1. 1Economist: Daniël Karunanamage, Economist | Tel: +44 207 803 1489 | e-mail: dkarunanamage@oxfordeconomics.com
9 Apr
2015
Puerto Rico
Highlights
 Puerto Rico’s economy continues to suffer from a
recession that has now lasted for the best part of a
decade, triggered by the expiration of a corporate tax
break in 2006 that had seen firms relocate from the
mainland. The move exposed the island economy’s
other structural flaws and has been accompanied by
large population outflows. We estimate that GDP fell
further in 2014, by 1.3%, and expect similar falls this
year and next before a mild recovery sets in.
 The weak economy has left Puerto Rico on the brink
of insolvency. As a result of years of fiscal deficits,
Puerto Rico’s debt has grown to $72.3 billion, roughly
70% of GDP. Moreover the island’s main financer,
the GDB (Government Development Bank for Puerto
Rico) is also predicted to face liquidity issues after
years of keeping troubled public entities afloat. As a
result, the island’s general obligation (GO) bonds
were downgraded by Moody’s to Caa1 in February.
 In our opinion, the likelihood of a Puerto Rican default
grows stronger as time goes on – though we do not
expect it to happen this year. The cash-strapped
government continues to issue bonds, although
higher interest rates – yields on GO bonds have risen
to 10% from 8.5% in 2014 – suggest increased signs
of stress. While further debt issuance may help with
liquidity issues in the short run, it cannot be sustained
for a prolonged period, especially given the weak
growth profile and an increasingly onerous debt
repayment schedule.
 According to Moody’s, the island is likely to default on
its general obligation bonds and its COFINA bonds
within the next two years. The Puerto Rican
government has tried to pass a law that would allow
the state-owned Puerto Rico Electric Power (PREPA)
– the island’s sole energy provider – to restructure its
debts, thereby alleviating some pressure on the
public finances. However this attempt was blocked by
a U.S. federal judge, who ruled the legislation
unconstitutional.
 The government has managed to implement some
policies to improve fiscal sustainability. Governor
Alejandro Padilla secured approval for the first
balanced budget in over a decade years in 2014. The
Governor has also proposed replacing the current
sales tax (7%) with a value-added tax of 16%, which
could net an extra $1.5 bn in revenue. However, we
remain of the view that coping with the fiscal crisis
amidst the economy’s long-standing under-
performance will be an extremely challenging task.
2013 2014 2015 2016 2017 2018
Real GDP growth (% year) -1.5 -1.3 -1.2 -1.0 0.6 2.1
CPI inflation (%) -0.1 0.6 0.4 0.4 0.5 0.5
Exports of goods ($ bn) 68.3 69.3 70.7 72.2 74.5 76.6
Exports of services ($ bn) 3.8 3.8 3.9 4.0 4.2 4.3
Imports of goods ($ bn) 49.6 50.8 51.9 53.0 54.6 56.2
Imports of services ($ bn) 2.5 2.6 2.7 2.8 2.9 3.1
Exports of goods (% year) 0.4 1.5 2.0 2.2 3.1 2.9
Imports of goods (% year) -0.9 2.5 2.2 2.0 3.1 2.9
Current account ($ bn) 4.7 6.1 6.7 7.6 8.2 8.3
Current account balance (% of GDP) 4.6 6.1 6.8 7.8 8.3 8.2
Exchange rate per USD (year average) 1.00 1.00 1.00 1.00 1.00 1.00
External debt total ($bn) - - - - - -
Government balance (% of GDP) - - - - - -
Population (millions) 3.69 3.69 3.68 3.68 3.68 3.68
Nominal GDP ($bn) 103.1 98.7 97.9 97.3 98.4 101.0
GDP per capita ($ current prices) 27,935 26,785 26,616 26,448 26,736 27,444
Forecast for Puerto Rico
(Annual percentage changes unless specified)
Country Economic Forecast

2. 2Economist: Daniël Karunanamage, Economist | Tel: +44 207 803 1489 | e-mail: dkarunanamage@oxfordeconomics.com
9 Apr
2015
-5
0
5
10
15
20
25
30
35
40
45
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: Oxford Economics / World Bank
% year
Puerto Rico: Inflation
F'cast
Western
Hemisphere
Puerto Rico
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
1992 1995 1998 2001 2004 2007 2010 2013 2016
Exports of goods
F'cast
Source: Oxford Economics
Imports of
goods
Puerto Rico: Imports and exports
US$ bn
Exports of services
Imports of
services
0
10
20
30
40
50
60
1975 1980 1985 1990 1995 2000 2005 2010
US = 100
