Will Puerto Rico’s contracting economy lead to default?

By Cate Long
December 2, 2013

Justin Vélez-Hagan is the executive director of the National Puerto Rican Chamber of Commerce, a small non-profit not to be mistaken with the much larger Puerto Rico Chamber of Commerce.  Vélez-Hagan argues in a recent Forbes opinion piece that Puerto Rico must default on its debt:

Washington politicos aren’t the only ones instigating a perpetual debt crisis.  Puerto Rico too is experiencing a political stalemate-induced fight for their financial lives that affects not only its 3.7 million residents, but millions of others who have purchased bonds to help finance its government, causing us to wonder if the next logical step is a debt default.

Here is his rationale:

Many experts say Puerto Rico is entering the eighth year of a recession, with at least one who considers it to be in the midst of an all-out depression.  Gustavo Vélez, former economic adviser to the governor, is one such analyst, acknowledging that the economy has been kept afloat by increasing taxes, with little or no effort to fix underlying structural problems.

Though the Puerto Rico Government Development Bank has not published the September Economic Activity Index they have released the component figures of the index for September and October. The numbers are terrible, and indicate that the economy continues to rapidly contract. For example employment has declined 4.7 percent year over year for the July through October period:

Electric energy consumption (MM kWh) is down 6.7 percent year over year for the July through October period and gasoline consumption declined 3.5 percent. Commercial bank capital, the assets necessary to expand lending to boost the economy, declined 4.2 percent and commercial loan activity declined 17 percent.

Government revenues, however, increased 14.8 percent for the July-October period year over year. This increase in government revenues draws resources away from economy. Unfortunately government employment decreased 7.3 percent, so the additional government revenue is not recirculating into the economy. Instead the additional government revenues are paying debt service — which had formerly been financed with additional borrowings.

Vélez-Hagan argues that some structural reform has been accomplished by the government:

Some reforms have been enacted with the recent passage of a pension reform bill and the relatively bold 2014 budget. The fix will again fall short, with substantial tax increases (another $1 billion) and a dash of restructuring (a mere $575 million of restructured bond debt, equal to less than 1 percent of total debt, and a reduction of $600 million in pension contributions) that offers little incentive for economic growth.

We could dismiss the opinion of an executive director of a tiny Puerto Rico non-profit — but it is unlikely that any prominent leader would call for a Puerto Rico debt default or restructuring.

The call comes from the Puerto Rico fringe now. But will it soon become mainstream if their economy continues to contract?

6 comments

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This article explains why I received this Update:

CUSIP: 745160RD5
Issue Name: Puerto Rico Comwlth Aqueduct & Swr Auth Rev – 6% due 07/01/2047
Event: Market price change Down 8.5% from 76.323 to 69.859
Date: 11/26/2013 18:00:00

Posted by BBrite | Report as abusive

I can be wrong but PR can’t default like Detroit. The States and Territories can’t, but financially we’re Broke as hell.

Posted by DavidFranco | Report as abusive

Economic Indicators of Puerto Rico 2013 vs 2012 http://www.scribd.com/doc/182039412/Situ acionEconomica2013-pdf

Posted by LuisRamos | Report as abusive

Puerto Rico Econoics indicators 2013 Vs. 2012 http://www.scribd.com/doc/182039412/Situ acionEconomica2013-pdf

Posted by LuisRamos | Report as abusive

Economic activity down 5% for Sept and Oct year over year:

http://www.gdb-pur.com/documents/201310O ctoberGDBEconomicActivityIndex25nov2013v 3.pdf

Posted by Cate_Long | Report as abusive