Transcript xxxx

Fiscal Reconstruction and
Key Reforms to Foster
Economic Growth
Asociación de Hospitales de Puerto Rico
José R. Otero Freiria
Executive Vice President – Financing
Government Development Bank
April 26, 2011
GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO
Forward Looking Statements
Today’s presentation includes certain statements that are
not historical in nature. These statements are based on
the Government Development Bank’s current beliefs
regarding future events, and are based upon a number of
estimates and assumptions that are subject to significant
uncertainties, many of which are outside the control of
the Government Development Bank for Puerto Rico, the
Government of Puerto Rico and its agencies and
instrumentalities. This presentation has been prepared
solely for informational purposes, and should not be
construed as a recommendation to buy or sell any
security or to participate in any particular trading.
2
Agenda
1
Fiscal Progress
2
Key Reforms in Place to Foster Growth
3
Economic Outlook
4
Concluding Remarks
Agenda
1
Fiscal Progress
2
Key Reforms in Place to Foster Growth
3
Economic Outlook
4
Concluding Remarks
Where do we come from?…
5
An unattended recession that resulted in a
“Lost Decade” of no growth
Long lasting recession
2.1%
-11.9 %
2.7%
1.9%
Projection
0.5%
-1.2%
-1.0%
+7.2 %
-2.9%
-4.0%
FY 2003
2004
2005
2006
2007
2008
2009
-3.8%
2010
2011
Government
Shutdown
Source: PR Planning Board
6
A government without expense controls, facing
a $3.3 billion deficit…
(in $ millions)
Inherited Deficit FY 2009
44% of
Government
revenues
General Fund
Revenues
$3,306
Deficit
Deficit
Budget
Expenditures
7
…with a credit rating on the verge of JUNK
status
Central Government Credit Rating (General Obligation)
A3
A-
Baa1
BBB+
Baa2
BBB
Baa3
BBBNot
Rated
Moody's
Standard & Poor's
Fitch
8
What we did?…
9
What we did to address the problem
Pre-government
Inauguration
Governor elected;
Names Private Sector
Advisory Council
Advisory Council
Report; public and
media out-reach about
the crisis
Planning and Legislation
Executive Order #1: Declares
State of Fiscal Emergency
Approval of 4 laws to reestablish
cash for central government
Fiscal and Economic
Reconstruction Plan
designed
Rating Agencies Visited
Fiscal Emergency
Act approved
Inauguration
Nov
Dec
2008
Jan
Jan
Feb
2009
Mar
Implementation
Establishment of Fiscal
Restructuring and
Stabilization Board
Government workforce
reduction
Moody’s upgrades to A3
S&P assigns
positive outlook
and then
upgrades to BBB
Mar Sept Apr Nov Mar
2010-11
10
How we cut government expenses?







10% pay cut for the Governor and 5% for agency heads
10% cut in operating expenses, including official vehicles, cell phones and
credit cards
30% reduction in political job appointees
Freeze on all salaries and all economic clauses in collective bargaining
agreements for two years
15% cut in contracts for consulting, legal services and lease contracts
Shrank government employee ranks through an orderly voluntary and
mandatory process
Fund but maintain closed-out defined benefit pension plan and move to a
performance based defined contribution plan for new government employees
11
Agenda
1
Fiscal Progress
2
Key Reforms in Place to Foster Growth
3
Economic Outlook
4
Concluding Remarks
We are building Puerto Rico’s economic structure
through key reforms
Act 29 of
2009
1
Public Private
Partnerships Authority

4

Enacted
Jan-11
Established to enhance
and promote investment
in infrastructure
Act 161
of 2009
2
Tax Reform
Permits Reform
To alleviate tax burden on
corporations and
individuals
Fiscal and
Economic
Reconstruction
3

To streamline permits
process and facilitate
business and job creation
Act 82 of
2010
Energy Reform