Source: Oxford Economics / World Bank
Puerto Rico: GDP per capita* (US$)
Puerto Rico
Western
Hemisphere
High Income:
non OECD
*calculatedusing market exchange rates
`
-4
-2
0
2
4
6
8
1990 1994 1998 2002 2006 2010 2014 2018
Source: Oxford Economics / World Bank
% year
Puerto Rico
Puerto Rico: Real GDP growth
F'cast
Western
Hemisphere
Source: Oxford Economics / World Bank
% year
Puerto Rico
Puerto Rico: Real GDP growth
F'cast
Western
Hemisphere
-20
-15
-10
-5
0
5
10
-16
-12
-8
-4
0
4
8
1992 1995 1998 2001 2004 2007 2010 2013 2016
Source: Oxford Economics
US$ bn
% of
GDP
US$ bn
(LHS)
Puerto Rico: Current account balance
% of GDP
F'cast
0
5000
10000
15000
20000
25000
30000
2013
Puerto Rico
Western Hemisphere
Emergers
$ PPP
Source: Oxford Economics / IMF
Puerto Rico: GDP per capita
Puerto Rico

3. 3Economist: Daniël Karunanamage, Economist | Tel: +44 207 803 1489 | e-mail: dkarunanamage@oxfordeconomics.com
9 Apr
2015
Background
Colonised by Spain at the end of the 15th century, Puerto Rico became a colony of the US after the 1898 Spanish-
American War. Its residents were granted American citizenship in 1917. Growing agitation for independence led to the
staging of a referendum and adoption of a new constitution in 1952, allowing the country to elect its own leadership but
remain an ‘associated commonwealth’ (estado libre asociado) of the US. The present domestic political system is
modelled on that of the US but led by a governor, elected on a four-year term. The US president is head of state,
although the island plays no part in US taxation or representation, sending only observers to the US Congress. Spanish is
the first language for over 98% of the population and the working language of government, but English – studied by all at
school and spoken fluently by most – is also an official language. The US dollar circulates as official currency.
Referenda in 1967, 1993 and 1998 confirmed public preference for commonwealth status over formally becoming
America’s 51st state, with only a small number voting for independence. But the victory margin for association over full
federation with the US was less than 5% in 1998. In the November 2004 governorship election, Anibal Acevedo Vila’s
winning margin for the pro-association Popular Democrats (PDP) was just 0.2% (3,500 votes); and in November 2008
Acevedo was heavily defeated by Luis Fortuno of the New Progressive Party (NPP), which favours full federation. At a
referendum in November 2012 voters were asked two questions – whether they thought that Puerto Rico's territorial
status should continue and which political status they preferred from three possibilities: statehood, independence, or a
sovereign nation in free association with the United States. Some 54% voted for a change from the current status quo
and, of those who voted on the second question, 61% voted for statehood. The second vote went against the wishes of
the newly elected Governor Padilla but he has agreed to President Obama’s suggestion that a constituent assembly be
convened to resolve the status issue.
The independence movement remains very small because of perceived economic, political and defence advantages
close linkage to the US. Citizens are enrolled in the US social security system, and the country is included in US
statistical censuses. An extra-Congressional pro-independence group has engaged in periodic terrorist actions since the
1970s. These appear to have set back the popularity of the constitutional independence movement, the Independence
Party (PIP). But the killing of veteran rebel leader Filiberto Ojedo Rios in September 2006 caused political offence on all
sides, mainly because it was carried out by FBI agents
A fiscal shortfall developed during 2006, forcing a brief closure of schools and state agencies before Congress voted a
temporary tax to pay public wages. The crisis arose when Congress, controlled by the NPP, proposed a 2006/07 budget
that the governor rejected on the grounds of excessive spending; but it reflects a chronic structural imbalance, which has
worsened as public pension costs have risen, and been greatly exacerbated by five years of falling GDP during 2007-11.
