Long Shadow on Puerto Rico's Future
As Puerto Rico and the Virgin Islands grapple with the aftermath of the third and most destructive hurricane this season, we update our estimates of the impact of this damaging hurricane season and provide some detailed background on what will make Puerto Rico a political and fiscal issue for some time. Our main conclusions are as follows:
- Federal hurricane aid should eventually reach more than $100bn in fiscal year 2018. Congress already passed $15bn for Texas in the aftermath of Harvey and we think another package of around $50bn for Harvey, Irma, and Maria should come in October. It won’t be nearly enough to cover rebuilding costs in Puerto Rico and we expect another package in H1 2018. That would still leave substantial losses uncovered by private insurance or federal aid.
- Maria hit Puerto Rico in the midst of a Greece-like fiscal/economic crisis. The island has been operating under the oversight of a federally appointed fiscal oversight board for over a year. Fiscal austerity on top of a decade of recession had only pushed Puerto Rico deeper into a negative feedback loop whereby fiscal cutbacks and a lack of competitiveness had accelerated outmigration and shrinkage of the tax base. Puerto Rico declared bankruptcy under the federal law that had formed its oversight board in May of this year and creditors should expect very little recovery of the more than $70bn in defaulted debt.
- There will likely be philosophical debates about fiscal responsibility versus colonialism and predatory lending as the magnitude of the necessary rebuilding effort is assessed. Philosophy aside, the reality is that the less generous and slower moving the federal rebuilding effort, the greater will be the inclination of Puerto Rico’s citizens to survive through migration to the mainland making the island’s finances ever more unsustainable.