Puerto Rican Governor Alejandro García Padilla plans to present Puerto Rico’s balanced budget plan a year early in response to the Switzerland-based financial services company UBS AG’s credit downgrade forecast.
“Given the myriad obstacles facing Puerto Rico, we believe that at least one rating agency will [downgrade Puerto Rico’s general-obligation bonds] within the next 30 days,” analysts Thomas McLoughlin and Kristin Stephens wrote in a report released last week.
The downgrade to junk status would limit demand for the commonwealth’s debt, as it would be below investment grade.
Meanwhile, the balanced budget plan, which the governor had pledged for 2016, will go into effect for the 2014-2015 fiscal year. The current administration has pledged to change pensions and raise taxes to help close the budget gaps. Details of the changes have not been released.
The announcement is expected to generate negative backlash from Puerto Ricans, who have seen the cost of commodities soar while nearly half the population lives under the poverty line. The passage of pension cuts in January led to a two-day teacher’s strike and a lawsuit filed by the Asociación de Maestros de Puerto Rico (Teacher’s Association of Puerto Rico) in Puerto Rico’s Supreme Court.
Governor García Padilla is expected to introduce the detailed budget in the coming weeks.
All eyes were on Detroit earlier this month as Federal Judge Steven Rhodes ruled that the city could discharge public pensions, along with other debt, as it restructures under Chapter 9 bankruptcy.
While other cities look at the ruling as a viable—though unfortunate—solution for their financial woes, there is one especially troubled economy that will not be able to take advantage of the ruling, or file for bankruptcy at all: Puerto Rico.
Last Wednesday, Moody’s Investors Service announced that it may downgrade Puerto Rico’s general-obligation debt to “junk” (noninvestment) status. All three credit rating agencies currently have the island at just above junk status, but with "weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy," a downgrade seems increasingly likely.
Puerto Rico’s high debt is exacerbated by its pension obligations—25 percent of all workers were employed by the Puerto Rican government before former Governor Luis Fortuño cut more than 40,000 jobs during his tenure—as well as budget deficits that predate the Great Recession and the prolonged deterioration of the island’s economy.
Now entering its eighth straight year of recession, Puerto Rico has found it difficult to recover as U.S. federal funding has dried up, energy prices have skyrocketed and tens of thousands of Puerto Ricans have fled the island looking for better opportunities on the mainland. Although Detroit’s debt pales in comparison to Puerto Rico’s—as of 2013, the island’s debt is nearly four times larger than Detroit’s –as a commonwealth, Puerto Rico is ineligible for bankruptcy.
As the U.S. government’s shutdown stretches into its second week, local economies everywhere are suffering—but perhaps none as acutely as Puerto Rico.
The Island of Enchantment, which is home to nearly four million people, is slogging through its seventh straight year of recession with an economy that has already contracted 5.4 percent since August 2012. And the shutdown is making it difficult for the U.S. territory to overcome the economic difficulties that have plagued it for the better part of the decade.
Though Puerto Rico’s average per capita income is half that of Mississippi’s— the poorest state in the union—consumer prices on the island are sky high. On average, electricity costs on the island are double those on the mainland, and the cost of importing 85 percent of Puerto Rico’s food is often passed onto the consumers.
The result: nearly half the population lives under the poverty line, and Puerto Ricans are abandoning the island at a record pace due to high costs, a wobbly economy and high unemployment. The government shutdown that began on October 1 will only exacerbate Puerto Rico’s already fragile economy.
The island is burdened by $69 billion in public debt and relies on federal funding for 39.6 percent of the money it spends, compared to the average of 26.2 percent for U.S. states. While less than $6.6 billion of the funding the island receives from the federal government is considered discretionary, the unintended side effects of the shutdown will ripple through various industries and could bring the unstable economy to a grinding halt.
With Puerto Rico’s unemployment rate at a staggering 13.9 percent—the highest in the country—the federal shutdown means the continued loss of what little employment is available on the island. Federal employees, already suffering with furloughs due to sequestration, number about 10,000 on the island; about half of those are considered non-essential and affected by the shutdown. The longer Congress fails to pass a resolution, the more likely it is to increase the unemployment rate in Puerto Rico where workforce participation is just 40 percent and there are fewer than 900,000 jobs.
But the shutdown also threatens to affect the other main source of income on the island: tourism.
In 2011 alone, tourism contributed over $6 million to the GDP and supported 59,500 jobs across sectors. The lost revenue from the closure of some of the island’s main tourist attractions, including Fort San Felipe del Morro and Fort San Cristobal in Old San Juan, as well as El Yunque National Park— the only tropical rainforest in the U.S. National Forest System —will also have a negative impact on local businesses that depend on tourism.
