Fed’s Dudley says Puerto Rico must ‘start from scratch’

The president of the Federal Reserve Bank of New York has said the hurricanes which devastated Puerto Rico in 2017 may have provided the US territory with an “opportunity” to rebuild its economy and infrastructure from the ground up.

Speaking on February 23 at a press briefing, William Dudley provided an update on Puerto Rico and the US Virgin Islands, almost 4 months after they were hit by two of the worst hurricanes witnessed in over a century.

“Now is a perfect opportunity for Puerto Rico to essentially start from scratch,” Dudley said.

Dudley said even before the hurricanes, Puerto Rico faced “severe fiscal difficulties” and other economic challenges. Puerto Rico’s inhabitants are citizens of the US and vote for members of a local legislative assembly. They cannot vote for candidates for the US senate or presidency.

“For over a decade, the island has been experiencing a shrinking economy, contracting employment, low and declining labour force participation, and persistent out-migration of residents to the mainland,” the New York Fed president said.

The “problematic level” of public debt means that the local assembly and the infrastructure companies, including power and water authorities, lost their ability to borrow on public markets, he noted markets.

“The combined impact of complex pre-existing economic problems and the hurricanes has made recovery much more challenging,” Dudley said. The local government’s ability to “respond to the damage and rebuild and upgrade infrastructures” is “severely hampered” by its lack of access to debt markets.

But while he acknowledged the outlook looked “grim”, Dudley also stressed there are “good reasons not to despair”.

Research from the New York Fed shows roughly 75% of the country now has power, with southern and western parts of the island seeing “nearly full restoration”. Meanwhile, there are signs the labour market has begun to recover.

“Jobs in leisure and hospitality (largely restaurants) – the sector usually most affected by natural disasters – have started to bounce back in Puerto Rico,” the analysis says.

Nevertheless, the New York Fed – whose jurisdiction Puerto Rico comes under – has committed to continue to support the country as it recovers in the form of independent research and analysis, and by “leveraging our convening authority”.

“We recently held two events on the island—one for small business owners impacted by the storm and another for credit unions.  We plan to do more in the months and years ahead,” Dudley said.

“Painful” decisions ahead

“Puerto Rico now must not only complete the recovery from the hurricane, but also do what is necessary to get on a sustainable economic and fiscal path,” the New York Fed chief said.

Dudley drew a parallel with New York City in the 1970s, which also lost access to debt markets. But the city’s leaders “had the courage to confront these problems head-on”, he argued, setting up a fiscal oversight board and making the budgeting process more transparent.

Puerto Rico’s fiscal adjustment would resemble New York’s, Dudley said. It would be “painful, and many important decisions will undoubtedly be unpopular”.  He called on the territory’s oversight board to make sure that not just the pain but the benefits of recovery were “shared broadly”.  

US Virgin Islands face similar problems

“In the US Virgin Islands, the situation is similar in many ways,” Dudley said.  “Its economy, which is much more dependent on tourism than that of Puerto Rico, has also been contracting for the better part of a decade.” It has also lost access to debt markets.

But the US Virgin Islands is in some ways better positioned than Puerto Rico, Dudley argued. Its population has fallen less sharply and its economy has stabilised in the last two years.

Like Puerto Ricans, inhabitants of the US Virgin Islands are US citizens but cannot vote in presidential or senatorial elections. Citizens elect a local governor and representatives in a legislative chamber.