* Caribbean island’s population dropped 1.5 percent in a year
* Exodus stings housing, schools and businesses
* Jobs scarcity, crime motivate many moves to mainland
By Michael Connor
Sept 10 (Reuters) – For generations, Puerto Ricans have been migrating to the mainland United States in search of a better life. But the Caribbean island’s long recession has turned a steady flow into a torrent, stripping the territory of its young and educated population and pushing its economy into a deeper rut.
The effects are evident in the capital city of San Juan, where vacant offices dot its Golden Mile banking strip and blocks of empty condominiums have become eyesores marring its tropical beach front.
As U.S. citizens, Puerto Ricans are free to move to the mainland without legal restrictions, an option that tens of thousands of people – many of them young and well-educated – are now choosing.
In 2011 alone, the island lost a net 54,000 people, or nearly 1.5 percent of its population, as the economy weathered a sixth year of a recession that only ended in 2012.
«This is a worrisome picture for Puerto Rico,» said Deepak Lamba-Nieves, research director at San Juan’s Center for the New Economy think tank, who added that Puerto Rico’s economy has shrunk by nearly 14 percent since 2006, and its labor force participation is among the lowest in the world.
Some economists estimate the outward flow has reduced the island’s gross domestic product, now at $101 billion a year, by some $3 billion in the last decade, in part because of an increase in skilled Puerto Ricans leaving the island.
Its unemployment rate is worse than any U.S. state at 13.5 percent, U.S. Department of Labor data shows, and it’s been stuck at 10 percent or higher for at least a decade.
«And you have all these other problems like crime,» Lamba-Nieves said, «you are bound to see people looking for opportunities elsewhere.»
GRAYING OF SOCIETY
Maria Luisa Monserrate can’t put her finger on a single reason for her decision to leave the island for a new life on the mainland with her teenage son and toddler daughter.
«Long term, I know the job market is pretty hard,» said the 35-year-old single mother, who is preparing to leave her job as an organizational development trainer and join a brother and sister settled in Minneapolis.
«The public safety issue is a big factor. I always have to look over my shoulder,» she said. «There are better educational opportunities than I can afford here.»
The island’s murder rate runs six times that of the mainland, according to Michigan State University. Much of the violence is tied to illegal drug-trafficking, and Police Superintendent Hector Pesquera has said that the level of violence in Puerto Rico would spark an emergency declaration if it occurred elsewhere in the United States.
Statistics suggest young professionals are leaving the island in droves. The number of doctors and teachers getting on planes quadrupled in 2011, according a study entitled «Profile of the Migrant» by Puerto Rico’s Institute of Statistics. At the same time, the median age of returnees is steadily rising.
«The graying of society occurs at an alarming rate in Puerto Rico,» said Vincente Feliciano, an economist at Advantage Business Consulting. «The migration is up and down the socioeconomic scales, from neurosurgeons to house maids. The constant is that the migrants tend to be younger.»
Puerto Rico’s 1,500 public schools expect 415,000 to 420,000 children to enroll this school year, down from 441,000 students last year and more than 500,000 a decade ago, in part because birth rates are declining.
Puerto Rico’s brain drain and its shrinking population have become fodder for headlines on the island.
Recent news that the family of a child actor featured in an economic development ad had moved to Florida brought an ironic twist to the worrisome trend.
The family later said the move is not permanent because the father, an engineer, has a temporary employment contract in Florida and keeps his home on the island.
SHRINKING CONSUMPTION
The migratory wave shows few signs of letting up, with the U.S. Census Bureau projecting the population will drop to 2.3 million in 2050, compared with 3.7 million at present.
The 4.9 million Puerto Ricans living in the continental United States as of 2011 outnumbered those on the island by more than 1 million, according to the U.S. Census Bureau.
The effects are showing up in a wide range of statistics, including construction, housing, school enrollments and retail sales, according to economists and government data.
Government officials last month reported that sales-and-use taxes, generated largely by consumers, shrank to $553 million in fiscal 2013, down from $797 million five years earlier.
Sales of gasoline, electricity and cement dropped in July from a year earlier, according to government data released Aug. 30. Non-farm payroll employment that month dropped 3.7 percent to 889,400 from a year earlier, the federal Bureau of Labor Statistics said.
