Sunday, December 17, 2017

Economists, demographers present grim picture to Puerto Rico fiscal board

By on November 17, 2017

(Juan J. Rodríguez / CB)

SAN JUAN – After Hurricane María, there are two things in the future of Puerto Rico in which a group of economists and demographers agree: There will be economic contraction and the population will continue to tailspin. Apparently, there is very little that can be done to avoid this scenario.

In the Pablo Casals Symphony Hall in San Juan, the fiscal control board held Thursday the first of three “listening sessions” to receive input from different experts and sectors of society ahead of its revision of the government’s fiscal plans.

On Oct. 31, the entity created by the federal Promesa law required the administration of Gov. Ricardo Rosselló Nevares to submit new drafts for the central government, the Electric Power Authority (Prepa) and the Aqueduct and Sewer Authority (Prasa) on or before Dec. 22. The board expects to certify the new fiscal plans, which should contemplate the new reality after María, on or before February.

Present at the meeting were the fiscal board’s executive director, Natalie Jaresko; its chairman, José Carrión; members Ana Matosantos, David Skeel and Arthur González; and the deputy director of the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), Alejandro Camporreale. However, the session was led by economists Andrew Wolfe and Rafael Romeu, who advise the board and the government, respectively.

Fiscal board Chairman José Carrión and member Ana Matosantos during the the first of three sessions where the board listens to experts and sectors of society ahead of the revision of the government’s fiscal plans. (Juan J. Rodríguez / CB)

During the afternoon, the board also heard presentations by mayors, politicians and representatives of the tourism, healthcare, energy, construction and retail sectors, among others.

Odds against recovery

Like a bucket of cold water, the presentation of Irish economist Amir Jina, of the University of Chicago, warned about the harsh reality faced by hundreds of jurisdictions that have experienced storms and hurricanes.

“There is no evidence of recovery to the previous level [before the storm] even up to 20 years later,” Jina said about his research. The conclusion is the same for countries regardless of size or whether rich or poor; their economies never managed to recover to the levels before the weather event.

For Wolfe, the findings of Jina’s study present “a very revealing implication.”

For her part, Matosantos asked the economist if the study took into consideration significant investments in infrastructure such as federal funds that could reach Puerto Rico for long-term recovery and its possible positive effect on the economy. Jina explained that this aspect was contemplated, but its impact varies greatly case by case.

“We saw some increases in GDP [gross domestic product] due to investment in infrastructure, but they don’t seem to translate into long-term growth,” said the economist, adding that “it doesn’t mean there is no possibility of rebuilding better [the economy], but maybe it’s been done incorrectly.”

Population decline set in stone

Since before María, large numbers of Puerto Rico residents had been abandoning the island in search of better opportunities. After the hurricane, this will continue to be the case, said several experts who participated in the second panel of the day, which focused on the demographic challenges of Puerto Rico.

For Lyman Stone, an immigration expert, María could have a net impact on the island’s population of 220,000 fewer people over a five-year period. Also, he estimated that by 2020, the population will be about 2.9 million and fewer than two million by 2060.

“It takes something extreme to reverse a population decline,” said Stone, who presented the case of Ireland as an example and how it faced serious population-loss problems. “Ireland is like a bad word for demographers, it has been the worst [event] on record, but Puerto Rico is on track to beat it,” he said.

Greater population decline anticipated for Puerto Rico by 2025

According to his model, it does not matter if a large number of those who left after María return to the island nor if there were a baby boom, there will be fewer people living in Puerto Rico by 2060.

For his part, Puerto Rican economist Vicente Feliciano, of Advantage Business Consulting, warned that the workforce will decrease, which would leave, for example, fewer resources available to meet the needs of children and elderly populations. He also mentioned that a smaller population would result in fewer participants in the public health plan and the closure of more schools due to the drop in student numbers.

“Social policies that were sustainable in the past, will not be in the future,” said the economist, who recommended that those in the third age who can contribute more to Treasury, do so.

The first panel discussed Puerto Rico’s gross national product and the fiscal factors that would affect the macroeconomic projections of the island and that will be part of the fiscal plans. (Juan J. Rodríguez / CB)

The director of the Puerto Rico Statistics Institute, Mario Marazzi, recalled that the U.S. Census Bureau updated its demographic projections downward, which increased the difference with the projection used in the fiscal plan nearly seven-fold. The latter estimated the population decrease during the next 10 years at 0.2%.

“It’s still too early to speculate on the magnitude of the effects [of María],” the Puerto Rican economist warned. For him, speculating on the number of people who would leave the island in the future could encourage the departure of those may have not left.

The director of the Statistics Institute also said the entity is working on a new report that provides annual demographic projections, not every four years, as are the Census Bureau’s. Marazzi hopes to have the first report ready by spring 2018.

Edwin Meléndez, from the Center for Puerto Rican Studies at Hunter College, participated in the panel remotely and spoke about the study he carried out on the population exodus after María. Before his presentation was interrupted due to technical problems, he indicated that he estimates a loss of 114,000 to 212,000 people within the next year as a result of the hurricane.

Up to 15% drop projected

The first panel discussed Puerto Rico’s gross national product (GNP) and the fiscal factors that would affect the macroeconomic projections of the island that will be part of the fiscal plans.

“It sounds like all the panelists agree that we will see a drop in GNP during this fiscal year,” Wolfe said, adding that Puerto Rico has never seen a storm with a cost in excess of 100% of its economic output.

For Puerto Rican economist Juan Lara, of Advantage Business Consulting, the island’s economic decline during this fiscal year could fluctuate between 8% and 15%, depending on the pace at which the government restores basic services and infrastructure, particularly that related to electric power. According to the fiscal plan certified before María, a reduction of 2.8% and 2.4% was anticipated in fiscal years 2018 and 2019, respectively.

“We know there will be a fiscal shock this year,” Lara said, noting that in María’s aftermath the economy will suffer significantly at both demand and supply levels, but only for a quarter.

For her part, Puerto Rican economist Heidie Calero said she estimates the damage to public infrastructure caused by María at $115 billion.

“The board can take the lead in rebuilding the island,” she said while emphasizing that beyond projections, it is critical to determine what Puerto Rico’s economic focus will be facing the future.

Moments before Calero’s presentation, another Puerto Rican economist, Joaquín Villamil, also called for the establishment of an “economic development plan” parallel to what the government’s fiscal plans may be.

Alejandro Guerson, of the International Monetary Fund, also participated in the panel and spoke about his experience on the island of Dominica, which is also recovering from the onslaught of the hurricane and faces challenges similar to those of Puerto Rico.

“The amount of private investment will depend on long-term planning that considers the recurring effect of these events,” Guerson warned of the high probability that hurricanes like María will affect the island in the future.

Other concerns included the possibility that a large part of the federal funds provided to Puerto Rico for immediate reconstruction efforts will not remain in the local economy and the adverse impact the federal tax reform discussed in Congress could have on the island’s industrial base.

“This would be María part two,” Calero said of the Trump administration’s tax plan, to which Jaresko replied, “We agree.”

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