Debt moratorium needed to face economic crisis worsened by Covid-19, watchdog group says
Espacios Abiertos economist: Gov’t should eliminate austerity measures, draw up ‘realistic’ plan
SAN JUAN – Citing Gov. Wanda Vázquez administration’s recently revised fiscal plan indicating Puerto Rico is losing its ability to meet fiscal obligations due to significantly worsened economic conditions, that have been exacerbated by the Covid-19-spurred lockdown, government watchdog Espacios Abiertos (EA), or Open Spaces, is calling for a public debt moratorium, as well as an end to austerity measures required by the Financial Oversight & Management Board (FOMB).
“Instead of requesting a delay in cost-cutting measures, the government should be demanding an end to austerity measures as part of Puerto Rico economic policy once and for all,” EA Executive Director Cecille Blondet said during a teleconference with reporters Tuesday, accompanied by economist and EA senior analyst Daniel Santamaría Ots.
Blondet likened the FOMB’s austerity measures to the negative economic effects of the more than two-month-old lockdown in place on the island to curb the spread of the potentially deadly virus, saying austerity measures “turn off the economy” as have the coronavirus measures.
Blondet and Santamaría said that in the latest fiscal plan the Vázquez administration submitted to the FOMB on May 3, the government acknowledges that the amended Plan of Adjustment (POA) the board negotiated with commonwealth creditors—and filed in federal court Feb. 28 to settle $35 billion in central government debt—“is simply not feasible in our post-Covid-19 reality,” suggesting it may have to be renegotiated.
The amended POA calls for $1.5 billion in annual debt service, which would be in addition to payments already being made for renegotiated Puerto Rico Sales Tax Financing Corp. (Cofina by its spanish acronym) and Government Development Bank debt. A portion of the island’s sales and use tax revenue is earmarked annually to pay Cofina creditors.
The administration’s February 2020 fiscal plan projected the cash flow available for debt repayment as ranging from $900 million to $1.3 billion each year, while in the current plan, from May 2020, the cash flow available for debt repayment is projected to range from $200 million to $600 million annually, Santamaría said.
“The current fiscal plan, presented on May 3, interprets this new situation as an unprecedented risk scenario for Puerto Rico,” the economist said. “For the first time there appears a formal complaint by the government about the imposition of austerity measures by the [oversight board]. This could indicate that the official narrative may finally be starting to recognize that austerity is a failed public policy, at least in the face of the current crisis.”
During a Senate Treasury Committee hearing Wednesday, Puerto Rico Office of Management & Budget Director Iris E. Soto Díaz said the governor’s fiscal 2021 consolidated budget proposal of $17.12 billion was $1.5 billion greater than the one submitted by the FOMB. The oversight board’s proposal includes an 8.5 percent cut to the number of public workers in 40 commonwealth agencies, she said.
In fact, Santamaría said the projected local Covid-19-induced “deep recession” calls for the government and the FOMB to enact a “realistic and plausible macroeconomic plan,” which would include shelving austerity measures and petitioning the court and creditors for a moratorium “of no less than one year” on existing debt service payments involving Cofina and the defunct GDB. Such actions would give the island some room to weather the health and economic crisis, he said.
The economist noted that the new fiscal plan is projecting that the island’s real gross national product (GNP) will shrink by 3.8 percent in fiscal year 2020, which ends June 30, and contract by another 7.8 percent for fiscal 2021. The estimated losses resulting from the pandemic could reach $6.6 billion, he said, citing data provided by the Puerto Rico Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym).
The impact is reflected in the island government’s coffers, with tax collections for the general fund dropping 11.3 percent since March, Santamaría said, noting that such revenue had maintained an upward trend and had exceeded estimates until two months ago. As a result, the commonwealth’s liquidity and cash flow have been drying up, falling well below projections, he said, citing data published by Aafaf, and added that a fiscal deficit of at least $708 million is being projected for fiscal 2021.
Moreover, the commonwealth unemployment insurance fund could run out in six months even as the government relaxes the lockdown, given that surging jobless claims might not diminish substantially by the end of the year due to the closure of businesses that could not withstand the lockdown-induced losses, Santamaría said. The number of without jobs could reach 380,000 by June, sending the island’s unemployment rate to 23 percent, compared with 8.8 percent in February, he said.
On the other hand, the Puerto Rico economy could benefit from the $5.7 billion in federal and local Covid-19 emergency aid, Santamaría said, noting the figure is still short of the $80 billion in federal funds projected for recovery from 2017’s Hurricane Maria. Still, any recovery will depend on how fast such aid is disbursed, he said, adding that the island has benefited from just a fraction of the aid.
In fact, Puerto Rico’s economy grew for the first time in seven years in fiscal 2019, when real GNP grew 1.5 percent, the economist said, noting that the last time the island’s real GNP had grown was in 2012, when it rose 0.5 percent. Still, Puerto Rico’s economy has shrunk by 21 percent in real GNP since 2006, he said.
“There have been no signs of [sustained] economic growth because the macroeconomic model of growth has not been modified. Everything we see now has to do with federal aid. There is a lot of uncertainty over what the fiscal and monetary stimulus will be at the end. This is going to be continually reevaluated,” Santamaría said. “The economy in Puerto Rico, as well as globally, the United States included, will not perform the same way if the aid package remains at $6.8 trillion, than if an expected additional $3 trillion is approved, which the U.S. Congress is looking at.”
In the May 3 fiscal plan, the government developed its new economic projections on the basis of three scenarios for the period from 2020 to 2025, Santamaría said. The first, and most optimistic, projection suggests a lower impact from the crisis, which would lead to an average surplus of $502 million in each fiscal year. The second, “baseline,” scenario, assumes the crisis will cause a larger impact, reducing the average primary fiscal surplus to $32 million. The third, or “downside,” projection, would lead to an annual deficit of $578 million in each fiscal year through 2025.
The government acknowledges in the fiscal plan that these scenarios would call for a cut in the central government debt of no less than 90 percent—far greater than the 56 percent reduction negotiated in the amended POA.
Santamaría stressed that “a debt moratorium makes more sense than ever now,” given that such a measure is needed until a clearer picture of the local and worldwide economic situation emerges. He said this action would be in line with the 12-month moratorium covering $20 billion in debt and interest that the G20 bloc of countries negotiated with 76 developing nations amid the Covid-19 crisis.
“All possible resources within the budget of the government’s general fund, in addition to those federal funds sent to the island for dealing with this crisis, should be invested in making the island economy more robust and meeting its citizens’ most pressing needs—all with the purpose of overcoming the health and financial crisis created by the pandemic,” he said.
Moreover, Santamaría called for an official analysis of the sustainability of the public debt that includes the long-term effects of the pandemic. He stressed that the government needs to complete and publish audited financial statements for 2017, 2018 and 2019 so “a realistic and plausible macroeconomic plan can be developed.”