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Economist predicts grim scenario for Puerto Rico’s economy

By on May 17, 2017

SAN JUAN – Renowned economist and former legislative adviser Gustavo Vélez forecast an ominous panorama for the next five years in Puerto Rico, almost a year after the establishment of the fiscal oversight board and the Congressional Task Force on Economic Growth in Puerto Rico under the federal Promesa law.

During his speech Wednesday in the Chamber of Commerce’s discussion panel to meet the candidates for the CofC’s board, Vélez, who was a fierce Promesa supporter, said he was frustrated and unsatisfied with the eight-member task force on economic growth and the local business sectors’ lack of focus on the importance of economic development.

“Out of this process, the most frustrating aspect for me is that the famous task force discussed in Washington is sheltered somewhere in [Sen.] Orrin Hatch [R-UT] or [House Speaker] Paul Ryan‘s office…,” he said.

Economist Gustavo Vélez warned that, unless the government develops a strategic economic development plan, Puerto Rico’s fiscal crisis will surely worsen within the following years. (Agustín Criollo/CB)

Vélez said Puerto Rico’s greatest challenge is whether the country will remain passive before inaction by Congress to provide tools for the island to promote economic development or to demand that the U.S. government immediately activate the task force to reactivate the economy.

“We are already making the same mistake again by being complacent, entertained with what happens locally-[focusing] on the bankruptcy process, who will win, who will lose, how much the haircut is going to be-and we are losing the essence [of needing economic development],” he said.

Vélez argued that if Puerto Rico’s economy continues on its same course, it could lead to an economic debacle while the restructuring process continues to be discussed without having clearly defined what type of productivity base will make it possible to repay the public debt.

The economist said that up until fiscal year 2016, the local economy shrank 18% to 20%, and faced contractions between 2.5% and 3% year-on-year through April 2017.

“That means the downward spiral of this economy is becoming more acute. The contraction in manufacturing, in retail, in the banks, is accelerating the fall. What’s going to happen from 2017 to 2022, according to the fiscal plan approved on March 13; the macroeconomic behavior in that period, there will be contractions in 2017 and 2018 of 2.8% and 2.4%,” he said.

“Unfortunately the contractions are not going to be like that. If austerity, as it has been proposed is what it is, we will fall from 4% to 5% in the next two fiscal years. If we have contractions like that, and we see this continues in decline until 2022, the projection we have is the economy, when it completes this cycle, will have contracted from 30% to 33%,” he added.

Vélez explained that this percentage represents one-third of Puerto Rico’s production capacity. In the past 15 years, he said, the island has lost a third of its size, a reality that will change the entire economic ecosystem within which Puerto Rico operates, and even its bond-repayment capacity.

The economist stated that the current challenge is to minimize the gap between the bankruptcy process through Promesa’s Title III, which will reflect a poor image for Puerto Rico in the following years from an investment standpoint, to attract money for public-private partnerships (P3). He explained that whatever the government tries to project will be trapped by that downward spiral cycle and will continue to pull the economy toward the cliff.

“What I’m saying is that now, more than ever, we have to go to Congress, not to ask for a bailout, but to demand that the task force phase out things that don’t have a fiscal cost, things that will give us the tools, because otherwise, this won’t work. My advice is to focus on the short-term matter of the task force. See what we can do,” he said.

Four Proposals

Vélez explained that he developed four proposals aimed at establishing a process of economic development for Puerto Rico in the upcoming years.

The first one is to transform Puerto Rico into a free trade zone for the entire hemisphere. He said these are registering a lot of activity globally and the idea could be extremely attractive to Congress, as this is the most southerly U.S. jurisdiction.

Second, Vélez assured that Puerto Rico could use its tax framework to be more competitive in corporate taxes and to make feasible the repeal of the tax on inventories.

“We can also turn Puerto Rico into a center of export activity to the Caribbean. I recently met with the company Tropical, which is a local shipping company that is moving a lot of merchandise from local business owners to the Caribbean using Puerto Rico as a hub,” he said concerning his third proposal.

Lastly, Vélez pointed out that there should be a follow-up of all local government efforts to develop the economy, such as small and midsize companies, the International Insurance Center and the destination marketing organization (DMO), among others initiatives.

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