Economist: Many Mistakes Have Been Made

Six years ago, Estudios Técnicos made projections indicating that, growing at a rate of 1.8% a year, Puerto Rico’s economy would not return to 2006 levels until 2016. Now, after revising these projections, the firm estimates that achieving this goal will not be possible until 2023. “The economy has lost 16 or 17 years of its evolution and that means major structural changes,” said José J. Villamil, chairman of Estudios Técnicos, during his lecture last week before the Financial Professionals Association.

Villamil believes that many mistakes have been made in recent years that have brought the economy to the situation where it now stands. The Special Communities program decapitalized the Government Development Bank (GDB) and projects such as the Tren Urbano, which costs $150 million a year, were funded. But the “biggest mistake was not taking action by early 2013” because, as early as January 2013, it was known that there were liquidity problems and the government did nothing until midyear, when 15 taxes were approved.

“One of the most serious mistakes was not to approve the crudita bill in November 2014,” he said, referring to the hike in the petroleum-products tax. The bill was submitted by the executive branch in November 2014 to provide liquidity to the GDB, to whom the Highways & Transportation Authority (HTA) owes more than $2 billion. The goal was to issue $2.95 billion [in bonds] that would have solved the GDB’s liquidity problem. After several amendments, the Legislature finally approved the bill March 15, 2015. But the bond issue guaranteed by that tax never came to fruition. Amendments filed by the Legislature constituted a rejection of the legislation and to this day, Puerto Rico is still paying the cost of not approving that bill. There have been other mistakes, such as lack of government transparency and how the information has been provided, he indicated.

On Dec. 30, the government activated the clawback clause, which aims to redirect funds backing some [bond] issues’ financial obligations such as those of the HTA and the Infrastructure Financing and Convention Center District authorities, among others.

“What the government did was deplete those agencies’ reserves to pay debts,” and that’s technically a default, Villamil said. The clawback allowed Puerto Rico to pay a debt of about $1 billion, but $37 million went unpaid. He explained that after saying it had no money, the government had to show evidence of the fact, and that’s why the default took place, even if only for a small amount. “The reality is that the clawback contributed very little to the $1 billion,” he said.

But does the government have money to pay off the debt or not? Villamil believes there is no more flexibility to continue cutting government spending. He said it is very difficult to make budget cuts and doing so would mean layoffs. Reducing payroll by $200 million would mean some 7,000 people would lose their jobs.

“The other option is to increase taxes and that has its complications. We have raised taxes, which should not have been raised,” Villamil said, referring to the 4% tax that companies have been paying since October for services between companies (business-to-business tax). “It’s a terrible tax. It’s a tax on economic activity and it has harmful implications for small and midsize businesses.

“The government’s tax team has forgotten something fundamental. Tax systems have to be simple, easy to implement and manage, and shouldn’t involve costs,” he said.

Villamil also opposes the introduction of the value-added tax (VAT, or IVA by its Spanish acronym) in April. He said it is a good system, but it has certain implementation costs “and this suggests this isn’t the right time” due to the island’s economic situation. In the past 10 years, Puerto Rico has lost more than $100 billion in wealth, which includes bank assets and home values.

The government does not have many options and the critical date of July 1 is approaching fast—this is the day the government must make a $1.3 billion payment, money that it doesn’t have.

Villamil would not welcome the implementation of a federal fiscal-control board either. “I think it is a serious mistake,” he said. “Not knowing who is going to be part of it, not knowing what its responsibilities will be. It is a very dangerous measure.”

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