The negative consequences go further still. Besides decreasing the revenue from the island’s most popular industry, the shutdown affects more than just vacationers and tourist destinations. Perhaps the most dangerous consequence of the shutdown will be the reduced resources to combat violent drug crime.
With a per capita murder rate six times that of the U.S. mainland, more than 70 percent of homicides in Puerto Rico were related to the drug trade in 2012. Up until recently, the federal government paid little attention to what was happening on the island. By 2012, Puerto Rico had received just $260 million to combat drug-related crime—compared to the $1.6 billion that the U.S. initially pledged to Mexico as part of the Mérida initiative.
This all changed with Operation Caribbean Resilience, which began in July 2012—one year after murders in Puerto Rico surged to a record 1,117 per year. While the drug trade began to thrive on the island in the 1980s, it saw a dramatic spike in drug violence 2009, when tighter security at the U.S.-Mexico border closed off traditional drug trafficking routes.
While the federal government has sent 30 additional Homeland Security investigation agents to Puerto Rico and the Coast Guard has increased patrols of the Caribbean smuggling routes, the shutdown affects federal agencies on the island that are already chronically understaffed. Even the U.S. District Court for the District of Puerto Rico halted new judicial activities as of October 1.
With more than 43,000 pounds of narcotics seized in 2012 alone, it is clear that the U.S. can’t afford to neglect nearly 4 million citizens affected by the drug war due to partisan politics.
On the day of the shutdown, the FBI announced that it had dismantled a powerful drug organization in Puerto Rico that had generated over $100 million in revenue since 2005. I applaud that success and the new U.S. interest in the Caribbean—and recognize that federal agencies such as the FBI and Coast Guard are not currently affected by the shutdown.
Yet with chronically understaffed federal offices—even when the government is functioning at its full capacity—the shutdown seems poised to stifle the progress that has been made to reduce crime on the island.
Nearly 2 million Puerto Ricans went to the polls yesterday, and while they could not participate in the U.S. presidential election, residents of the U.S. territory opted for statehood in a non-binding referendum. Voters on the island also elected the pro-Commonwealth candidate Alejandro García Padilla as the new governor of the island.
The first question on the two-part referendum asked voters if they wanted to change their political status with the United States. Nearly 54 percent (992,374) chose not to continue their 114-year-old relationship with the United States, while 46 percent (786,749) favored the status quo of the island remaining a territory. The second question was geared toward those who favored a change in status and asked voters to choose between three options—U.S. statehood, independence or “sovereign free association.” Sixty-one percent opted for statehood.
Under the current status of Free Associated State (Estado Libre Asociado—ELA) residents of Puerto Rico do not have the right to vote in presidential elections and only have one non-voting representative in Congress. However, Puerto Ricans have been U.S. citizens since 1917. The status of Free Associated State grants a certain degree of autonomy to the island, but restricts its residents from becoming involved in topics such as security, trade and diplomatic relations, among others.
But the future of Puerto Rico also depends on who governs the island. While Governor Luis Fortuño supports Puerto Rico’s incorporation as the 51st state, Governor-elect Alejandro García Padilla advocates maintaining the status quo. García Padilla of the Popular Democratic Party (Partido Popular Democrático—PPD) was elected with 48 percent (870,005 votes) support, while Fortuño of the New Progressive Party (Partido Nuevo Progresista) received 47 percent (855,325) of the votes.
Top stories this week are likely to include: the United States heads to the polls; Puerto Rico decides on status; Michel Martelly requests emergency aid; and Rafael Correa gets re-nominated for president.
Elections in the United States: On Tuesday, voters across the United States will go to the polls to vote for the next president as well as all congressional representatives and select governors and senators. A poll of polls from Real Clear Politics has President Barack Obama maintaining a razor-thin edge—0.5 percentage points—over Governor Mitt Romney. The difference-maker could be the turnout of Latinos, a demographic that supports Obama by 52 percentage points over his Republican challenger according to a poll released last week by Latino Decisions. AQ Senior Editor Jason Marczak observes: “The question is the degree to which Latino political preferences will translate into votes, especially in battleground states. Beyond Election Day, Latino turnout tomorrow will shape the extent to which their concerns will factor into policymaking in the next four years.”
