PUERTO RICO ECONOMIC TURNAROUND ROADMAP

FEBRUARY 17, 2016

DEBT/FISCAL PARADOX

One

•  In 2014, the Irish bonds were traded at a yield of close to 3%. The fiscal deficit target was of 3.7% of GNP.

Two

•  At present, Puerto Rico bonds yield nearly 10% and the aim was for a zero fiscal deficit at the central government level.

EXPLAINING THE PARADOX

Ireland refused to increase taxes on its export sector, although it raised the VAT to 23%.

Ireland enacted energy reform.

Ireland’s education system is one of the best in the world.

During the period 1994 to 2007, the growth in Ireland's economy averaged 6.4% while Puerto Rico growth was sluggish.

Ireland showed 1.8% growth in GNP in 2012, accelerating to 2.7% in 2013. Growth of 7% in 2015 reduced the debt / GNP ratio despite a fiscal deficit.

For the period of fiscal 2007 through 2015 the economy of Puerto Rico has been stagnant at best and in deep contraction at worst.

How much production each hour?

How many hours?

How many people work?

THE PRODUCTION OF A JURISDICTION IS A FUNCTION OF THREE VARIABLES:

Lower productivity than in the

U.S.

Low labor participation by world standards

THE PRODUCTION OF A JURISDICTION IS A FUNCTION OF THREE VARIABLES:

More holidays, paid sick days and vacation days than in

the U.S.

2000 2010 Change % 2000-2010

2014 Change % 2010-2014

Under 19 years 1,219,804 1,017,590 -16.6% 879,623 -13.6% 20-34 835,523 753,182 -9.9% 698,587 -7.2% 35-49 748,783 731,514 -2.3% 688,299 -5.9% 50-64 579,363 681,505 17.6% 664,877 -2.4% 65-79 324,029 412,402 27.3% 469,003 13.7% 85 years and over 101,108 129,596 28.2% 148,008 14.2% Total 3,808,610 3,725,789 - 3,548,397 -

ECONOMY DRIVES THE POPULATION PROFILE

Source: U.S. Census Bureau and American Community Survey

CRITICAL STRUCTURAL REFORM

• Complete energy reform 1

• Labor reform 2

• Transportation reform 3

IT IS NECESSARY BUT INSUFFICIENT TO DEAL WITH THE FISCAL ISSUES

1

•  More aggressive pension reform than the one declared unconstitutional in Illinois or imposed by the court in Detroit.

2 •  Reduction in payroll, closings of schools.

3

•  Tax increases from corporate income tax to gas excise tax to sales tax.

THE PERCENTAGE OF GOVERNMENT EMPLOYEES IN PUERTO RICO IS HIGH

THE NUMBER OF PUBLIC SECTOR EMPLOYEES IS NOT HIGH

74

68

78

66

2008 2015

Government employees per 1,000 residents (June)

United States Puerto Rico

Source: BLS, U.S. Census Bureau and Puerto Rico Planning Board

THE PRIVATE SECTOR IS TOO SMALL, PARTLY BECAUSE LABOR LAWS

379 374

181 193

2008 2015

Private sector employees per 1,000 residents (June)

UNITED STATES PUERTO RICO

Source: BLS, U.S. Census Bureau and Puerto Rico Planning Board

THERE ARE OTHER POSSIBLE SPENDING CUTS...

•  UPR could move towards income based tuition; Fiscal Adjustment Plan assumes a $300 million spending cut.

1

•  Many “Juntas de Inscripción Permanente” could stop being “permanentes”.

2

•  Many more schools need to be closed, as proposed in the Fiscal Adjustment Plan.

3

… BUT SOME NECESSARY SPENDING INCREASES.

•  Police officers and teachers need to be enrolled in the social security system. 1

•  Health related initiatives are needed such as increasing the payment for used tire disposal.

2

•  Most poor individuals lack legal representation in civil court cases.

3

TWO FISCAL IMPOSSIBILITIES

• Pension Money runs out in 2018 PENSIONS

• Obamacare Money runs out in 2018 HEALTH

CONSENSUS ON THE NEED TO RESTRUCTURE DEBT

•  Economists from Nobel Prize winner Joseph Stiglitz to staff of the Federal Reserve and the US. Department of Treasury to Desmond Lachman from the conservative think-tank American Enterprise Institute.

A •  All US Senators from the Democratic Party plus the

White House. B

•  The PR Private Sector Coalition, religious groups and local media. C

1

2

3

In addition to handling urgent financial issues, Puerto Rico needs to address the structural issues of the economy in order to move forward.

While fiscal discipline must continue, it is unsustainable without economic growth.

Debt restructuring is a sine qua non for economic recovery.

Conclusion