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.
Top stories this week are likely to include: Chávez designates successor as he heads to Havana; Puerto Rico convenes legislature for statehood; Arab-Latin American Forum in Abu Dhabi; and impact of recent energy takeover deals in Canada.
Developments in Venezuela: This is the final week of campaigning in Venezuela’s regional elections, and the electorate will vote on Sunday for state governors and legislators. The most important contest is the gubernatorial race in Miranda, Venezuela’s second most populous state, where chavista loyalist and former Vice President Elías Jaua faces off against presidential runner-up Henrique Capriles Radonski. Furthermore, after President Hugo Chávez’ announcement last Saturday night that he is returning to Cuba for surgery today and having designated Vice President Nicolás Maduro as his heir should he not be able to lead, many in Venezuela will wonder about the severity of Chávez’ cancer and the future of his Bolivarian revolution. Notes AQ Editor-in-Chief Christopher Sabatini, “Now with President Chávez naming his successor, the gubernatorial election in Miranda is becoming a test of succession within the opposition over who could potentially have the legitimacy to lead in the post-Chávez era.”
Extra: Stay tuned for a Web Exclusive this morning from Javier Corrales, Amherst College professor of political science and AQ editorial board member, on Chávez’ announcement.
Puerto Rico Discusses Next Steps for Statehood: After Puerto Ricans rejected their present commonwealth status and 61 percent of respondents backed statehood in a referendum last month, Governor Luis Fortuño plans to call a special session of the legislature to discuss asking the U.S. federal government to honor Puerto Ricans’ request. However, although Puerto Rican voters supported statehood last month, they voted out Governor Fortuño and instead selected Alejandro García Padilla whose Partido Popular Democrático (Popular Democratic Party) wants to keep Puerto Rico as a commonwealth.
Arab-Latin American Forum: In recognition of the growing economic ties between Latin American and Arab countries (roughly $30 billion annually) Abu Dhabi, United Arab Emirates (UAE) will host a forum this Saturday for representatives of the two regions. UAE Foreign Minister Shaikh Abdullah bin Zayed Al Nahyan has stated that Arab states’ interest in Latin America goes beyond trade to other aspects of bilateral cooperation—such as food security, environment, education, and culture.
Impact of Canada Energy Deals: After Canada’s trade ministry rejected the takeover of Progress Energy Resources Corp. by a Malaysian state-owned enterprise in October to much disagreement, it seemed to have reversed course—approving the deal last Friday as well as the takeover bid of Canadian firm Nexen by the Chinese firm China National Offshore Oil Corporation on the same day. How will Canadians react to these deals: as necessary alliances for more capital inflow, or as strategic assets in the hands of foreign investors?