To reduce dependence on
oil and refocus on cheaper
fuel sources
13
PPP
LIMITED
INVESTMENT
CAPACITY
PUBLIC PRIVATE
PARTNERSHIPS
established to enhance and
promote investment in
infrastructure
Schools:
P3s Working for Our
Children
Project
Status:
First Schools Awarded
Basilio Milán School, Toa Baja
• First Design-Build-Conservation
project in schools for Puerto Rico.
• 100 to be renovated throughout
Puerto Rico.
• 49 schools already awarded.
Construction
Status:
Rafael Cordero School, Cataño
• 35 schools already in construction.
• $706 million in net construction
investment.
Financing:
• QSCBs issuance expected in
2011 ($756 MM)
15
Toll Roads:
P3s for Better Mobility
Project
Status:
Project
Schedule:
Shortlist
Status:
Toll Road PR-22
• Long-term concession to
rehabilitate and operate PR-22
and PR-5.
• Significant improvement to toll
road and up-front revenues for
Government.
• Proposal deadline: May 2011
• Preferred bidder: Summer 2011
2 shortlisted bidders:
• Goldman Sachs & Abertis
• Morgan Stanley & Grupo OHL
16
Airport:
P3s for Better
Global Connectivity
Project
Status:
Luis Muñoz Marin Int’l. Airport
• Long-term concession to
rehabilitate and operate the
Airport.
• Completing project consensus
of 65% of airlines.
RFQ Target
Date:
• After completing 65% of airline
approval or Summer 2011.
Project
Goals:
• Enhance traveler experience.
• Infrastructure improvements.
• Fiscal strengthening of PRPA.
17
PERMITS
REFORM
COMPLEX
PERMITS
PROCESS
PERMITS REFORM
to streamline permits process
and facilitate business
and job creation
Act 161 provides for a complete overhaul of the
permits process…
Past Permits Structure
New Streamlined
Permits Structure
Four different
agencies used
to be involved
Project
Proponent
Agencies
Planning
Board
New Permits
Office
Environment
Quality
Board
Permits
Administration
Office
Project
Proponent
Secondary
Agencies
Inspector
General
Office
Review Board
19
ENERGY REFORM
HIGH
ENERGY
COSTS
ENERGY REFORM
to reduce dependence on
oil and refocus on cheaper
fuel sources
Energy Reform will implement an aggressive fuel mix
diversification to lower energy costs through PublicPrivate Partnerships and other PREPA initiatives
Current Fuel Mix
2012*
Renewable
Petroleum 3%
9%
Coal
16%
Petroleum
69%
Coal
16%
Natural
Gas
14%
1%
Hydro
Natural
Gas
72%
Natural gas prices should remain stable in the long-term while
oil prices are projected to triple
* Generation mix as a percentage of forecasted peak load
21
The long-term plan traced on our Energy Reform is to
leverage Puerto Rico’s unique geographic features and
further diversify our fuel mix to renewable sources
Over $1 billion
in potential
private sector
investment
Projects under
development:
Wind: 170 MW
Solar: 20 MW
WTE: 83 MW
WASTE-TO-ENERGY
Total: 273 MW
22
TAX
REFORM
OVER TAXED
POPULATION
PRO-GROWTH
TAX REFORM
to alleviate tax burden on
corporations and individuals and
reinforce tax compliance
We have enacted a pro-growth tax reform
Puerto Rico is following the right economic strategy…
The tax policy is PRO GROWTH, and balances the source of growth
between domestic production and the efforts of large multinational firms
Research has shown that fiscal consolidation is most successful when
SPENDING IS CUT and TAXES ARE KEPT LOW
The tax policy is coupled with an ENERGY REFORM that provides
corporations with significant savings
PUERTO RICO IS IMPROVING ITS VALUE PROPOSITION
24
Implementation will occur in phases and in
complete synchronization with our plan to balance
the budget by FY 2013
GOAL: STIMULATE ECONOMIC GROWTH AND CREATE NEW JOBS
Tax Relief
Measures
Tax Positive
Measures
Revenue Positive Tax Reform
25
Reduction of maximum corporate tax rate to
25% to promote investment and job creation
ACTUAL
