Thursday, February 2, 2023

A Summit to Restore Confidence

By on February 11, 2016

Puerto Rico is hosting another Investment Summit, a yearly conclave of wealthy investors designed to showcase attractive incentives contained in Acts 20 and 22 of 2012, to lure them to establish local businesses and/or make the island their home.

The benefits of Acts 20 and 22 include a 4% corporate tax for businesses in Puerto Rico exporting services and 100% tax exemption on capital gains from eligible services, respectively.

All told, more than 200 investors are expected to descend on the Pedro Rosselló Convention Center in San Juan during the two-day event. The Alejandro García Padilla administration is hoping they will join the more than 700 adopters of Acts 20/22 who have already made Puerto Rico their home, as the island desperately needs to offset a sad pattern of jobs being lost at an apocalyptic rate.

To date, Acts 20/22 have helped create more than 3,000 direct jobs. This is but a drop in an empty bucket, as Puerto Rico has lost more than 290,000 jobs dating back to the beginning of a 10-year depression that started in 2006. The lack of job creation was singled out by all the credit-rating agencies when Puerto Rico’s credit was downgraded to noninvestment grade, or junk status, early in Garcia Padilla’s first term. So, too, was joblessness a core concern in the report “Puerto Rico: A Way Forward,” written by former International Monetary Fund Managing Director Anne Krueger, along with colleagues Ranjit Teja and Andrew Wolfe.

The most recent admission of the poor prospects for job growth on the island came during last week’s briefing of congressional staffers given by Puerto Rico’s restructuring brigades.

During the briefing, former Chief Restructuring Officer for the U.S. Treasury Jim Millstein, who is the point man for the commonwealth government in debt negotiations; Government Development Bank (GDB) Chairwoman & President Melba Acosta; and Puerto Rico’s legal counsel, Richard Cooper, who is a partner at Cleary Gottlieb Steen & Hamilton, explained that there is no way the commonwealth can meet upcoming debt payments. The GDB has some $422 million due in May and the central government owes another $805 million on general-obligation bonds in July.

The commonwealth’s Restructuring Brigades are proposing a debt-exchange plan that intends to prompt holders of some $49 billion in Puerto Rico government debt to exchange their notes for tradable instruments called “base bonds” worth $27 billion. The remainder of what they are owed—some $22.7 billion—would be put in instruments called “growth bonds,” which are paid back in full across 30 years, but only if Puerto Rico’s economy grows beyond the rate of inflation (around 2% a year). Given Puerto Rico’s depressed economy, they should have called these “Cinderella bonds.”

In their dog and pony show, Millstein and Company stated in no uncertain terms that even with the austerity and fiscal measures the commonwealth has implemented, they do not expect Puerto Rico’s economy to grow significantly over the next decade. The caveat is a damning admission because it means that the holders of $49 billion in debt across some 11 entities, not including Puerto Rico’s Electric Power and Aqueduct & Sewer authorities, will be taking a 40% haircut.

Such frank talk before congressional staffers would seemingly imply that Puerto Rico’s advisers are counting on an orderly restructuring regime passing in the U.S. Congress. They know better. The only certainty is that market confidence in Puerto Rico continues to dwindle. This is a dangerous game with too much at stake—Puerto Rico can ill afford to scare away capital for another 20 years.

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