An outline and analysis of recent trends in the economy of Puerto Rico.

1. 1
Puerto Rico: Economic Growth and Recent
Economic Performance
Juan A. Castañer Martínez
August 5, 2015

2. 24
2
Content
Economic Growth
Three Critical Issues
Recent Economic Performance
A Comparative Perspective 27
17
8
3

3. 3
Economic Growth

4. Economic Growth
4
¡ As expected, fiscal year 2014 registered a
contraction in real GNP growth of -0.9%, following
another contraction in 2013 of -0.2% from a
preliminary positive growth of 0.3%.
¡ Real growth for fiscal 2012 was revised downward to
0.5% from 0.9%. Thus, with the exception of 2012, the
local economy has posted negative growth in all
years but 2012 since 2007, for an accumulated
contraction in real growth of 13.8%.
-1.7%
0.5%
-0.2%
-0.9%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Real GNP Growth, Fiscal Years
Preliminary
Real GNP r
Average: 2007-2014: -1.8%
Source: P.R. Planning Board (2015). Statistical Appendix 2014 (April). Table 1.
r = Revised and preliminar for 2014.
¡ The results for 2014 reflects
negative contributions from
P C E a n d g r o s s f i x e d
domestic investment, as
construction investment
declined. Imports declined
more than exports. On the
other hand, the contribution
of government spending
was positive, as there was
an increase of $350.0 million
i n s p e n d i n g b y t h e
Commonwealth. (a)
(a) It includes certain corporations such as the
University of P.R., and the Highway and
Transportation Autority.

5. 5
¡ Since 2000 the gap in real GNP growth between the local economy and that of the US has widened,
remaining on negative territory since fiscal 2007.
Economic Growth

6. 6
¡ Growth expectations for the short and medium terms are not favorable.
¡ Starting in current fiscal year 2015, and assuming a conservative, albeit somewhat positive rate of growth of
1.8%, it will take the economy 16 years just to recuperate to the GNP level of fiscal 2006. And that does not
take into consideration the scenario described here of the impact of the proposed debt restructuring.
Economic Growth

7. 7
¡ The decrease in annual investment in construction has been one defining condition of the economy. Future
growth will depend on new investment in productive activities, and in the recuperation of the housing
segment, although the latter is not expected to grow as high as before, given demographics and migration
trends.
Investment in Construction
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Construction Investment as a Share of GNP (Nominal)
Total Investment
Private
Public
Source: P.R. Planning Board (2015). Statistical Appendix 2014.

8. 8
Three Critical Issues

9. 9
¡ Besides negative economic growth, the
economy has been facing the weight of a
high level of public indebtedness,
¡ Debt has increased from $24.2 billion in fiscal
2000, to $72.2 billion in 2015.
¡ It represents 103.2% of the nominal GNP, the
highest ratio among all states.
¡ The level of public debt has increased at a
rate faster than revenues.
A key issue: Public Debt
58.4%
60.2%
65.2%
67.1%
72.2%
73.4%
74.6%
76.2%
85.2%
91.8%
96.8%
97.8%
102.7%
101.9%
103.2%
57.5%
55.9%
60.8%
61.3%
65.5%
66.9%
68.5%
70.6%
74.8%
83.3%
88.4%
89.7%
95.1%
94.5%
97.2%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010p
2011p
2012p
2013p
2014p
Ratio of Total Gross Debt in Circulation and Gross
Public Debt to GNP
Total debt
Gross Public Debt
Sources: Office of Management and Budget (2015); Planning Board (2015);
Government Development Bank (2015).
3.7%
8.7%
1.9%
Nominal GNP Total Circulating Gross
Public Debt
General Fund Net
Revenues
Annual Growth of Nominal GNP, General Fund Net
Revenues, and Total Gross Public Debt,
Fiscal Years 2000-2014*
Sources: Planning Board (2015); Government Development Bank (2015). * Compound
annual rate of growth.
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0
$75.0
$80.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Mar-15
Billion$
Total Public Debt in Circulation
Other debt
SUT (COFINA)
Extra-constitutional
Municipal
Public Corporations
Constitutional
Sources: Government Development Bank; OMB, Budget Requests, various years.

