Puerto Rico: The Island’s Economics Don Rissmiller January 15, 2014 Strategas Research Partners 212-‐906-‐0134 drissmiller@strategasrp.com
Puerto Rico Economy: Overview • Roughly three Hmes the size of Rhode Island. • Climate: tropical marine; liNle seasonal temperature variaHon. Periodic droughts; hurricanes. • PopulaHon: 3,645,648 (July 2013 est) • PopulaHon growth rate: -‐0.47% (2013 est.)
Source: CIA World Factbook
Puerto Rico Economy: • American CiHzenship/Defense. • Commonwealth status. • Tax treatment versus other jurisdicHons.
Puerto Rico Economy: • Lack of independence. • Lack of control of own currency & monetary policy. • Size creates vulnerability to money flows. • “Be careful what you wish for.”
2006 Law Change: Tax Changes • Change in tax treatment removes corporate incenHves. • Companies begin to relocate. • Puerto Rico economy stagnates since 2006. • BUT .. Debt tax advantages remain.
Labor Force ParHcipaHon Falls 51
PR Labor Force ParHcipaHon (%)
49
47
45
43
41
39
37 2004 -‐ Jul 2005 -‐ Jul 2006 -‐ Jul 2007 -‐ Jul 2008 -‐ Jul 2009 -‐ Jul 2010 -‐ Jul 2011 -‐ Jul 2012 -‐ Jul 2013 -‐ Jul
Why Is Labor Force ParHcipaHon Key? • Labor Force ParHcipaHon Rate can be more reliable than either the numerator or denominator. • Puerto Rico: 41% • U.S.A: 63%
Why Is Labor Force ParHcipaHon Key? • Increased labor force parHcipaHon gives a broader group to contribute to paying off exisHng (government) debt. • Lack of labor force parHcipaHon leaves more people dependent on alternate programs. – Dependency raHos become an issue.
• Movements tend to be slow and secular: demographics, etc. mean slow reacHons. – Hard to reverse quickly.
Timely Data Suggest Puerto Rico Economy Remains Weak Govt Development Bank Economic AcHvity Index
Headlines Suggest Vulnerability to a Shock • Puerto Ricans Flock North Away From BaNered Economy. Exodus in Past Decade Was the Largest Since the 1950s. WSJ, 1/6/14 • Plagued By Violence, Bad Economy, Puerto Rico Rings In 2014 With Bang; 13 Murders In 5 Days. Fox News, 1/8/14
This has happened despite easy Fed policy (which PR “imports”). Federal Funds [effective] Rate % p.a. 6
6
5
5
4
4
3
3
2
2
1
1
0
0 03 04 05 06 07 Source: Federal Reserve Board
08
09
10
11
12
13
Lack of Monetary Policy Control • “PrinHng money” Hed to another central bank, with different objecHves. • Not necessarily a bad thing, eg, some U.S. states are weaker than others. – But fiscal policy should make up the difference.
• QuesHons: do the areas trade a lot, and can individuals & capital move freely?
Why Debt/Income MaNers • In the long run, debt/income should go sideways, otherwise interest costs can consume the enHre budget. • For countries, debt/GDP is open used. • A measure of vulnerability.
Debt/Income Must Go Sideways as a DefiniHon of Fiscal Sustainability
Not “Too Big to Fail?” • Other state & local governments have either filed for bankruptcy (eg, Detroit) or seen their situaHon improve. • There is no longer an “emergency” climate. • PR Revenue collecHons for the first 6 months of fiscal 2014 were $80 million above budgeted esHmates (Bloomberg, 1/9)
Conclusion • Some natural advantages for the island economy. • Structural issues with labor force parHcipaHon • The Fed is easy, but perhaps not enough. • Crisis acHons are fading as other areas improve. • Can the debt burden be smoothed?
