NS4540 Winter Term 2019 Puerto Rico: Outlook 2019 Oxford Analytica,Cuba: Economic Woes to Mark Succession Preparation December 13, 2017

Outlook I Alongside reconstruction from devastation caused by Hurricane Maria in September 2017, fiscal consolidation, debt-restructuring and structural reforms will dominate political and economic affairs. These issues will shape the November 2020 election campaigns. The US government is likely to provide US$10bn-15bn in federal funds in the forecast period, helping the bankrupt local government to keep running, and providing relief and reconstruction assistance. After deals in August 2018, debt-restructuring negotiations with (mostly US-mainland-based) creditors of the island's US$64bn debt in default will progress However debt-relief may not be sufficient to put the public finances on a sustainable footing in the longer term. After the impact of Hurricane Maria on productive capacity and utilities led GNP to fall by an estimated 8% in the 2017/18 fiscal year (July-June).

Outlook II Federal funds for reconstruction will support construction activity and contribute to a partial upturn in 2018/19 (4.5%). The Economist Intelligence Unit expects the positive impact to extend into 2019/20 (1.5%). But as reconstruction stimulus fades and fiscal austerity impacts activity, the island's secular decline will reassert itself thereafter. Hurricane damage to local food supplies and higher production costs as businesses turn to small generators for power has had less an impact on inflation than expected. Inflation will hover at just under 2% in 2019-20. Exports will partially recover in 2019-20 from the decline in 2018 caused by disruption to productive activities. But, as pharmaceutical companies continue to scale back operations, Puerto Rico's traditionally large current-account surplus will narrow.

Recent Developments The governor, Ricardo Rosselló, has continued to resist efforts by the Financial Oversight and Management Board to impose its will on economic policies, helping to support his standing ahead of the 2020 elections However this will complicate plans to overcome the island's challenges. The US president, Donald Trump, has questioned the reliability of Puerto Rico's government officials to manage massive federal assistance. Some US lawmakers have argued for the appointment of a US manager for the rebuilding of the island's power grid. The EIU continues to estimate that a total of US$10bn-15bn in US federal funds will be channeled in 2019-20, but it will not be a smooth process and it will strain inter-government relations. Previously the EIU thought that the island's chronic decline would resume in 2019/20. The EIU now expects that rebuilding and business normalization-lifting the economy by an estimated 4.5% in 2018/19-will continue for longer. Real GNP should grow by 1.5% in 2019/20.

Forecast