Two weeks after Hurricane Maria ravaged Puerto Rico and destroyed her infrastructure system completely, President Trump paid a condolence visit to the island. With major infrastructure completely wiped out or partially damaged but unusable, the country’s economy continued to take a roller coaster down south.
While on the island, Trump hinted at wiping out the country’s enormous debt, stating:
“”We have to look at their whole debt structure. You know, they owe a lot of money to your friends on Wall Street. And we’re going to have to wipe that out,” he said. Mr. Trump added, “you’re going to say goodbye to that, I don’t know if it’s Goldman Sachs but whoever it is, you can wave goodbye” to Puerto Rico’s debt. ”
Today, Puerto Rico has about $70 billion in debt and her unemployment rate is 2.5 times higher than the average unemployment rate in the US. The poverty level in this US territory exceeds 45% while her Medicaid insurance program that was designed to alleviate the medical problems of the poor is embarrassingly underfunded.
In addition, Puerto Rico’s per capita GDP is consistently lower than both the U.S. average, and from the states where many Puerto Ricans have moved to in the U.S. Over the past decades Puerto Rican incomes have stagnated at 35% of the average U.S. incomes.
Without a way out of her dwindling economy and $74 billion of bond debt, the country filed for bankruptcy in May. That may trigger the president’s desire to help the country out of her debt crisis in the form of wiping out her debt.
What’s responsible for Puerto Rico’s huge debt?
Puerto Rico’s debt is a source of concern for Puerto Rican and some financial experts. It amazes such people how the tiny island could owe such a huge amount of money. Well, many factors are responsible for the financial crisis in the country. It was this crisis that eventually plunged the country into debt.
Here are some of these contributory factors:
1. Declining economy
The economy of this island is nothing to write home about. It is sickening. Out of the past eight years, the country has witnessed declining GNP in 7 years with a tiny leap in 2012. A typical example of this is between 2006 and 2014 when the country’s GNP reduced by13%. On the other hand, while the United States experienced internal recession that year, she recorded almost 11% increase in GNP. That decline over the years contributed to the inability of the country to pay off her debt.
The decline is due to the absence of industries and companies that can move the economy forward. Puerto Rico is ill-equipped for production of goods and manufacturing. Therefore, there is practically nothing on ground to create an environment that is conducive to economic growth.
2. Shrinking population
The dwindling economy has led to the migration of able-bodied men from the island to other parts of the United States where the economy is buoyant. That has led to a gradual shrinking of the population. Within the past 10 years, Puerto Rico has lost over 250,000 people, the larger and better chunk of her labor force, to migration.
The shrinking population also translates to shrinking labor force. With the majority of working-age men out of the island in search of greener pastures, Puerto Rico has to make do with aged men and women who can contribute little or nothing to the country’s labor force and economy.
The problems Puerto Rico faces are similar to those of some states in the U.S., but without the growth that stateside regions have experienced.
According to the Puerto Rico review, in 1970, only 20% of adults in Mississippi had a college degree, agriculture was the main source of jobs, and about half the children of Mississippi lived in poverty — about the same as in Puerto Rico.
Today, roughly 22% of the people of Mississippi live in poverty — an improvement from 2012, when the number was 25%. While this is not a statistic to celebrate, it does show a real improvement over the situation in the 1970s. Puerto Rico continues to have about a 50% poverty rate.
As a result, the government has continually taken loans to support the ailing economy and drive it out of the crisis without any means of serving such loans. Hence, the debt crisis became inevitable.
3. The end of Tax Benefits
Puerto Rico for decades was subject to beneficial tax regulations, including PR Act 20 which provided a 4% corporate tax rate to companies and investment managers who export their services from the island, to eliminating the capital gains tax for individuals with a bona fide residence on the island, to a regulation that for many years saw 2/3 of American pharmaceutical manufacturing occur on the island.
According to the Bureau of Labor statistics, in 2016 pharmaceutical and medicine manufacturing was the top export, comprising 72.4% of total exports, and almost 50% of total GDP, and 16 of the 20 top selling drugs in the mainland U.S. are produced in Puerto Rico.
However due to the expiration of tax incentives, changing climates with generic drug production in India and China, competition has been tough.
In 1996 Bill Clinton extended the Puerto Rican tax incentives for 10 years, which were set to expire in 2016. Since then there has not been an extension, however President Trump’s new policy could involve the extension of the existing incentives.
Critics state that forgiving the Puerto Rico debt could end the bull market in the stock market, and also be a leading indicator for the municipal bond market as a whole, however it could also be a crucial lifeline to helping advance the area’s economy on par with the rest of the nation.