To be sure, funds sent home by more emigrants might help support the Puerto Rico’s wobbly economy. But data on remittances by Puerto Ricans is not made available by the World Bank, which provides numbers for other countries. Local studies, however, have shown Puerto Ricans tend to send relatively low remittances back home, compared with emigrants from other countries in the region.
Regardless, depopulation has made it more difficult for the territory to reverse its economic decline and pay off debts of about $70 billion, which are far higher on a per capita basis than any mainland state government.
It is a situation that echoes the economic troubles that caused the financial crises of Detroit and Stockton, California, though, unlike those jurisdictions, Puerto Rico is ineligible for Chapter 9 municipal bankruptcy protection because any debt overhaul would have to be treated as a foreign obligation, analysts say.
Still, the outflow has stirred fears in the U.S. municipal bond market that a smaller, more impoverished population will have to repay Puerto Rico’s massive debt. Reflecting the perceived risk, the island pays interest rates far higher than any state government. Yields of some Puerto Rico bonds spiked above 10 percent on Monday.
«We are seeing occur what occurred in Detroit. But it is not as severe a case as Detroit,» said Dan Heckman, fixed income strategist at U.S. Bank Wealth Management. (Writing and reporting By Michael Connor in Miami; Additional reporting by a Reuters correspondent in San Juan; Editing by Tiziana Barghini and Tim Dobbyn)
Governor: PR isn’t Detroit, ‘political interests’ behind hits on Wall Street
Investors pushed yields on some Puerto Rico bonds above 10 percent briefly on consecutive days this week. The selloff came in the wake of a negative front-page report on Puerto Rico’s finances by Barron’s that was picked up by or echoed a range of other high-profile business news outlets.
The governor pointed to Barron’s, which he said ran a “reckless report” likening Puerto Rico to bankrupt Detroit after it published another signaling that the U.S. is on the same path as problem-plagued Greece.
“The U.S. isn’t Greece and Puerto Rico isn’t Detroit. And, by the way, we don’t want to be Detroit,” the governor said during a Chamber of Commerce economic forum in San Juan.
“There have been reports on our fiscal situation circulating in magazines and by commentators in the U.S. in recent days,” García Padilla said. “Some of them I dare say were planted in bad faith by people with political interests in Puerto Rico.”
The governor reiterated that Puerto Rico’s liquidity isn’t an issue and there is no risk of default.
“Puerto Rico pays its debt because it has a responsible government. Even if it didn’t, the island Constitution requires it,” he said.
Treasury Secretary Melba Acosta and Government Development Bank Chairman David Chafey, meanwhile, issued a joint statement highlighting the steps taken to shore up Puerto Rico’s financial footing and safeguard its credit rating.
“In the past month, there has been considerable attention paid to the fiscal challenges faced by the commonwealth of Puerto Rico. Much of this attention ignores the significant actions that the new administration of Gov. Alejandro Garcia Padilla has taken to address Puerto Rico’s financial issues in the eight months of his new term,” they said. “Puerto Rico has made major advances since its debt was downgraded in December 2012, and is confident in its plan to grow the economy.”
In December, Moody’s downgraded the debt of various Puerto Rico issuers of municipal debt and assigned a negative outlook based on its perception that the commonwealth suffered from large structural budget gaps, high debt levels, lack of meaningful pension reform and weak economic growth prospects. Standard & Poor’s and Fitch followed suit and all three ratings agencies now peg Puerto Rico’s general obligation bonds at just one notch above noninvestment grade and have warned of potential downgrades to a junk rating.
“Recent press attention has drawn an unfair and inflammatory comparison of Puerto Rico’s fiscal situation with that of Detroit,” Aponte and Chafey said. “Comparing Puerto Rico’s per capita public debt vis-à-vis that of the 50 states is inaccurate, as the comparison fails to include each state’s portion of the U.S. federal debt.”
The total federal, state and local debt per capita in the states for fiscal year 2011 was approximately $57,000, which is more than three times the public debt per capita in Puerto Rico,” they said.
“We have addressed each of the concerns raised in the Moody’s downgrade write-up in a swift, decisive and unprecedented manner. The tough decisions made by this administration stand in stark contrast with the failure of many distressed municipalities in the states – particularly Detroit – to take similar steps to address their fiscal situations.”