Puerto Rico's Referendum: Voters in Puerto Rico will decide on Tuesday about the future of the island’s status. Currently it is a semi-autonomous “unincorporated territory” of the United States that—since it is not a state—plays no role in the U.S. presidential general election. Puerto Ricans will decide whether they want the island to gain more autonomy as a “sovereign free association,” or whether Puerto Rico should become a U.S. state or independent altogether. Tuesday’s vote will be the fourth time in 45 years that Puerto Ricans have formally weighed in at the ballot box on the status of the island. A poll last month found that a slim majority—51 percent—want to keep the island’s current status intact, according to AS/COA Online. “This is probably the most complicated ballot used for a referendum on Puerto Rico’s status and will likely split the vote for those opposing the commonwealth’s status quo,” observes AQ Editor-in-Chief Christopher Sabatini.
Haiti Rebuilds After Superstorm Sandy: Sandy, which took on many forms including tropical storm, hurricane and post-tropical storm, left much damage in its wake—including in Cuba, Jamaica, the Dominican Republic, Puerto Rico, the Bahamas, and the United States. But a country that appears to have suffered the most long-term damage is Haiti. According to the Associated Press, 70 percent of crops in the south of the country were destroyed and livestock killed—significantly damaging the agricultural industry. President Michel Martelly is appealing to the international community for emergency aid as his country adds the superstorm damage to the loss inflicted by a devastating earthquake outside of Port-au-Prince in 2010. Will Martelly’s request be granted this week?
Correa to be Nominated at Party Convention: Ahead of Ecuador’s presidential election in February, the Alianza País incumbent party will hold its convention on Saturday and re-nominate President Rafael Correa to represent the party on the ballot. Foreign Minister Ricardo Patiño affirmed this past Wednesday that Correa, first elected in December 2006, will run for another full term. If he wins, the populist leader will remain in power into 2017. Early polls show Correa with a huge advantage over potential challengers, bringing in 56 percent of votes versus Guillermo Lasso, an ex-banker of the opposition who garners 23 percent.
Campaigning in Puerto Rico yesterday, Republican presidential candidate Rick Santorum said residents of the U.S. territory would have to make English their official language if they want to pursue statehood. A referendum on whether to pursue statehood or remain a commonwealth of the U.S. is scheduled for November; the island currently recognizes both English and Spanish as official languages.
In an interview with El Vocero newspaper, Santorum said he supported Puerto Ricans’ right to determine the island’s political status, but insisted that English be the primary language. “Like any other state,” he said, “there has to be compliance with this and any other federal law. And that is that English has to be the principal language.” However, no clause in the U.S. Constitution designates an official language or mandates that a territory adopt English as its principal language to acquire statehood.
Santorum traveled to Puerto Rico on Wednesday, hoping to capitalize on the momentum following his wins in the Alabama and Mississippi primaries on Tuesday. Puerto’s Rico’s Republican primary election is scheduled for Sunday, March 18. Though Puerto Ricans cannot participate in the general election in November, they do control 20 delegates to the Republican National Convention. A candidate must accumulate 1,144 delegate votes to win; the latest Associated Press tally showed Mitt Romney with 495, Santorum with 252 and Newt Gingrich with 131.
Santorum met briefly with Governor Luis Fortuño, who has endorsed Romney, before holding a townhall meeting. His insistence on adopting English as the primary language may not sit well with Puerto Rican Republicans, many of whom contend that issues of language and culture should be decided at the state level.
Puerto Rico Governor Luis Fortuño announced yesterday that he is submitting a bill to the island’s Legislative Assembly that—if approved—would call for a referendum next year to decide the island’s political status. Fortuño’s decision to move forward with a two-part referendum comes in response to President Barack Obama saying in mid-June that Puerto Rico would remain a commonwealth until the majority of islanders voted otherwise. “When the people of Puerto Rico make a clear decision, my administration will stand by you.”
In a 20-minute televised address, Governor Fortuño emphasized: “We must enable our citizens to resolve the most important and transcendental issue in Puerto Rico’s history, the island’s political status.” He added: “The island’s status is an issue that affects every aspect of our daily lives, including employment opportunities, health services, public safety, our children’s education, and our very rights as citizens.”
The bill—which Fortuño will file today—includes two phases. On August 12, 2012, Puerto Ricans would vote on whether they want to change the status of the island. If the majority of voters approve some type of change, Puerto Ricans would then decide on Election Day (November 6, 2012) among three non-territorial status alternatives: statehood, independence or sovereign free association. A free sovereign association would be an improved version of the current commonwealth status; similar to the territories of the United States of Palau or Marshall Islands.
Governor Fortuño and Puerto Rico’s representative in the U.S. Congress, Pedro Pierluisi, have already sought to change the island’s political status with the Puerto Rico Democracy Act of 2009. It passed in the U.S. House of Representatives by a strong majority but did not succeed in the Senate.