10. 10
¡ Persistent fiscal deficits reflect institutional factors, not just the weak
economy, as a result of overly optimistic revenue projections and
budget requests.
¡ For example, between fiscal year 2000 and 2014 the budget requests
approved exceeded final expenditures by $11.3 billion, and the gap
between final expenditures and net revenues to the General Fund was
$21.5 billion.
¡ The graph below illustrates this situation. According to the Krueger
Report (p. 9), revenue forecasts by Hacienda have exceeded actual
collections by $1.5 billion each year (2004 - 2014).
A key issue: Public Debt
$6,000
$6,500
$7,000
$7,500
$8,000
$8,500
$9,000
$9,500
$10,000
$10,500
$11,000
$11,500
$12,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014p
Assigned Budget, Actual Expenditures and Net Revenues to
the General Fund,
Fiscal Years 2000 - 2014
Assigned Budget
Net Revenues General Fund
Expenditures
Sources: Office of Management and Budget. Peticiones Presupuestarias, various years; Presupuesto
Aprobado Año Fiscal 2015; Presupuesto Propuesto AF 2016 (May 20, 2015).
Debt Restructuring
Debt restructuring under U.S. law
can be a contentious and long-
lasting process. In June of last year
the U.S. Supreme Court ruled that
Argentina could not pay the 92.0%
of creditors who accepted big
reductions in the amount they were
owed, unless it also paid the litigant
“holdouts” the full value of their
original claims plus interest.
The triumph of the minority came at
the expense of the majority who
accepted the restructuring. The new
precedent will probably involve
more restructurings in litigation, and
make bondholders very cautious in
agreeing to restructure their claims in
the first place, although the
economic and legal costs to litigants
can represent constraints to
litigation.
Even U.S. bankruptcy law recognizes
that when public authorities
restructure their debt, there are
claimants besides the creditors, that
there is a social contract that may
ensure the continued provision of
pension, education, food, or health
benefits.

11. 11
¡ As a result of the increased indebtedness, the proportion of the total consolidated budget dedicated to service
the debt has increased.
A key issue: Public Debt
$2,450.1
$3,083.8
$3,773.8
$4,346.1
$4,820.2
2000 2005 2010 2015 2016r
Total Debt Payment and as a Share of the
Consolidated Budget*
Source: Office of Management and Budget. Consolidated Budget, several years.
*Corresponds to amount actually spent.
13.4% 12.5% 13.2% 15.5% 16.7%

12. 12
¡ Higl level of debt, the deteriorating economy, persistentfiscal fiscal deficits, and a deterioration in the financial
situation of key public corporations, have contributed to negative ratings of the Island’s credit.
A key issue: Public Debt

13. 13
¡ Reflecting deteriorating economic conditions, the
number of residents leaving the island has increased.
¡ According to the U.S. Census, the wave of Puerto
Ricans arriving consists mainly of 18- to 44-year-olds.
Orlando and the rest of Central Florida have displaced
New York and every other destination for Puerto Rican
migration.
¡ From a peak of 3.8 million in 2004, Puerto Rico's
population fell to about 3.5 million last year, according
to census estimates, marking a fall of roughly 8.0%.
¡ Compared to all the states, increase in out-migration
has ben the highest since 2010.
¡ The populations loss, primarily to the U.S. mainland, is
being led by younger and less educated sections of
the population.
¡ Puerto Rico’s recent surge in out-migration, together
with the consequent population decline, presents a
host of difficulties for the Island to overcome. A smaller
population translates into a shrinking tax base, which in
turn strains government finances.
Another issue: Out-Migration
Puerto Rico and the States – Out-Migration

