The document proposes an alternative fiscal plan for Puerto Rico that focuses on achieving sustainable economic growth through orderly fiscal adjustment and structural reforms. It summarizes the key weaknesses of Puerto Rico's current fiscal plan, including overly pessimistic growth assumptions and an uncertain implementation outlook. The alternative plan aims to achieve a central government surplus by 2018 through restructuring public enterprises, implementing public-private partnerships, and negotiating federal support for healthcare programs. A debt sustainability analysis projects that government debt would decline to 51% of GDP by 2025 under the alternative plan.

1. Puerto Rico:
Is there a way out with
growth and dignity?
CLAUDIO M. LOSER
CENTENNIAL GROUP- LATIN AMERICA
AND EMERGING MARKETS FORUM

2. Where are we now?
 The Current Strategy , as set up, envisages a comprehensive set of
budget and structural reforms that would be supported by federal policy
changes and by concessions made by public sector creditors:
 Specifies a fiscal adjustment program, based on the Krueger Report.
 Assumes no access to financing and a decline in GDP
 Does not recognize that, in light of international evidence, adjustment and reform
improve economic prospects.
 Is very pessimistic on federal aid, and ends with a large financing gap. Government
says debt is unsustainable. There is no analysis of a debt moratorium and does not
discuss costs of broad-based-restructuring
 Seeks prompt and transparent macroeconomic and fiscal information No serious
action has been taken in this area

3. FY2016 FY2017 FY2018 FY2019 FY2020
Projection(In $ mill.)
Revenue (passive) 1/ 16257 16399 16809 17009 17114
(In % GNP) 23.3 23.2 23.6 23.6 23.6
Noninterest expenditure (before measures) 2/ 15769 16044 16636 17405 17556
(In % GNP) 22.6 22.7 23.3 24.2 24.2
Primary balance, before measures 488 355 173 -396 -442
(In % GNP) 0.7 0.5 0.2 -0.6 -0.6
Reform measures 3/ 1132 1818 2469 2969 3308
(In % GNP) 1.6 2.6 3.5 4.1 4.6
Incremental cost of measures -262 -549 -569 -616 -538
(In % GNP) -0.4 -0.8 -0.8 -0.9 -0.7
Increased revenue from reform induced GNP growth 0 115 322 584 907
(In % GNP) 0.0 0.2 0.5 0.8 1.2
Primary balance, after measures 1358 1739 2395 2541 3235
(In % GNP) 1.9 2.5 3.4 3.5 4.5
Interest 4/ 2320 2370 2320 2239 2170
Overall balance -962 -631 75 302 1065
(In % GNP) -1.4 -0.9 0.1 0.4 1.5
Amortization 1810 1044 957 1628 1299
Arrears/payables (reduction -) 0 -827 -501 -501 -501
Net deposit replenishment and other (-) -538 -500 0 0 0
Inflows other entities 105 0 0 0 0
Gross financing requirement after measures 3205 3002 1383 1827 735
Central Government Accounts FY2016-2020
Sources: Puerto Rico Fiscal and Economic Growth Plan.

4. Studies have shown that, contrary to conventional wisdom, fiscal adjustment and reforms in other countries
have helped reverse the economic decline by reestablishing confidence in the future and access to financing
at lower costs, both of which are critical in promoting domestic investment. For instance, the Independent
Evaluation Office of the International Monetary Fund conducted a review of 133 programs in high- and
middle-income countries, with an average targeted fiscal adjustment of about 2 percent of GDP over two
years. It found that economic growth in the first program year improved over the previous year and that it
improved further in the second year.
Independent Evaluation Office, Fiscal Adjustment in IMF-Supported Programs, 2003.
The experience of 15 more recent cases including countries in Latin America and Europe, countries with
dollarized economies (Ecuador, El Salvador and Panama) or Euro or Euro-linked economies (Spain and
Croatia), and countries whose economies took off after major adjustment processes (Colombia, Panama,
Peru, Poland, Turkey and Uruguay), shows a remarkable association between the improvement in their public
finances and the strong recoveries in GDP growth.
Although not part of this review, two other Euro-zone countries (Ireland and Portugal) have implemented impressive and successful adjustment programs.