President Barack Obama arrived in Puerto Rico today, marking the first time in 50 years that a current U.S. president has visited the island. The five-hour trip kicked off with a brief speech in San Juan where the president supported a referendum for Puerto Rico residents to decide their political status—the options being statehood, independence or remaining a commonwealth. He will deliver a longer address during a visit with Puerto Rican Governor Luis Fortuño at the governor’s mansion where he is expected to discuss the $7 billion stimulus package granted to Puerto Rico and its effect on the island’s 16 percent unemployment rate.
According to the Cecilia Muñoz, White House director of intergovernmental affairs, the visit demonstrates that the Obama administration has prioritized Puerto Rico’s economic and political affairs. Shortly after taking office, Obama expanded a presidential task force on Puerto Rico’s political status created by former President Clinton in 2000 and chaired by Ms. Muñoz.
Following trips to North Carolina and Florida where jobs and the economy were the topics of interest, today’s trip to Puerto Rico is also a sign that the President is gearing up for the 2012 campaign. Though Puerto Ricans who live on the island cannot vote in the presidential election, frequent migration and strong ties between Puerto Rico and U.S. cities like New York and Florida give the president an audience that extends far beyond the residents of San Juan. 4.5 million Puerto Ricans live in the mainland United States.
Today’s visit is a chance for the president to address the booming Latino electorate on the mainland. He will no doubt remind his audience that he has appointed more Latinos to his presidential cabinet than any other president in American history, along with Supreme Court Justice Sonya Sotomayor.
From Americas Society/Council of the Americas. AS/COA Online's news brief examines the major—as well as some of the overlooked—events and stories occurring across the Americas. Check back every Wednesday for the weekly roundup.
PDVSA Hit with U.S. Sanctions over Iran Ties
Venezuelan Foreign Minister Nicolás Maduro said Tuesday he could not guarantee the supply of oil to the United States after the Obama administration sanctioned Venezuelan state oil firm PDVSA over its dealings with Iran's energy sector. Venezuela exports one million barrels of oil per day to the United States, which amounts to 10 percent of U.S. imports. The Chávez administration threatened to cut exports in the past, but did not do so.
Colombia’s Senate Passes Victims Law
The Victims Law, which would provide a system of state reparations and means to recover illegally usurped land to victims of the country’s civil conflict, passed Colombia’s Senate. The House and Senate versions must now be reconciled. La Silla Vacía outlines the main points that require clarification before the Colombian Congress decides to approve the legislation.
LatAm, Asia Still Leading the Way on Global Econ Recovery
The UN’s mid-year update to the World Economic Situation and Prospects Report found that Asia and Latin America continue to aid a global economy on the mend. “The strong recovery continues to be led by the large emerging economies in Asia and Latin America, particularly China, India, and Brazil,” according to the report. However, the survey also warns of potential bumps in the road for these growth economies: “[C]oncerns include persistently rising inflation and emerging domestic asset price bubbles, fuelled by large capital inflows and related upward pressure on their exchange rates.”
Latinos Like Mobile
In February, the Pew Hispanic Center released a report finding that Latinos were less likely than non-Hispanic whites to use the internet, have a home broadband connection, or own a cell phone. A new study by the Hispanic Institute, however, found that English-speaking Hispanics have “emerged as the most avid users of wireless services,” and that they are more likely than non-Hispanics to own a cell phone, send text messages, and use a greater variety of mobile features.
A National Council of La Raza (NCLR) reported released on Tuesday reveals that a shocking 56 percent of Puerto Rico’s children live below the poverty line. According to a study titled 2010 KIDS COUNT - Puerto Rico Data Book, the poverty rate among Puerto Rico’s under-18 demographic, representing a quarter of the island’s population, is three times that of children in the rest of the United States (18 percent). According to the U.S. government, a family with two adults and two children making less than $21,834 a year is considered poor.
NCLR, the U.S.’s largest Hispanic civil rights and advocacy organization, said a leading cause of child poverty is the prevalence of single family households. In total, 49 percent of children in Puerto Rico live in single parent households, compared to 32 of children elsewhere in America. The teen birthrate is among the highest in the United States and the island leads the country in the proportion of teenagers who neither attend school nor work (14.6 percent).
The author of the report, Nayde Rivera-Hernández, said the information is meant to inform government officials, nonprofits, community groups, and the private sector of the harsh realities facing children, and promote policies that effectively support young people. NCLR’s KIDS COUNT program was founded in 2002 as an advocacy tool for the socioeconomic well-being of Hispanic children in the United States.