The NPP blamed the previous PDP majority for letting public spending overrun, and embarked on a major programme of
deficit reduction and selling or leasing-out state assets to repay public debt.
The agricultural commodity-dependent economy was depressed and unstable for much of the 20th century, leading to
heavy migration to the US mainland, where an estimated 1-4 million Puerto Ricans now live. However, production and
living standards grew in the 30 years to 2006 through the development of tourism and establishment of an offshore
production base attractive to US manufacturers. A significant biotechnology sector developed on the foundation of the
earlier-established chemicals sector and on a skilled labour force whose elite tends to be educated in the US. The main
tourist resorts have become established as a major cruise ship destination, assisting the targeting of more affluent
tourists from North America, Europe and East Asia.
Traditional offshoring advantages have been eroded by the withdrawal of tax concessions enjoyed whilst a US colony,
the opening of free-trade zones in other Caribbean, Central and South American countries and their more recent move
towards free-trade agreements with the US. This has reinforced the incentive to improve the skills base so as to attract
higher-productivity, technology-intensive production and service industries. In GDP per capita terms, Puerto Rico is
significantly below the poorest US state. The wealth differential between the two closed significantly in the two decades
before the global crisis, but the lengthy economic recession that began in 2007 caused the gap to widen again and has
been accompanied by rising poverty and crime rates.
Puerto Rico

4. 4
9 April
2015
Economist: Daniël Karunanamage, Economist | Tel: +44 207 803 1489 | e-mail: dkarunanamage@oxfordeconomics.com
Key Facts
Politics
Head of state: President Barack H. OBAMA
Head of government: Governor Alejandro Garcia PADILLA
Political system: Territory of the US with commonwealth status
Date of next legislative election: 2016
Currency: US dollar (USD)
Long-term economic & social development
1980 1990 2000 2013*
GDP per capita (US$) 4503 8653 16192 27935
Inflation (%) - - 3.1 -0.1
Population (mn) 3.19 3.52 3.80 3.69
Urban population (% of total) 67.8 92.9 94.4 93.7
Life expectancy (years) 73.7 74.2 76.7 78.5
Source : Oxford Economics & World Bank
Structure of GDP by output * 2013 or latest
2011 available year
Agriculture 0.7% Source : CIA Factbook
Industry 48.6% Location: Caribbean, island between the Caribbean Sea and the
Services 50.7% North Atlantic Ocean, east of the Dominican Republic
Source: Puerto Rico Planning Board (CIA Factbook)
Long-term sovereign credit ratings & outlook Corruption perceptions index 2014
Foreign currency Local currency Score
Fitch B (Negative) Not Rated Developed economies (average) 75.1
Moody's Caa1 (Negative) Not Rated Emerging economies (average) 37.8
S&P B (Negative) Not Rated Puerto Rico 63.0
Western Hemisphere 40.4
Source: Transparency International
Structural economic indicators Scoring system 100 = highly clean, 0 = highly corrupt
1990 1995 2000 2013*
Current account (US$ million) - -4853 -5904 4742
Trade balance (US$ million) 3583 4213 6261 18700
FDI (US$ million) - - - -
Debt service (US$ million) - - - -
Debt service (% of exports) - - - -
External debt (% of GDP) - - - -
Oil production (000 bpd) 0.0 0.0 0.0 0.0
Oil consumption (000 bpd) 140.2 169.1 201.4 145.0
Source : Oxford Economics / World Bank / EIA
Destination of goods' exports (2010)
United States 69.7%
Source: US statistical abstract Source : Puerto Rico Planning Board
Pharma-
ceuticals
57.6%
Electronics
2.2%
Other goods
exports
35.1%
Transportation
0.7%
Travel
4.5%
Composition of goods & services exports,
2012
Puerto Rico