New Tax Reform
Maximum Rate:
30% as of year 2011
41%
Maximum Rate
starting in 2014:
25%
26
Average effective tax rate for individuals will
be reduced by 49% by year 2016
Effective Tax Rate - Individuals
Tax Year 2010
Tax Year 2011
9.0%
9.0%
9.1%
9.4%
9.7%
9.9%
-29%
-49%
8.1%
6.8%
6.6%
6.7%
9.9%
6.6%
5.9%
5.0%
2010
2011
2012
2013
2014
2015
2016
27
We will achieve these tax reliefs in a fiscally
responsible manner…
 The tax reliefs approved for tax years 2014, 2015 and 2016 will be
implemented if these three tests are met:
Tests
1 Expenses Control Target
Certification: Office of Management and Budget
2 General Fund Net Revenue Target
Certification: Treasury Department
3
Economy
(Real GDP Growth)
Certification: Planning Board
 During fiscal years 2011 through 2016, if there is a budget surplus,
the first $100 million will be deposited in a restricted reserve for a
period of 10 years for the benefit of future generations
28
With the successful implementation of these key
reforms and initiatives, Puerto Rico is heading
full steam ahead to economic recovery…
Health
Reform
Key Reforms
in place
Tax Reform
Energy
Reform
January
2011
Permits
Reform
Public Private
Partnerships
Authority
July
2010
August
2010
December
2009
March
2009
Reconstruction
Plan enacted
“Better times ahead”
April 2, 2011
29
Agenda
1
Fiscal Progress
2
Key Reforms in Place to Foster Growth
3
Economic Outlook
4
Concluding Remarks
GDB Economic Activity Index during February
2011 registered an increase to 127.2, the first
month-over-month increase since October 2010
February YOY decline is the smallest since September 2007
3.0%
1.0%
-1.0%
-3.0%
-5.0%
-7.0%
-9.0%
FY 2006
FY 2007
FY 2008
Economic Activity Index - GDB
FY 2009
FY 2010
FY 2011
Year-over-year change in EAI (%)
31
Our Reconstruction Plan continues to succeed
with private sector employment showing marked
signs of stabilization
32
Service sector employment continues to show
marked improvement
Service Sector Employment
% Year-over-year change
2.8%
1.6%
0.6%
1.1%
-1.6%
0.5%
-1.4%
-1.8%
-1.7%
-3.2%
33
We have jumpstarted our real estate market with
strategic incentives to spur economic activity
New Home Sales YOY Growth
September – February
(6-month period)
51.8%
Existing Home Sales YOY Growth
September – February
(6-month period)
8.1%
-19.9%
US
-12.8%
Puerto Rico
US
Puerto Rico
13,194 total homes sold in 18 months, representing $1.8 billion in sales
* Housing Finance Authority
34
A re-capitalized banking sector and an improving
real estate market are key components of the
recovery
 Joint efforts between FDIC, OFIC and GDB resulted in a
successful holistic approach and a three bank simultaneous
consolidation in April 2010
$5.28 billion in loss-sharing agreements
between FDIC and the acquiring banks
Over $2 billion of combined capital raised by local banks
Total: Over $7 billion
Source: WSJ
35
Exports are up 5% on a year-over-year basis as of
October 2010
Exports
Year-over-year comparison
(in $ millions)
8,500
(in thousands)
8,374
November / December
January - October
8,000
$68,555
7,500
7,000
$59,726
6,500
$8,839
15%
$15,158
6,000
5,500
5,000
4,500
$50,88
9
$53,39
8
2009
2010
4,000
3,500
36
Sales Tax collections during month of March 2011
ended 8.1% above last year’s collections
FY 2011 (March) Sales Tax Collections
(in $ millions)
140
YoY
120
100
Collections
9.0%
123.8
7.0%
97.3
95.9
90.4
80
8.1%
Highest
collection ever
2.7%
86.7
83.7
4.5%
88.6
91.7
89.2
5.0%
3.1%
4.1%
60
3.0%
3.1%
2.3%
1.6%
1.0%
40
-0.1%
-1.0%
20
0
-3.0%
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
37
Planning Board’s revised recent economic
projections point to positive growth by 2012
Real Gross Product Growth (Base Forecast)
Real GNP – fiscal years
r – Revised
