Thursday, April 19, 2018

Think Strategically: Okuvamile

By on January 29, 2018

Weekly Market Summary Close

IPO Calendar–Trade Date Estimate: Week of Jan. 29

President Trump in Davos: Takeaways from the World Economic Forum

The Zulu word “Okuvamile,” which means “Common Good,” is perhaps the best description of the work the World Economic Forum (WEF) performs to tackle the significant issues concerning the world, from political reforms and economic growth, to social and environmental issues.

Participants include some of the most prominent CEOs, ambassadors, public figures, heads of state, media personalities, government officials and religious leaders. The principal event is hosted by WEF and every January in Davos, Switzerland.

The WEF hosted President Trump in Davos for the first time, probably expecting “The Apprentice” or Twitterverse version of Trump but instead received Donald Trump, the debonair salesman.

The president stated in his address to the World Economic Forum: “America is open for business, and we are competitive once again.”

Trump’s speech was designed to target global companies to come to the U.S. and increase investment under his administration.  

However, all was not honey and spice; the president warned countries that the U.S. would no longer allow the abuses of international trade deals.

The president stated, “We cannot have a free and open trade if some countries exploit the system at the expense of others,” he said. “We support free trade, but it needs to be fair, and it needs to be reciprocal.”

The speech was a transition from Trump’s initial day at Davos, where he dominated the event with his trademark bold moves, and spontaneous and normal disruption. For Trump, this was a presidential, respectful and businesslike scripted pitch to an audience of global elites.

With U.S. unemployment down, both business and consumer optimism up, and U.S. companies increasing investments due to the new federal tax reform, it creates the basis for continued U.S. economic growth.

Puerto Rico update: An updated fiscal plan

Gov. Ricardo Rosselló presented this week a revised fiscal plan for Puerto Rico. One of the most challenging items to stomach is that there is no allocation for debt-service payments over the next five years.

In March 2017, the Financial Oversight & Management Board (FOMB) had certified a plan that covered a 10-year period and allocated about $800 million per year for debt-service payments, which translated to less than 25% of Puerto Rico’s debt-service needs.

This decision will result in severe damage to most bondholders, especially local ones.

These are some of the facts:

  • Individual local bondholders total 60,000;
  • Many are retired employees who had put their life savings in Puerto Rico bonds;
  • Depend on the interest payments as their primary source of income;
  • Local bondholders include government employees, retirees, professionals, small businesses, corporations and wealthy families;
  • As opposed to other investor groups, local bondholders own bonds from almost every Puerto Rico government issuer.

The most widely held holdings, in order of exposure, by P.R. residents are:

The consequences of this action will be to further destroy the savings of most local bondholders.

In the aftermath of Hurricane Maria, a decision was made that the fiscal plan had to reflect the $94 billion-plus destruction Puerto Rico has suffered and focus on rebuilding better.

This revised fiscal plan mainly covers the central government and reduces the timeframe from 10 to five years without debt-service payments, and guarantees government employees their pensions.

While the government will increase its expenses during the five-year period, further analysis points to a steep decline in population of 18% to 20%, which translates to 612,000 to 680,000 Puerto Ricans mainly moving to the States.

The fiscal plan estimates disaster-relief funding as follows:

Although the government anticipates receiving more than the $35.3 billion, it previously requested $94.4 billion in federal disaster relief aid.

The proposed funding uses for the Federal Emergency Management Agency (FEMA) allocation are:

  • 51% for repairs, modernization and strengthening of power and water and sewer infrastructure;
  • 24% for reconstruction of critical mixed buildings and fixing equipment;
  • 25% for rebuilding and enhancing emergency-response capabilities and water control facilities.

The government’s plan considers a model that incorporates U.S. gross domestic product (GDP) growth transfers from the federal government and historical capital investments in economic and oil prices. The model also includes hurricane impact, disaster-relief assistance, revenue and expense measures, and structural reforms.

After all government transformation initiatives and structural reforms are implemented, the economy faces a contraction for fiscal year 2018 of minus-11.2%, followed by 7.6% in fiscal 2019, 2.4% in fiscal 2020, 1.8% in fiscal 2021 and 1.5% in fiscal 2022.  

The consensus from economists is that not allocating debt-service payments is problematic for Puerto Rico, and others have stated that this economic-growth forecast will be next to impossible to achieve. Puerto Rico may foresee a funding gap of $3.4 billion through fiscal 2022. As a result, some form of a liquidity facility will be needed.

Rep. Rob Bishop (R-Utah), chairman of the U.S. House Natural Resources Committee and father of Promesa, wants full transparency in the transformation process, saying it “cannot be done behind closed doors.”

“It is imperative the Oversight Board and Governor fully integrate those who hold the debt into the development of these plans, thereby guaranteeing accuracy and transparency in the underlying assumptions,” Bishop said in a statement issued Thursday.

