Maria dims Puerto Rico’s bleak eco­nomic out­look

Daily Local News (West Chester, PA) - - BUSINESS - By Alexan­dra Ol­son

NEW YORK » Hur­ri­cane Maria has thrown Puerto Rico’s al­ready messy eco­nomic re­cov­ery plans into dis­ar­ray.

For now, the fo­cus has shifted from Puerto Rico’s fi­nan­cial woes to meet­ing the ba­sic needs of its 3.5 mil­lion peo­ple, many of whom still lack ad­e­quate food, water and power more than a week since the Cat­e­gory 4 hur­ri­cane laid waste to the U.S. ter­ri­tory. But as Puerto Rico emerges from the worst of the dis­as­ter, it will still face a $74 bil­lion public debt load and a decade-old eco­nomic re­ces­sion that has sent hun­dreds of thousands of is­lan­ders flee­ing to the U.S. main­land.

The hur­ri­cane has in­ter­rupted court pro­ceed­ings and me­di­a­tion ef­forts with cred­i­tors aimed at re­struc­tur­ing the debt. The de­struc­tion will se­verely dis­rupt rev­enue flows and force a re­cal­cu­la­tion of a fis­cal plan, painfully ne­go­ti­ated with fed­eral over­sight board ap­pointed to over­see Puerto Rico’s fi­nances. While there is some po­ten­tial for fed­eral re­cov­ery money and in­sur­ance pay­outs to jolt a stag­nant econ­omy, much de­pends on how much aid Congress will ap­prove.

Pres­i­dent Donald Trump on Fri­day promised the re­build­ing ef­fort “will end up be­ing one of the big­gest ever.” With so many un­knowns, however, econ­o­mists are un­sure if there will be any sil­ver lin­ing for Puerto Rico.

“Gen­er­ally, what we find is that nat­u­ral dis­as­ters are just tem­po­rary prob­lems and in most cases after the re­build­ing, things re­vert to the long-term trends,” said David Hitch­cock, an an­a­lyst with S&P. “Un­for­tu­nately, the longer-term trends al­ready weren’t very good.”

Here are some things to watch as Puerto Rico con­fronts the dual chal­lenges of nat­u­ral dis­as­ter and eco­nomic chaos.

Fis­cal re­cov­ery plan in limbo

Puerto Rico’s ef­forts to put its fi­nances in or­der were mired in con­tro­versy, law­suits and street protests. Now, the is­land must re­think ev­ery­thing. The over­sight board ap­pointed by Congress ap­proved a 10-year spend­ing plan in March that chipped away at the gov­ern­ment’s debt load while cut­ting em­ployee ben­e­fits and rais­ing ser­vice fees. The plan must now be re­vised to take into ac­count ex­pected rev­enue losses and a drop in eco­nomic out­put.

Tax collection is cer­tain to plum­met, espe­cially if more Puerto Ri­cans flee to the main­land. And no­body will be pay­ing their elec­tric or water bills any­time soon.

The Puerto Ri­can Power author­ity says it could take months to com­pletely re­store power. Rev­enue from man­u­fac­tur­ing and tourism will also fall.

“The over­sight board has to re­visit the whole fis­cal plan and make a de­ter­mi­na­tion based on the new re­al­ity,” said Rep. Ny­dia Ve­lasquez, a New York Demo­crat who was born on the is­land. “Puerto Rico to­day is to­tally dif­fer­ent from the Puerto Rico of a week ago.”

Jose Luis Ce­deno, a spokesman for the board, said “all op­tions are on the table.” For now, the board has au­tho­rized $1 bil­lion of the cur­rent bud­get to be di­verted for hur­ri­cane re­lief. That’s a frac­tion of the tens of bil­lions of dol­lars that the hur­ri­cane is ex­pected to cost.

Bond­hold­ers in the lurch

The dis­as­ter is bad news for the is­land’s in­vestors, mostly mu­tual funds and

hedge funds that bought dis­tressed Puerto Ri­can bonds at a dis­count in hopes of mak­ing a profit. Cred­i­tors can ex­pect de­lays in the re­struc­tur­ing process and will come un­der pres­sure to ac­cept even more re­duced pay­ments, said Ted Hamp­ton, an an­a­lyst with Moody’s In­vestor Ser­vice.

