Members of the Financial Oversight and Management Board. (semisquare-x3)
Members of the Financial Oversight and Management Board. (GFR Media)

A new Fiscal Plan was certified yesterday amid complaints and expressions of frustration from the members of the Financial Oversight and Management Board regarding an alleged lack of political will in the administration of Ricardo Rosselló and the Legislature to make decisions that put the economy in positive ground.

The plan that contemplates a historic investment of $ 69 billion in federal funds post Hurricane María, within the next five years. This injection would contribute for the budget of the central government not to have deficit for the first time in almost 20 years, if the payment of the public debt is excluded.

It would also be the first time in more than a decade that Puerto Rico would see four consecutive years of economic growth. After falling by 8 percent last fiscal year, the document certified yesterday indicates that, starting this current fiscal year, the gross domestic product would register an annual performance of 7.8 percent, an advance that reminds the strength of economies such as India and, just a few years, China. The economic boost tied to hurricane María would go beyond the 2020 elections, that is, for another two years until 2022, when the gross domestic product would be around 2.5 percent.

For Rosselló and his fiscal team, economic projections are so favorable in the years to come, that the scope of the cuts in public spending the Board is requesting are unnecessary.

Therefore, during Board’s fifteenth public meeting, Christian Sobrino Vega, government representative before the federal entity, rejected the move and anticipated that they will go again to the fiscal body to advocate for more changes to the current budget.

Frustration on sight

"Frankly speaking, I don't like this fiscal plan, I think that none of us like it," said Board member Ana Matosantos, when she explained her vote in favor of the document.

According to Matosantos, the plan certified yesterday will end up weakening basic services to citizens. Matosantos' comment seemed to be endorsed by her colleague Andrew Biggs. He warned that local politicians were "denying" Puerto Ricans a future of prosperity.

Retired judge Arthur González, who has participated in hundreds of corporate insolvency cases, agreed to compare the situation in Puerto Rico with the recent Sears store bankruptcy.

"Sears could close as many stores as possible, but if it cannot compete in the commercial world, it will fail. This insolvency -that of Puerto Rico- is not different from that," González added. He explained that, although significant relief is needed while paying bondholders, it is also required that Puerto Rico make deep changes so that it can compete with other economies without the support of federal programs.

However, in the new Fiscal Plan of the central government, certified yesterday unanimously, the missing pieceis the structural reform that would prevent the boom associated with Hurricane María from vanishing in 15 years. Without structural reforms, Puerto Rico would return, by that moment, to the illiquidity scenario faced before the cyclone.

In that sense, far from designing a path towards fiscal stability and sustained economic development, the plan approved yesterday would not meet the mandate of federal PROMESA law.

The Board gave way to a fiscal plan that does not comply with PROMES, just about 10 months before the directors three-year term (which started in the summer of 2016) expires.

Similarly, the Board´s criticism against the island´s politicians occur only weeks before US midterm elections. This process will affect the Board´s composition, depending on the party that will control Congress after the November elections. 

Temptation to spend

Among other things, the document certified yesterday establishes that after the multi-million dollar injection in federal funds associated with Hurricane María, the government would have a primary surplus of about $ 16 billion by 2023.

In general terms, the primary surplus is the difference between the income received by the Treasury and the payment of obligations. The figure certified yesterday is more than twice the amount that Rosselló estimated last September. Back then, the governor said that the magnitude of the cuts in public spending agreed in March 2017 was no longer necessary.

The government has not paid bondholders for about three years, so it is understood that the primary surplus could be available for the payment of the public debt once it has been negotiated.

But yesterday, both the Board´s executive director Natalie Jaresko and Sobrino Vega, indicated that the use of the surplus –if it does materialize- has not been defined yet.

Immediately, José Ramón González –banker and Board member- urged not to fall into "the inevitably political temptation" to spend what you don’t have. He suggested to use the surplus to pay for what can be negotiated with bondholders or to direct that money to any activity that yields sustained results in the economy.

The government's position

"We understand that this -the surplus- is a projection that is not conservative, that is too aggressive and puts the government against the wall because it projects some revenues that should not be given," said Sobrino Vega.

According to the certified plan, the government must cut $ 2,848 billion in spending over a five-year period and, in that same period, increase its collections by $ 544 million. However, the economic analysis suggests that there would be no money to pay bondholders by 2033, a scenario that even though it’s relatively far, cannot be ignored. This is because the Board seeks to renegotiate the public debt with repayments of 30 and 40 years.

Questioned on the adverse projections, Sobrino Vega said that these are "a planning exercise that cannot define the entire operation of a government in a five-year period”. 

Meanwhile, the Board members and Sobrino Vega were holding to their arguments, President Donald Trump, in one of his unexpected tweets, accused the "inept" politicians of Puerto Rico of trying to use reconstruction funds to pay off old obligations, which sparked a range of reactions.

"This document is raising a flag. We still have time to make and take measures that could change our future," said the Board chairman José B Carrión, in a conciliatory tone. He indicated that he expected Rosselló, his team and the political class to "reconsider" (their position).

However, during the press conference offered by Sobrino Vega and the president of the University of Puerto Rico Governing Board, Walter Alomar, they hinted that they will not comply with the requirements of the Board.

The same happened at La Fortaleza. There, they informed that the Governor will challenge federal judge Laura Taylor Swain’s determination before the US First Circuit of Appeals, in Boston. Judge Swain determined that although they cannot legislate, the Board has the last word when it comes to public spending.

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