14. 14
• The band extending from Vega Baja to Ponce in the lower map, segments two very different Puerto Rico’s in
terms of population growth.
Population Changes
Change in population, 1990 - 2000
Change in population, 2000 - 2010

15. 15
Median Household Income, 2010
Highest incomes in suburban municipalities around San Juan

16. 16
¡ Puerto Rico faces another hefty cut to Medicare, with
an alarming shortage of Medicaid funds, its health
care system is headed for a crisis.
¡ More than 60.0% of residents receive Medicare or
Medicaid.
¡ Its cause dates back decades and stems, in large part,
from a vast disparity in federal funding for health care
on the island compared with the 50 states.
¡ Add to that the proposed reduction of 11.0% to
Medicare Advantage plans in Puerto Rico in January
2016. Three-quarters of the Medicare population on
the island is enrolled in Advantage.
¡ The public health care system, which serves nearly 1.6
million people, or 45.0% of the island's population, has
been operating on a deficit. By 2018, when the
funding under Obama Care will expire, that deficit is
estimated to increase to at least $1.8 billion. The
question is: from where will the funds then come?
The next crisis: Health Care

17. 17
Recent Economic Performance

18. Recent Economic Performance: Summary
¡ As requested by the Governor, the General Fund budget for incoming fiscal year 2016 will amount to $9.8 billion,
$235.0 million less than that for fiscal 2015 The increase reflects a rise in the amount dedicated to payment of the
debt, which will account for 16.0% of the General Fund budget.
¡ The estimate of revenues is the same as that for total expenditures, $9,800 million. It reflects the enacted changes to
the Internal revenue Code through Law 72, approved on May 29, which included an expanded Sales and Use Tax
(IVU) to 11.5% starting in July 1st
, which will transition into a Value Added Tax on April 1st
, 2016, at 11.5% (10.0% going
to the government and 1.5% at the municipal level), and certain exclusions and additions in the tax base.
¡ The revenue estimates hinge on the changes enacted in the tax rate and in the type of consumption tax, and in the
introduction of changes in the minimum alternative contribution through “transfer pricing”. In all, Treasury estimated
revenues of $2,560.2 million, of which $1,738 million will accrue to the General Fund.
¡ Judging by the experience with the budget for fiscal 2015, which ended with an estimated deficit of $740.0 million,
according to the most recent Supplement Dated June 30, 2015 to Quarterly Report Dated May 7, 2015 (p. 3). The
prior estimate was $191.0 million. Another deficit in fiscal 2016 is likely, compounding the already serious fiscal
situation.
18

19. ¡ Hacienda still faces a serious cash problem to finance the first three months of the budget, which usually is done
through the sale of TRAN’s (short-term notes). Besides requesting a loan through these notes from J.P. Morgan, it
also requested from GDB a loan of $300.0 million, when the Bank itself is financially strapped. The government
needs $669.0 million, including the $300.0 million for the TRAN’s, which go to finance current expenditures.
¡ On that same date the Krueger Report on the economy of Puerto Rico was made public. It is suppose to be a sort
of policy blueprint, presenting a complete picture of P.R’s fiscal and debt situation, and the basis for the
restructuring of public debt.
¡ Broadly it says that the economy of Puerto Rico requires both structural reforms and debt restructuring to fix of
general obligation debt, which could be a precedent-setting move within U.S. jurisdictions. The report was released
just as the government face a serious fiscal situation, running low on cash, crunch time with several bond payments
due in July 1st and coming months, PREPA in talks struggling to avoid a possible default.
¡ And the panorama for fiscal year 2016 is not favorable. In its latest Quarterly Financial Report (May 7th), the GDB
stated that Act 154 would not in all likelihood be extended beyond December 31, 2017. In the absence of this
excise tax, which represents 21.0% of the net revenues to the General Fund (as of fiscal 2015), and “to the extend
that the revenues could not be replaced, the government would have to implement emergency measures in fiscal
2016 and thereafter, which could include a moratorium on the payment of debt service or debt adjustment.”
19
Summary (Cont.)

20. Employment (SA)
• During the first two months of the second quarter, nonfarm salaried employment (Seasonally Adjusted) decreased
0.7% y/y in the quarter, following another decline of 1.0% in the first quarter, as public employment fell again, this
time by 2.9% y/y.
• Private employment increased 0.1%, after declining 0.3% in the first quarter, with a gain of 700 jobs.
• Initial unemployment claims (NSA) declined 9.7% y/y, to 7,013, but were up 24.1% from the previous quarter,
reflecting lay-offs of teachers, and other public employees.
20
650.0
655.0
660.0
665.0
670.0
675.0
680.0
685.0
690.0
870.0
880.0
890.0
900.0
910.0
920.0
930.0
940.0
950.0
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Nonfarm Employment, SA
(In ths)
Total Private
Source: U.S. BLS. Establishment Survey. SA = Seasonally adjusted. Note: Reflects revisions of March 2015.
Total
nonfarm
Private

21. Employment (SA)
• The unemployment rate (Seasonally Adjusted) moved up, from 11.9 % in the first quarter, to 12.3%. The labor force
participation rate declined to 39.7% from 40.2% in the previous quarter.
• The employment-to-population ratio (The proportion of the working-age population 16+ employed) fell to 34.7%
from 35.6% in the second quarter, .
• Notwithstanding increases in private employment, the accumulated net job losses continue since the start of the
contraction. As of June 2015, a total of 142,250 jobs have been lost, a development to which the reduction in
public employment and manufacturing have contributed, as shown below
21
-142.250
-69.852 -72.208
-35.975
Total Private Government PR Manufacturing
Net Losses in Nonfarm Employment, 2007 - 2015*
(Seasonally Adjusted)
Source: U.S. BLS (2015). Establishment Survey. * Up to June.

22. 22
Change in Payrolls Since 2007
Job Growth by Sector

23. Inflation
• So far this year inflation has been declining
consistently. During the first two months of the
second quarter, the CPI declined an average of
1.2% y/y. So far this year inflation has registered a
negative growth of 1.1%, from an increase of 0.6%
in 2014.
• The decline in the CPI reflects consistent
reductions in energy prices. During the two months
of the quarter, gasoline prices fell an average of
22.0% y/y, and electricity prices 19.4%. Gasoline
prices, though moved up in April and May, from
an average of 68.4 cents/liter, to 74.0, a trend that
has continued into June.
• Food prices, on the other hand, increased but at a
slower pace compared to the previous quarter,
from 2.4% to an average of 1.3% during the
second quarter.
• Core inflation increased 1.9% during the first two
months of the second quarter, from 1.3% in the
previous quarter, as the public transportation index
rose 24.6%, led again by an increase in air and sea
transportation costs.
23
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Headline and Core Inflation
(December 2006 = 100)
CPI Core Inflation
Sources: P.R. Department of Labor; Estudios Técnicos, Inc.

24. Fiscal Revenues
• The fiscal situation continues to be a topic of concern,
in the light of continuing tightness in recurrent receipts.
• For the first two months of the second quarter (April
and May), net revenues to the General Fund
increased 2.3% y/y, as receipts from income taxes rose
14.5% in April. On the other hand, receipts from Law
154 fell by 3.8%, still accounting for an important part
of total revenues, 19.7%.
• Compared to fiscal 2014, revenues were 0.6% lower, as
receipts from Law 154 declined 1.2% during the eleven
months of fiscal 2015. Total receipts for fiscal 2015 were
$604.1 million below estimates.
24
$2,097
$3,021
$1,611
$1,811
$2,149
$2,691
$1,699
$2,260
$2,134
$2,944
$1,774
$1,982
$2,247
$1,979
Q1-12
Q2-12
Q3-12
Q4-12
Q1-13
Q2-13
Q3-13
Q4-13
Q1-14
Q2-14
Q3-14
Q4-14
Q1-15
Q2-15*
Net Revenues to the General Fund (Mm)
Source: Treasury Department (2015). Data for 2013 excludes the transfer from the
Redemption Fund in March.. * Up to May.
$1,933.8 $1,979.3
$404.4 $389.1
Q2-14* Q2-15*
General Fund Net Revenues
Net Revenues
Receipts from
Law 154
Source: P.R. Treasury Department. * Up to May.
$8,026.9 $7,982.2
$1,762.1 $1,741.1
FY 14* FY 15*
General Fund Net Revenues (Fiscal Years)
Net Revenues
Receipts from
Law 154
Source: P.R. Treasury Department. Data for 2013 excludes the transfer from the
Redemption Fund in March. * Up to May.

25. Housing Market
• Sales of new housing units during the second quarter, according to our most recent quarterly survey, declined 7.8%
y/y, from another decline of 1.4% in the first quarter, but were up 3.% from the previous quarter. A total of 511 units
were sold, still below the high of 667 units in Q4-14. Sales in 2014 and first half of 2015 have been below the average
levels in 2012 and 2013, reflecting the local housing stimulus programs.
• As to new mortgage loans originations, the volume declined 10.9% y/y in the first quarter, following another decline
of 14.7% in the last quarter of 2014. While activity from commercial banks was a positive 12.2%, that of mortgage
institutions fell by a significant 42.8%, in part as a result of the closing of Doral Bank at the end of last year.
25
$700
$900
$1,100
$1,300
$1,500
$1,700
$1,900
Q1-08
Q3-08
Q1-09
Q3=09
Q1-10
Q3-10
Q1-11
Q3-11
Q1-12
Q3-12
Q1-13
Q3-13
Q1-14
Q3-14
Q1-15
Volume of New Mortgage
Loans Originations*
Source: Office of the Commissioner for Financial Institutions. *
Commercial and mortgage institutions.
$535.2
$600.6
$388.5
$222.4
$923.7
$823.0
Q1-14 Q1-15
New Mortgage Loans Originations
Commercial
Banks
Mortgage
Institutions
Total
(Mm)
Source: Office of the Commissioner for Financial Institutions.
12.2%
-42.8%
-10.9%
-20.8%
-36.9%
-28.5%
2,951
2,565
2,985
2,420
2,202
2,946
2,541
2,029
1,262
1,266
1,045
1,067
907
803
847
1,110
1,127
1,326
1,325
1,099
652
976
1,022
931
786
896
529931
501
554
482
667
494
511
Q1-07
Q4-07
Q3-08
Q2-09
Q1-10
Q4-10
Q3-11
Q2-12
Q1-13
Q4-13
Q3-14
Q2-15
Number of New Housing Units Solds
Source: Estudios Técnicos, Inc.(2015). Construction and Sales
Activity Report.
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
Q1-10
Q4-10
Q3-11
Q2-12
Q1-13
Q4-13
Q3-14
Q2-15
Annual Change in Sales of
New Housing Units
Source: Estudios Técnicos, Inc. (2015). Construction and Sales
Activity Report.
100
120
140
160
180
100
120
140
160
180
200
220
240
Q1-09
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
Q1-12
Q3-12
Q1-13
Q3-13
Q1-14
Q3-14
Q1-15
Home Prices Index for
Puerto Rico and U.S.
FHFA All-Transactions Index (NSA)
Case-Shiller 20-City Index (NSA)
Sources: FRED (2015); FHFA (May 2015). Each home price
index uses a different methodology.
FHFA-Q1-1995=100
CS-January2000=100
• The housing market still has a long
way to go, compared to the levels
of 2007 – 2009. Prices, in particular
of high-value properties, have
declined, according to the FHFA
index for PR. In the first quarter
they fell 2.1% y/y, the lowest
decline since the third quarter of
2013 of 6.0% y/y. The price index
has been declining since 2008.

26. Economic Indicators
26

27. 27
A Comparative Perspective

28. 28
Comparative Perspectives