p – Preliminary
Revised Projections
Projection Assumptions:
 Further deployment of ARRA
0.7%
funds
 Implementation of certain Public
Private Partnerships (P3’s)
 Deployment of Local Stimulus
Plan
-1.0%
 Increases in consumer spending,
provided by Tax Reform relief
-2.9%
2008r
 Based on oil price projections of
-4.0%
-3.8%
2009r
2010p
Source: Puerto Rico Planning Board
U.S. Dept. of Energy
 Upturn in construction and other
2011
2012
related sectors
Initial FY2011 projections
revised to account for
significant increase in oil prices
38
Economic improvement was further recognized by
the Federal Reserve Bank of NY chief who
acknowledged that Puerto Rico is on track to an
economic recovery
“Puerto Rico may finally be emerging from its painful recession…”
“The recovery in Puerto Rico has taken longer to
get off the ground, but now shows signs of
firming.”
“…many indicators suggest that conditions are in
place for stronger employment growth in the
coming months.”
William C. Dudley
President & CEO
39
Agenda
1
Fiscal Progress
2
Key Reforms in Place to Foster Growth
3
Economic Outlook
4
Concluding Remarks
In just over 2 years, we have achieved unparalleled
fiscal improvement, reducing our deficit from 43.6%
to 7.1% as a percent of revenues
Deficit as a % of Revenues for FY2008-2009
43.6%
36.8%
36.7%
22.2%
19.9%
18.8%
15.1%
8.5%
Puerto Rico
Arizona
California
Florida
Nevada
New Jersey
Illinois
Michigan
BBB-
AA-
A-
AAA
AA+
AA
A+
AA-
51
50
49
48
47
46
45
44
Budgeted deficit as a % of Revenues for FY2011-2012
45.2%
37.4%
29.3%
14.9%
14.6%
11.5%
7.1%
5.9%
Nevada
New Jersey
California
Florida
Illinois
Arizona
Puerto Rico
Michigan
AA+
A+
AA
AA-
A-
AAA
BBB
AA-
51
50
48
37
36
29
15
13
Source: Center on Budget and Policy Priorities.
41
Major credit rating agencies have recognized our
fiscal progress with positive ratings
Improvement in Credit Rating:
Rating/Outlook
in 2009
New Rating/
Outlook
Moody’s
Baa3
A3
Fitch
-
BBB+
42
More recently, as a result of the continued progress
of Puerto Rico’s Fiscal and Economic Reconstruction
Plan, Standard & Poor’s has recognized again the
concrete results with the first credit rating
UPGRADE in the history of Puerto Rico…
BBB(positive)
BBB
(stable)
First S&P UPGRADE in
U.S. since 2009
(Louisiana)
43
This UPGRADE confirms the path of progress
implemented after 7 years of continued negative
rating action…
Historical Standard & Poor’s Credit Rating of Puerto Rico
A+
A
A
Fortuño
Administration
Negative
Outlook
A-
A-
Negative
Outlook
BBB+
BBB
BBB
Negative
Outlook
BBB
BBB
Credit
Watch
BBB-
2000
2001
2002
2003
2005
2006
Positive
Outlook
Stable
Outlook
BBB-
2007
2010
2011
44
Progress is clear and compelling
FISCAL
FY 2009 / 2010
Deficit as a % of
revenues
43.6%
Credit Rating
Financing Cost
(G.O. bond spread)
Moody’s: Baa3 (stable)
Fitch:
N/R
S&P:
BBB- (stable)
FY 2011
7.1%
FY 2012
Moody’s: A3 (negative)
Fitch:
BBB+ (stable)
S&P:
BBB (stable)
2.36%
0.70%
Unemployment Rate
16.9%
16.0%
Year-over-year change in
Economic Activity Index
-6.1%
-1.8%
YOY change in private
employment
-5.9%
-0.6%
YOY change in service
sector employment
-0.6%
1.6%
ECONOMIC
45
Our Fiscal and Economic Reconstruction Plan
is delivering concrete results


Puerto Rico is emerging from a fiscally challenging
environment


Recent economic indicators confirm Puerto Rico’s
improving trend
Our Fiscal Reconstruction Plan has restored PR’s
path of progress
Key reforms are in place to promote sustainable
economic growth and job creation
46
Fiscal Reconstruction and
Key Reforms to Foster
Economic Growth
Asociación de Hospitales de Puerto Rico
José R. Otero Freiria
Executive Vice President – Financing
Government Development Bank
April 26, 2011
GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO