A macro view of Puerto Rico
Puerto Rico Governor Alejandro García Padilla will present his budget tonight. He has promised that it will be balanced, it will not require layoffs of government employees and it will not provide subsidies to Puerto Rico public corporations like PREPA (the Puerto Rico Electric Power Authority) or the highway authority.
Bloomberg is reporting that, according to the governor’s chief of staff, there will be no borrowing from the capital markets and the budget will not include debt restructuring. If the proposal is enacted as described, it will likely have a slowing effect on the island’s economy.
Richard Carrion, the current chairman and CEO of Puerto Rico’s largest bank, Popular, Inc., said in an interview with Sincomillas:
‘I think the most important thing is to regain growth,’ said Carrion, who is particularly concerned about two statistics: the fall of the population and low labor force participation rate, which is around 40 percent. ‘For me the most important statistic is that for the first time, we see how the population is reduced. I had never seen it before. It is a fundamental issue that needs to be reversed.’
I agree with Carrion that the focus for Puerto Rico needs to be on broad economic measures. Currently the government uses the unemployment rate, electricity generation, gasoline consumption and cement sales to monitor the economy on a monthly basis in the Economic Activity Index. These economic measures and estimates are too narrow to assess the economy.
Rather than reporting the “unemployment rate,” which varies depending on the labor participation rate that Richard Carrion highlighted, it would be more useful to report total employment on the island. This number has declined from 1,139,878 in January, 2009 to 1,009,555 in January 2014. This number is active workers who can contribute to funding the government and supporting social services for the other 2.5 million residents of the island.
The government should also report the amount of public debt versus the gross national product. Puerto Rico fueled much of its past economic growth by issuing debt. Governor García Padilla says this pattern will be reversed now and that Puerto Rico will not fund its shortfalls with debt. This promise must be monitored (data source: page I-33):
Finally, the amount of assets in the Puerto Rico’s banking system and the lending taking place in the economy should be monitored. The banking system has been debilitated since the 2008 financial crisis, and unlike on the mainland, there has been a substantial contraction in assets. Lending to small and medium-size businesses has constricted. I don’t think the government’s effort to attract to U.S. investors to live and invest in Puerto Rico can replace the lending that the commercial banks must do.