Home' Trinidad and Tobago Guardian : June 18th 2015 Contents BG18 REGIONAL
BUSINESS GUARDIAN www.guardian.co.tt JUNE 2015 • WEEK THREE
Puerto Rico is on the brink
of default and a massive
population drain. Its econ-
omy has been spiraling for
years now, and Puerto
Ricans of all social classes
have had it. They are moving to the United
States in rising numbers in search of jobs.
"We re in unprecedented territory
because this is, in recent memory, the
biggest out-migration that Puerto Rico has
experienced," says Mark Lopez, director of
Hispanic research at Pew.
It s gotten to the point where the migra-
tion is beginning to rival the record numbers
of Puerto Ricans who arrived in New York
in the 1950s ; the "West Side Story" era.
There are now more Puerto Ricans in Flori-
da than in Puerto Rico, according to Pew.
A debt debacle: In total, the Puerto Rican
government is $73 billion in debt, and
there s a solid chance it could default this
summer. A big payment for its energy
provider is looming in July.
The problem looks like this: Puerto Rico
has similar debt to New York---a very large
state economy---but it only has the pop-
ulation of Connecticut.
Every time someone leaves Puerto Rico,
it only exacerbates the situation. It shrinks
the island s tax base, which the government
needs to pay for itself and its debts. In
recent years, the government just issued
even more debt to pay off its current debt.
Puerto Rico s problems result from years
of government overspending, high energy
costs and dependence on debt, says Ted
Hampton, an analyst at Moody s who covers
Puerto Rican bonds.
"It s a self-perpetuating, vicious circle,"
says Hampton. Along with a shrinking
population, "the economy of Puerto Rico
at the same time has also greatly under-
Moody s downgraded most of the coun-
try s debt even further into junk status in
Puerto Ricans are leaving: That news
wasn t received well by many Puerto Ricans,
especially college graduates. They re getting
their degree and leaving, says Maritza
Stanchich, a professor at the University of
Puerto Rico and a columnist.
"It s a marked shift in the past 10 years,"
One of Stanchich s former students and
his wife plan to leave for Austin, Texas, in
July. He s never lived outside Puerto Rico
and had no plans to move up until a year
ago. When Moody s first downgraded Puer-
to Rico s bonds to junk status last year, he
made the decision to leave.
"I don t think we ve hit bottom yet and
that scares me," says the 25-year-old grad-
uate, who requested anonymity because
he hasn t quit his job in Puerto Rico yet.
"There comes a point where you say I ve
had enough. I m a good person, I m a good
citizen, I pay my taxes. "
He isn t alone. Consider this: between
1980 and 2000, the average annual migra-
tion of Puerto Ricans to the mainland Unit-
ed States was 12,000 people. From 2010
to 2013---when the economy started tank-
ing---that figure jumped to 48,000 people
Energy problems: More people might
try to leave after July 1st.
That s when the government-run elec-
tricity provider, PREPA, has to make a
US$400 million debt payment it almost
certainly can t pay. Moody s has rated
PREPA s bonds in the lowest category pos-
PREPA has about US$9 billion in total
debt. By comparison, when Detroit went
into bankruptcy, it shed US$7 billion. By
law, Puerto Rico isn t allowed to declare
Chapter 9 bankruptcy the way that Detroit
PREPA s problems are an oil story. The
company still imports and burns crude oil
to power its electric plants. While others
in the Caribbean have turned to natural
gas and renewable energy, PREPA continues
its "inefficient" energy spending, according
to Moody s analysts.
The looming default may foreshadow a
difficult dilemma for the government. It
must start making decision between what s
best for its people and what s best for its
The president "will not leave in a helicopter,"
promised Julio Alak, Argentina s justice
minister, last October. An earlier president,
Fernando de la Rúa, had done just that in
2001, when all other means of fleeing from
his palace were blocked by pot-banging protesters. In
October, as in 2001, Argentina was in the throes of an
economic crisis, though a milder one. It had defaulted
on its foreign debt.
Foreign-exchange reserves had dropped to their lowest
level in eight years; inflation was 40 per cent; pesos were
worth roughly half as much in the "blue dollar" market
as at the official exchange rate. President Cristina Fer-
nández looked chopper-ready.