5. 0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Change in Annual
GDP Growth(%)
Cummulative
improvement in Fiscal
Balance (%GDP)
Improvement in Fiscal Performance and in GDP Growth

6. 286
1461
17
882
551
220
697
141
88
35
240
321 323
-100
0
100
200
300
400
500
600
700
800
Country EMBI Spread improvement Global EMBI Spread Improvement
Improvement in Country and Global EMBI spreads (Reduction in EMBI
spread, basis points)

7. Main Concerns about the Plan
 The Plan aims at promoting economic growth. However, real GNP growth is assumed to be -1% a year
over the five-year period.
 The decline could be larger given the impact of a broad-based restructuring.
 The Plan does not stabilize the Commonwealth finances given that the central government overall
deficit and corresponding financing need will still be sizable in FY2020 and beyond.
 The Plan does not fundamentally address the financial problems of the public pension funds.
 Given that the Plan requires passage of constitutional amendments and various legislative changes, its
implementation as envisaged could be uncertain for an extended period. The creation of the proposed
control board would require the island to relinquish oversight over the budget and taxation.
 Commitment to implementing the Plan would remain uncertain given that important expenditure
adjustment measures are delayed and new expenditure commitments are front-loaded.
 The Plan ignores the adverse economic effects of a broad-based debt restructuring on (on island)
Puerto Rican bondholders and of uncertainties associated with protracted litigation.
 There is no debt sustainability analysis to support the statement that the debt is not sustainable. Such
an analysis would show that after the Plan’s five-year period, the debt burden would increase and then
remain high, as a proportion of a declining GNP.

8. An Alternative Fiscally Sustainable and Pro-Growth Plan: A Better
Way
The objective of Puerto Rico’s economic policy framework should be the restoration of the conditions
for sustainable economic growth through orderly fiscal adjustment combined with growth- and
competitiveness-enhancing structural reforms.
The Plan is a strong basis toward achieving this objective, but it needs to be reinforced under a
reinforced plan.
The adjustment and reform effort in FY2016-17 should focus on:
(1) achieving a central government deficit of ½ percent of GNP in FY2017, and a small surplus in
FY2018. This would help prevent a liquidity/credit crunch and a possible systemic crisis;
(2) restructuring the large public enterprises in ways that ensure continuing and more efficient service
delivery at lower cost;
(3) putting in place public-private partnerships to play a key role in such restructuring and to boost
infrastructure spending without unduly burdening the government finances.
In FY2018-20, efforts should focus on finalizing negotiations for adequate Federal Government support
of health care programs and expenditure restraint to help maintain an overall balance in the central
government finances, while channeling more government resources to high priority investment
projects and social spending, as well as deepening pro-growth structural reforms.

9. FY2016 FY2017 FY2018 FY2019 FY2020
Projection(In $ mill.)
Primary balance, before measures 488 355 173 -396 -442
Primary balance, after measures 1358 1739 2395 2541 3235
(In % GNP) 1.9 2.5 3.4 3.5 4.5
Interest 4/ 2320 2370 2320 2239 2170
Overall balance -962 -631 75 302 1065
(In % GNP) -1.4 -0.9 0.1 0.4 1.5
Amortization 1810 1044 957 1628 1299
Arrears/payables (reduction -) 0 -827 -501 -501 -501
Net deposit replenishment and other (-) -433 -500 0 0 0
Gross financing requirement after measures 3205 3002 1383 1827 735
Alternative Presented late in 2015
Primary Balance 1970 2619 2575 2570 2609
Overall Balance -350 111 25 -24 26
(In % GNP) -.5 .1 0 0 0
Gross Financing Requirements 2055 983 1482 2481 1824
Central Government Accounts FY2016-2020
Sources: Puerto Rico Fiscal and Economic Growth Plan.

10. VII. Debt sustainability analysis
A medium term debt sustainability analysis for the proposal suggests that government debt would come down from the
equivalent of 68 percent of GNP in FY2016 to 61 percent in 2020, and to 51percent in 2025. The projection is based on the
assumptions of average overall central government balance, and interest rates on new disbursements at 9 percent in the
first two years and 5 percent subsequently; it also envisages some recapitalization of public pension plans. Sensitivity
analysis assuming higher interest rates indicates only slightly changes, given a long maturity structure
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Total Public Debt Government Fund