It has been more than a year since Hurricane Maria ravaged Puerto Rico, compounding the agony of a commonwealth that was already caught in an economic downward spiral. In addition to experiencing an out-migration crisis, the island sought what amounted to bankruptcy protection in May 2017. And under the US Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), a federal oversight board now oversees its finances.
Though Maria was a tragedy, it also created an opportunity to rewrite a flawed fiscal plan that had been certified by the oversight board in March 2017. That plan was supposed to restore the island’s economic health while also providing money to creditors who were clamoring for repayment. But the plan was projected to depress economic activity even further, and failed to establish an appropriate basis for calculating how much debt restructuring Puerto Rico would need.
Sadly, the opportunity to right Puerto Rico’s fiscal ship has not been seized. On the contrary, the oversight board recently certified a new fiscal plan and a deal with holders of bonds issued by the Puerto Rico Urgent Interest Fund Corporation (COFINA) that could put the island in a debt straitjacket indefinitely.
At $17.8 billion, the stock of COFINA bonds (which are backed by future sales-tax revenues) accounts for more than one-third of the total debt in the new fiscal plan. And the COFINA deal is itself part of a larger debt-restructuring effort that is based on an unrealistic assessment of the commonwealth’s economic conditions. Simply put, the terms of the restructuring do not provide enough relief for Puerto Rico to be able to achieve future growth.
Under the new deal, Puerto Rico’s annual debt payments would increase from $420 million in fiscal year 2019 to almost $1 billion in fiscal year 2041, implying an aggregate recovery rate of 75.5% of the amount owed. That is a very generous deal for COFINA bondholders. But if Puerto Rico’s other bondholders are hoping to receive similar treatment, they should think again. As our computations show, if such a deal were to be implemented, there would be virtually nothing left for the other categories of bonds (assuming that the point of the debt restructuring is to restore the sustainability of the island’s debt).
Thanks to the oversight board, COFINA bondholders will now be getting far more than what they could have expected last December, when Puerto Rican bonds bottomed out. Prices of both COFINA and general obligation bonds have steadily recovered, owing to a political game over disaster relief funds that has been playing out among the oversight board, the US Congress, and bondholders – a game that Puerto Rico’s House of Representatives joined a few days ago when it passed a bill to allow for the COFINA deal.
As the old saying goes, funds are fungible. Even if all the money earmarked for disaster relief actually went where it was supposed to go, the injection of funds nevertheless frees up money elsewhere. Hence, the recent evolution of Puerto Rican bond prices reflects an expectation that the additional funds will go not to Puerto Ricans still suffering from the devastating effects of Maria, but rather to the commonwealth’s creditors.
The oversight board’s new fiscal plan is equally flawed. Based on new growth projections that are even more optimistic than those in the pre-Maria plan, the board assumes that the hurricane somehow provided a net positive shock to Puerto Rico. The new plan includes a relatively bright forecast for fiscal year 2019, and foresees economic growth and higher government revenue from then on, despite larger doses of fiscal austerity and declining federal aid.
It is hard to make sense of such assumptions, and harder still to accept that they could provide a good basis for computing Puerto Rico’s actual repayment capacity. As Brad Setser of the Council on Foreign Relations explains, the oversight board justifies its optimism by assuming – implausibly, in our view – that the plan’s proposed structural reforms for the 2021-2023 period will deliver extraordinarily large gains.
More realistically, the plan projects a steep decline in Puerto Rico’s population, from 3.3 million today to 2.1 million by 2058. Yet while the oversight board tacitly recognizes that many citizens will have to leave for the US mainland to find work, it expects output per worker to rise miraculously to compensate for the contraction of the labor force.
Despite a strong consensus among economists that Puerto Rico needs a radically different economic and debt-restructuring plan, the relevant policymakers do not seem to be listening. If the island’s liabilities are not properly restructured, it will remain in a debt trap. As long as the money needed for investments is going to pay bondholders, sustained growth is impossible.
Given the state of Puerto Rico’s economy after Maria, a much deeper restructuring is inevitable. But by pursuing its new fiscal plan and the COFINA deal, the oversight board has squandered valuable time, ensuring that Puerto Rico’s decade-long struggle will both continue and grow worse.
Copyright: Project Syndicate, 2018. www.project-syndicate.org