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?