An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability

Abstract

This paper makes two contributions. First, we examine the macroeconomic implications of Puerto Rico's Fiscal Plan certified in March 2017 for fiscal years 2017/18 to 2026/27. Second, we perform a Debt Sustainability Analysis (DSA) that incorporates the expected macroeconomic dynamics implied by the Fiscal Plan in order to compute Puerto Rico's debt restructuring needs. We detect a number of flawed assumptions in the Fiscal Plan that lead to an underestimation of its contractionary effects on the island?s economic activity. We conduct a sensitivity analysis of the expected macroeconomic dynamics implied by the plan that allows us to construct more realistic scenarios of Puerto Rico?s debt restructuring needs. We show that the island's current debt position is unsustainable, and compute the necessary debt relief to restore sustainability under different sets of assumptions. The paper offers insights for designing a plan of action for resolving Puerto Rico's current debt crisis that will remain valid after the certification of a new fiscal plan