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An Update On The Competitiveness Of Puerto Rico’s Economy
Economic activity in Puerto Rico remains generally flat at a depressed level and there are no strong signs that a meaningful recovery is taking hold. While Puerto Rico’s economy has historically paralleled the U.S. mainland economy, the Island’s latest downturn started earlier and was much steeper and more prolonged. Puerto Rico has now been in a slump since 2006.
More recently, serious fiscal challenges have surfaced that are closely interrelated with the Island’s weak economic performance. Persistent deficits in the Commonwealth’s fiscal accounts as well as mounting deficits in the operation of several major public corporations have substantially raised the Island’s overall public debt, leading to serious concerns about whether public debt at these levels can be sustained.
In light of the rising fiscal pressures Puerto Rico faces, the Federal Reserve Bank of New York has undertaken this update of an earlier report that examined the competitiveness of the Island’s economy. That report highlighted a number of features of the economic environment in Puerto Rico that were constraining economic growth. Here, we focus on an analysis of the Island’s financial health. The recent downgrading of Puerto Rico’s public debt to non-investment-grade was a strong signal that the current fiscal situation poses potentially serious risks to the Island’s economic future. Our analysis focuses on the factors leading to the sizable buildup of public debt and the key variables that will determine its trend.
The clear challenge going forward will be for the Commonwealth government to continue making progress on efforts to raise the economic growth rate while at the same time taking credible steps to constrain the buildup of debt. Other countries as well as some U.S. states and municipalities, including New York City, have faced difficult economic choices similar to those that Puerto Rico must now address. The leadership of many of these jurisdictions took the steps necessary to manage this trade-off and successfully returned their economies to fiscal health.
The Island appears to face two alternatives: either manage its own economic adjustment and put the Commonwealth on a secure fiscal basis, or wait for outmigration and the discipline of the market to force an even more painful adjustment, particularly for those unable or unwilling to leave the Island. Thus, the demanding choices Puerto Rico makes today will affect its long-run economic prospects and the future livelihood of its residents. A better future for Puerto Rico requires decisive leadership today.
We begin this update with a brief description of current economic conditions on the Island. In Section III, we review the challenges to raising the competitiveness of Puerto Rico’s economy that were outlined in the earlier report and note positive steps toward reform in some areas. The report then turns to the special focus on the Island’s fiscal condition. We highlight a number of important differences between the budget policies and practices on the Island and those in the U.S. mainland states, and we use revenue and expenditure patterns to show the buildup of debt and to measure the Island’s current fiscal health. A particular emphasis is on the fiscal condition of Puerto Rico’s public-sector corporations, which have played a sizable role in the Island’s rising debt. We then discuss the outlook for the sustainability of Puerto Rico’s debt and outline recent Commonwealth efforts to strengthen the Island’s public finances.
A final section presents further steps that we believe the Island needs to consider in order to complement recent efforts and show the firmness of its commitment to improving its fiscal health. The steps we outline are based, in part, on the experiences of other countries as well as the U.S. mainland states and municipalities that have faced fiscal pressures similar to Puerto Rico’s and that have developed successful strategies to manage and overcome them. We believe these steps will help form a pathway forward to fiscal health in Puerto Rico. We present these steps in the spirit of focusing debate and discussion on these critically important issues, and we invite feedback regarding their feasibility and implementation from stakeholders on the Island.