Since then things have calmed down. Reserves have
recovered, from US$28 billion to US$33 billion. Inflation
has slowed to 29 per cent. The gap between blue and
official dollars has narrowed. This does not mean that
the economy is in good shape: It is expected to shrink
by about 0.3 per cent this year. On June 9 trade unions
held a transport strike to demand higher wages and lower
taxes. But few Argentines now think that Fernández will
be airlifted from the Casa Rosada before her term ends
She has cheered up Argentines mainly by bringing in
more dollars. A clampdown on imports starting in 2012
slowed the outflow. Despite its default on foreign bonds,
the government has raised money abroad. A currency
swap with China last October has provided US$5 billion.
In April the government boosted reserves by raising
US$1.5 billion through dollar-denominated bonds issued
under Argentine law.
The province of Buenos Aires even managed this month
to issue $500 million in bonds under New York law, by
paying an interest rate of nearly 10 per cent. Collectively,
such measures are Fernández s "Plan Aguantar," or Plan
Hang On, says Fausto Spotorno of Orlando Ferreres and
Associates, a consultancy.
In a country mistrustful of its own currency, this influx
of hard cash lifts spirits. The government has used it to
buy pesos, which has slowed depreciation and helped
hold down inflation. It expanded a nutty-sounding
scheme under which Argentines who earn the equivalent
of at least US$1,000 a month can exchange 20 per cent
of their pay for dollars at official rates. The lucky ben-
eficiaries make a killing by buying pesos in the blue
market at a 40 per cent discount, a practice known as
"making purée" (perhaps because overvalued pesos are
turned into lots of cheaper ones). This is expensive: Spo-
torno estimates it will cost $6 billion this year. But it
serves the purpose of propping up the blue-market peso,
which eases fears of devaluation.
With lower inflation and more dollars in circulation,
confidence has perked up this year. Despite the recession
consumers are cautiously starting to spend more.
Fernández may have done just enough to avert a crisis
before she steps down as president (she is not permitted
to run again). But she has not solved the underlying eco-
The overvalued peso has made Argentine industry
uncompetitive; restrictions on imports have cut factories
off from supplies. Liberal spending on subsidies (to hold
down energy prices, for example) has pushed the fiscal
deficit to about 5.0 per cent of gross domestic product.
By the time Fernández leaves office, reserves are likely
to have dropped back to their levels of last October.
Her successor will have to clean up the mess. That
means allowing the devaluation that Fernández has fiercely
resisted, so that trade can function normally.
\The next president will have to reach a deal with
bondholders if the country is to borrow at reasonable
interest rates. Argentines can expect higher inflation and
a dose of austerity. No one will want to be its first economy
minister, economists joke. If he (or she) stumbles, the
future president may have to keep a chopper on stand-
by.@2015 The Economist Newspaper Ltd. Distributed
by the New York Times Syndicate
Plan Hang On
Puerto Rico's terrible economy
is causing a population exodus
Six Caribbean countries are set to benefit
from a €4.45 million (US$5 million) contri-
bution from the European Union (EU) to
promote the use of renewable energy and
The money has come with the signing of
a Contribution Agreement between the
Caribbean Development Bank (CDB) and the
European Union-Caribbean Investment Facil-
ity (EU-CIF), to support the new Sustainable
Energy for the Eastern Caribbean (SEEC)
The signing took place in Brussels on the
sidelines of the second EU-CELAC/8th EU-
LAC Summit held June 9 to 11.
The SEEC Programme is a multi-partner
loan and grant facility with a budget of
approximately €21.4 million (US$24 million).
The EU-CIF grant contribution to the
SEEC Programme will provide both technical
assistance and investment grants to Antigua
and Barbuda, Grenada, Dominica, St Kitts
and Nevis, St Lucia, and St Vincent and the
CDB president Dr Warren Smith said the
SEEC Programme would allow the Bank, in
collaboration with its development partners,
to use innovative financing methods to
advance sustainable energy solutions for those
six member countries.
"The programme has the potential to ini-
tiate a radical change in the energy landscape
for the beneficiaries. It could become a model
for the rest of the Caribbean; and the lessons
learned from this Programme can inform the
creation of expanded facilities for the benefit
of all of the borrowing member countries of
CDB," he said.
Six Caribbean countries to benefit from sustainable energy funds
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