Faced with mul­ti­ply­ing law­suits from cred­i­tors, Puerto Rico sought a form of bank­ruptcy pro­tec­tion in May. The fed­eral judge who is over­see­ing that process, Laura Tay­lor Swain, in­def­i­nitely post­poned a key Oct. 4 hear­ing be­cause the hur­ri­cane par­a­lyzed the is­land.

Funds ear­marked for debt re­pay­ment could be re­duced un­der a re­vised spend­ing plan. Those were al­ready low at $800 mil­lion a year, a frac­tion of the $35 bil­lion due over the next decade.

Brad Setser, a former top Trea­sury De­part­ment of­fi­cial who worked on Puerto

Rico’s debt cri­sis, said the over­sight board could al­low the ter­ri­tory to “zero out debt ser­vice for the next few years and di­vert all avail­able cash to cover its crit­i­cal short-term needs.”

“There is no way Puerto Rico can pay its debts right now,” Setser wrote in a blog post for the Coun­cil on For­eign Re­la­tions.

The Puerto Ri­can gov­ern­ment brushed aside one group of cred­i­tors who jumped in this week with new offer, ac­cus­ing them of trying to take ad­van­tage of the dis­as­ter to cut their losses.

The bond­hold­ers, who hold 40 per­cent of the Puerto Rico Elec­tric Power Author­ity’s $9 bil­lion debt, of­fered to ex­tend a new credit line through what’s known as debtor-in-posses­sion fi­nanc­ing. That would have helped fund the power com­pany’s re­pairs while also giv­ing the new bonds pri­or­ity

over other cred­i­tors in the re­struc­tur­ing pro­ceed­ings.

The bond­hold­ers group replied they were dis­ap­pointed in the “out­right re­jec­tion of our loan offer with­out any dis­cus­sion or counter-pro­posal.”

But it’s not just hedge funds and mu­tual funds left hang­ing. About a fifth of Puerto Rico’s debt is held by individuals who bought the bonds be­cause they are ex­empt from state, local and fed­eral taxes and had long been considered safe.

What Congress can do

Puerto Rico’s fun­da­men­tal chal­lenge is its decade­long in­abil­ity to gen­er­ate eco­nomic growth. The de­cline be­gan in 2006 when Congress re­pealed a tax ex­emp­tion that helped turn Puerto Rico into a global man­u­fac­tur­ing hub, espe­cially for phar­ma­ceu­ti­cals.

Hur­ri­cane Maria has dimmed al­ready bleak prospects

for a turn­around.

There is some that hope fed­eral re­lief funds and in­sur­ance pay­outs can help pull Puerto Rico out of its quag­mire. While cau­tion­ing that Puerto Rico “faces new risks and eco­nomic un­cer­tainty,” a Moody’s anal­y­sis said “fed­eral re­lief fund­ing in the wake of hur­ri­canes Irma and Maria could off­set some of Puerto Rico’s fi­nan­cial chal­lenges and help spur re­newed eco­nomic growth.”

But Puerto Rico was so broke to be­gin with that is dif­fi­cult to know how much ex­tra money will be left over after storm re­pairs. Even be­fore the hur­ri­cane, the Puerto Ri­can power author­ity had es­ti­mated it would need $4 bil­lion need to up­grade ag­ing in­fra­struc­ture that was al­ready caus­ing fre­quent black­outs. Tens of mil­lions of dol­lars were needed to fill over­flow­ing land­fills that make it un­bear­able to be out­doors in some towns.

THE AS­SO­CI­ATED PRESS

Nestor Ser­rano walks on the up­stairs floor of his home, where the walls were blown off, in the af­ter­math of Hur­ri­cane Maria, in Yabu­coa, Puerto Rico. Maria has thrown Puerto Rico’s al­ready messy eco­nomic re­cov­ery plans into dis­ar­ray.

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