposed in all the fiscal plans certified so far have contributed to a worsening of the current crisis and, in the final analysis, the unsustainability of the public debt,” said economist and Espacios Abiertos’s senior public policy analyst Daniel Santamaría-Ots.

Given this new situation, Santamaría-Ots recommended that in fiscal year 2020-21, all possible resources within the budget of the government’s General Fund, in addition to those federal funds sent to the island for dealing with this crisis, be invested in making the island economy more robust and meeting its citizens’ most pressing needs — all with the purpose of overcoming the health and financial crisis created by the pandemic.

To that effect, the economist proposed that the creditors of Puerto Rico’s public debt immediately be asked to grant a moratorium or “standstill” of no less than one year, which would entail a suspension of all current payments.

He insisted that this action is needed until a clearer picture can be had of the local and worldwide economic situation.

Espacios Abiertos also recommended an analysis of the sustainability of the public debt be carried out and published, to include the long-term effects of the pandemic; that austerity measures be eliminated once and for all as the guiding principle of the island’s public policies; that the audited financial statements for 2017, 2018, and 2019 be completed and published; and that a realistic and plausible macroeconomic plan be developed.

“In Puerto Rico, we should consider implementation of the kinds of relief measures for debt payments that are being promoted internationally by various groups of creditors in the private sector and by governments and multilateral organizations in different parts of the world,” Santamaría-Ots said.

“Economic stimulus packages and monetary policy are being combined with moratoria on the repayment of public debt to provide the fiscal space needed for dealing with the COVID-19 crisis. Puerto Rico needs a moratorium that will not further worsen the General Fund situation and needs, too, a halt to the austerity measures that are doing such great harm to the economy” he said.

“Given this new pandemic scenario, we should analyze the sustainability of the public debt with integration of a macroeconomic plan and updating of the audited financial statements that will allow us to go to the capital markets in the future with guarantees,” Santamaría-Ots added.

Bodies such as the International Monetary Fund and the World Bank agree that the current crisis, known now as the “great lockdown,” will lead to the greatest economic slowdown since the Great Depression of 1930.

The scenarios
The economist noted that the government’s new fiscal plan states that the current crisis presents an unprecedented risk scenario for Puerto Rico and points toward unsustainable public debt payments.

“The new fiscal plan presents projections of declines in the real Gross National Product (real GNP) of -3.8% for fiscal year 2020 and -7.8% for fiscal year 2021. Once the structural reforms and austerity measures are implemented, Puerto Rico will face primary fiscal deficits as early as 2030, rather than 2039 as had been projected in the February 2020 fiscal plan,” he said.

He noted also that the government developed its new economic projections on the basis of three scenarios for the period from 2020 to 2025.

The first, and most optimistic, projection suggests a lower impact from the crisis, which would lead to an average surplus of $502 million in each fiscal year. Espacios Abiertos proposes a 90% haircut, in which the present value of the central government’s debt payments after the restructuring would range from $3.5 billion to $3.9 billion.

The second, “baseline,” scenario, assumes that the crisis will cause a larger impact, which will generate an average primary fiscal surplus of $32 million. Espacios Abiertos proposes a 99% haircut, in which the present value of the central government’s debt payments after the restructuring would range from $229 million to $254 million.

The third, or “downside,” projection, would lead to an annual average deficit of $578 million in each fiscal year through 2025. The nonprofit proposes a 100% haircut, in which the present value of the central government’s debt payments after restructuring would be $0.