The board’s principal role under Promesa is to return Puerto Rico to fiscal solvency and full access to capital markets, and this can only occur if the budgetary plans respect the right priorities and liens of debtholders.

A bondholder critical of the new fiscal plan is Assured Guaranty, which has about $853 million of exposure to the Puerto Rico Electric Power Authority (Prepa), in a statement said: “The system cannot be sold free and clear of the lien on revenues unless the lien is discharged through full payment of the bonds. There is adequate coverage of debt service after any sale of assets, or the bonds are given the full value of their collateral through a confirmed plan of adjustment.”

As we review the new fiscal plan, the FOMB received the fiscal plans for the government, Prepa and the Puerto Rico Aqueduct & Sewer Authority (Prasa). We expect them to evaluate the three fiscal plans and may certify them by Feb. 23. The FOMB views the implementation of structural reforms and investing in critical infrastructure as key to restoring economic growth, and increasing confidence.

The FOMB will host, on Thursday, Feb. 1, a listening session in New York to receive testimony from experts and stakeholders on the future of Puerto Rico’s energy sector.

In the new fiscal plan, the government presents a large part of the transformation, which is a new model for operating the government. Below are some of the agencies and impacts.

Final Word: How do we substitute manufacturing’s 47.3% GDP or has economic growth become irrelevant?

There is little in the form of a cohesive economic development growth plan in the new fiscal plan, other than discussions of reforms, public-private partnerships and the resulting construction activity that occurs as a derivative of FEMA funding. We await to see the detailed plan from the economic development secretary about the new route his department will take us toward.

We need to create “Supra National Goals” that the entire country may protect and follow, and implement a detailed “Economic Development Plan” with a focus on creating a “Vision for Puerto Rico” for the period from 2018 to 2032. This process should have detailed principles, objectives, goals and strategic guidelines to accomplish them.

This vision should be implemented and followed no matter which party is in control of Puerto Rico, and includes the following parameters:

  • Legislate a New Vision for Puerto Rico that is based on consensus of all parties, approve principles, objectives and “Supra National Goals” for 2018-2032;
  • Present a Country Plan that covers the New Vision for Puerto Rico for 2018-2032 and the plan made by legislation, and make every government for the next four terms keep the implementation of the plan intact.
  • A Matrix of “Governability Index” benchmarks are being established to measure success and know-how to recognize it as it applies to the performance of governments.

As all Puerto Ricans can understand the new Vision for Puerto Rico and the Country Plan, every citizen will, in turn, defend and protect its goals and aspirations.

This new Vision for Puerto Rico must contain the following elements:

  • Facilitate increased levels of employment in the private sector to absorb thousands of government sector jobs.
  • Implement changes to our social structure and focus it on economic development and entrepreneurship.
  • Implement a forceful presence in the global economy.
  • Eliminate regulations and barriers to allow increased productivity.
  • Seek to make the local entrepreneurial sector, at all levels, into one that is highly competitive and focused on innovation and export.
  • Diversify our economy so we are not dependent on any single sector.
  • Move to the private sector every economic activity except in those cases that involve essential services such as health, security and justice.
  • Recognize that by implementing the regionalization concept, we can decentralize the government and eliminate duplicity in the municipal administrations.
  • Entrepreneurship must be the foundation for our new economic model, and all government incentives must guide these activities.

There are discussions among government technocrats and other experts about the “deindustrialization” of the Puerto Rico economy. Manufacturing matters heavily in Puerto Rico and we must all do what is necessary to prevent this base from being harmed. The Federal Tax Cuts & Jobs Act is a challenge since the U.S. Internal Revenue Service (IRS) considers Puerto Rico a foreign tax jurisdiction and all controlled foreign corporations may be subject to the 12.5% tax on profits from intangibles that impact pharmaceuticals, information technology and medical equipment. Losing this base would be severe for Puerto Rico, as is evidenced by the revenues below:

However, there are several loopholes in the new Tax Reform Cuts & Job Acts that may greatly benefit Puerto Rico. These loopholes are being modeled to implement a strategy to curtail the initial damage the law may impact and revert it to a growing opportunity for Puerto Rico. There are still many moving parts, but there may be a “Game Changing” development for Puerto Rico.

No one put it better than Apple co-founder Steve Jobs when he said, “Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma, which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your inner voice. And most important, dare to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

Puerto Rico and every citizen needs to find their own voice and seek their new way of doing business, focused on “Okuvamile.” What we have been doing for the past 20 years has not worked; the time has come to start anew.

–Francisco Rodríguez-Castro is president & CEO of Birling Capital. He has served in government, multinational and public corporations for more than 25 years, and has advised multiple entities in a diverse array of market segments. He has also participated in multiple mergers and acquisitions as well as structuring transactions that combined surpass $10 billion.

–The views expressed in the Opinion section are the columnists’ own and not necessarily the views of Caribbean Business.

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