Investors pushed yields on some Puerto Rico bonds above 10 percent briefly on consecutive days this week. The selloff came in the wake of a negative front-page report on Puerto Rico’s finances by Barron’s that was picked up by a range of other high-profile business news outlets.
A growing number of analysts has signaled that the blow the island was receiving on Wall Street was “irrational.”
“It seems muniland has gone on a Puerto Rico default watch recently, as it searches the next domino to fall after Detroit,” said Christian Herzeca, an investor and attorney who practiced corporate finance and securities law for over 20 years at Wall Street law firms “This is misguided. Dominoes is a particularly inapt analogy to use in analyzing risk in muniland, and this Puerto Rico default watch too shall soon pass.”
“The principal difference between Detroit and Puerto Rico is that Detroit wanted to default and Puerto Rico doesn’t want to default,” he added. “This is not to say that Puerto Rico doesn’t face significant economic development issues going forward, but muniland should regard Puerto Rico’s successful pension reform that it concluded earlier this year as the best evidence that Puerto Rico not only needs public finance markets but that, unlike Detroit, Puerto Rico places great importance on having continued access to them.”
“The dramatic selloff of Puerto Rico issues belies the strong fiscal measures taken by the new administration in a relatively short period of time,” said Alan Schankel, managing director at Janney Capital Markets. “The island economy is struggling, and it remains to be seen if revenue projections will be fully realized, but the measures taken to narrow the fiscal year 2014 budget gap exceed any steps taken by states or local mainland municipal governments.”
Dick Larkin, director of credit analysis at HJ Sims & Co., Inc., likened Puerto Rico’s current market situation to that of New York City during its 1975 fiscal crisis.
“If you did not panic, your investment in NYC general obligation debt was rewarded; if you sold into a market which was in a panic, you lost big time. Puerto Rico investors should continue to invest in Puerto Rico commonwealth-backed bonds for the long term,” he said.
Larkin also hailed the announcement by Government Development Bank interim President José Pagán that the commonwealth would limit its planned borrowing for the remainder of the year.
“At today’s irrational yields, the decision to slow down issuance is a smart move, because of the high cost of borrowing in these conditions,” Larkin said.
Pagán said that the GDB would keep borrowing for the remainder of the year in the $500 million to $1.2 billion range, rather than the nearly $3 billion that was originally planned.
“In light of the volatility in the market and the private transactions that we have recently closed, we expect to scale down our plan of financing for the rest of the year,” he said.
The financing measures had included a $600 million GO issue planned for later this month and a $2.2 billion deal for the Puerto Rico Highways & Transportation Authority, according to Wall Street sources.
Given the challenging market for municipal debt, Pagán issued a statement Monday highlighting actions taken during the past months to strengthen the liquidity position of Puerto Rico and the GDB.
The issuance of bond anticipation notes amounting to $800 million with private banks during the past two months, along with privately-placed tax and revenue anticipation notes amounting to an additional $600 million, provide the GDB and the commonwealth additional liquidity to meet their ongoing obligations, he said.
Pagán stated that the GDB is currently evaluating all alternatives and that it expects to hold an event open to all investors in the next few weeks to discuss in detail the commonwealth’s fiscal and economic plan, as well as the GDB’s plan of financing. At such event, investors will be able to directly ask questions to the members of the commonwealth’s fiscal and economic team.
Last month, the Puerto Rico Electric Power Authority raised $673 million in the municipal bond market, paying a yield of 7.12 percent on 30-year bonds. Since then, the value of those bonds has decreased from 10 percent to 15 percent, depending on their maturities, analysts said.
Because Puerto Rico bonds are exempt from local, federal and state taxes, they are widely held, and fund managers often fill out portfolios of specific state or municipal bond funds with Puerto Rico bonds because of their triple tax exemption. However, a series of negative reports on Puerto Rico’s economy and fiscal condition have publicized this practice, increasing pressure on fund managers to sell island bonds.
The entire $3.7 trillion U.S. municipal bond market is performing badly, as investors are rattled by Detroit’s bankruptcy and a proposed restructuring by Harrisburg, Penn., analysts said. There are other issues like an expected increase in interest rates as the Federal Reserve Bank winds down a U.S. Treasury purchase program that has kept rates down. However, Puerto Rico is getting hit the hardest over continuing fiscal concerns.
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