The economic implications of Puerto Rico’s political crisis

The current institutional and political crisis, triggered by the revelations of the Governor’s Telegram Chat, is clearly affecting the local economy, and the Island recovery efforts. Since 2007, Puerto Rico’s economy has been struggling with its worst depression in modern times. In 2016, Congress imposed PROMESA and a Fiscal Oversight Board, to restructure the Island’s $70 billion public debt and restores fiscal discipline.

 

This preliminary analysis is based on several assumptions. First, according to the PR’s Planning Board the Island’s GDP reached $101 billion, in 2018, and the local economy produces a weekly estimate of $1,942 million. We also assessed the possibility that the reconstruction funds could be delayed.

 

Assuming a disruption of 15% in the macroeconomic activity, the economic cost of the crisis could be the range of $500 to $600 million. This figure was obtained by assuming a 15% multiplied by $3,884M (value of production of 2 weeks). However, in the short term, is very unlikely that the economy will face systematic risk threat. Furthermore, we do not expect an economic collapse or a major macroeconomic disruption, that could affect the economic performance.

 

Prior to the current crisis, all indicators evidenced that economy was in a positive territory, as the result of the inflow of $19 billion, to mitigate the effects of hurricane Maria. Business owners whom with we have talked, have seen a decrease of 15 to 20% in their regular sales. Furthermore, the empirical evidence shows that the economic impact concentrates in tourism, retail, and restaurants.  

 

 

 

Tourism

 

Several cruise ships, scheduled to arrive to San Juan, decided to skip Puerto Rico. Also, several hotels reported cancellations, due to the social unrest. During 2018, the industry had experienced a sustained recovery, with the re-opening of prominent of major hotels, and registrations showed a positive trend. Nevertheless, the industry hasn’t reached the pre-Maria levels. Due to the manifestations, the international projection of social unrest has affected the Island’s image as a safety destination. Tourism and related activities represent 8% of GDP and generates 70,000 jobs.

 

Retail

 

The political crisis also affected the consumer confidence and consumption patterns. Before the political crisis, retail sales showed an stable performance due to the disbursement of $19 billion in relief funds to mitigate the impact of the hurricane. Nevertheless, the current crisis seems to have affected, at least temporarily, the consumer’s confidence.

 

Apparently, the perception of violence on the streets created awareness of public safety. Many consumers decided to stay at home or assisted to the manifestations. Last week, Plaza las Américas, the Island’s largest shopping mall, decided to shut down as safety measure. Also, in Old San Juan, a vast majority of the merchants decided to close, particularly, jewelers and miscellaneous shops.

 

 

Debt restructuring process and the federal recovery funds

 

Prior to the current political crisis, Congress and White House officials were seriously skeptical about the local government’s transparency and effectiveness to manage federal recovery funds. Due to the current institutional crisis, Congress and the White House are seriously considering the appointment of a Reconstruction Coordinator to manage the recovery funds. The implementation of this mechanism could be a positive policy to accelerate the disbursement of the recovery funds and the reconstruction process.

 

The institutional crisis is also affecting the debt restructuring process under PROMESA. Without a functional government, the Fiscal Oversight Board (JSF), is unable to implement the structural reforms and fiscal measures. Before the crisis, the FOMB was in fast track mode, trying to reach an agreement with GO creditors, PREPA and the pension systems.

 

Finally, the political crisis has affected the disbursement of the recovery funds, approved by Congress to Puerto Rico.  Last week, according to the Washington Post, Trump Administration will place new restrictions on the financial aid to finance the reconstruction of the Island.  

 

As stated by the WP, “the White House decision will impose new safeguards on about $8.3 billion in Housing and Urban Development disaster mitigation funding to Puerto Rico as well as about $770 million in similar funding for the Virgin Islands”

 

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