DevTech Practice Area:
Services provided:
Macroeconomic modeling • Fiscal Planning • Policy Analysis • Economic Surveillance and Reporting
Thematic Area(s):
Debt Restructuring
DevTech has provided macroeconomic advisory and technical assistance services to the Fiscal Agency and Financial Advisory Authority (FAFAA) of the Commonwealth of Puerto Rico Commonwealth since 2016.
Project Objectives
DevTech’s primary objective as an advisor to the Commonwealth of Puerto Rico has been to develop macroeconomic projections that underpin the Commonwealth’s fiscal plan for debt restructuring throughout the ongoing Puerto Rican debt crisis as well as restructuring efforts under the 2016 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)—enacted by Congress in 2016 to provide oversight to Puerto Rico’s debt restructuring activities through the establishment of a financial oversight board. With financial reporting being a core requirement of PROMESA, DevTech was contracted to improve the accuracy, speed, transparency, and accountability of the Commonwealth’s debt restructuring endeavors. DevTech developed a macroeconomic model for the island in 2016 and has regularly maintained and updated the model and forecasts since then, including major revisions following Hurricane Maria in 2017 and the onset of the COVID-19 pandemic in 2020.
Our Approach & Achievements
In January 2022, the Commonwealth of Puerto Rico received approval from a federal judge on its $120 billion Plan of Adjustment—the largest municipal restructuring in U.S. history—representing an important milestone for the island, which declared bankruptcy in 2016. DevTech has led the way throughout the Commonwealth’s journey to economic recovery, providing it with technical assistance even before the establishment of PROMESA.
Key activities undertaken by DevTech as part of this project have included working in close coordination with FAFAA and its financial and legal advisors to create a macro-fiscal framework and other key outputs, including reporting on economic indicators that illustrate Puerto Rico’s economic context (with historical and projected economic scenarios) and indicator tables that showcase its fiscal situation across multiple levels of government. DevTech modeled outputs after International Monetary Fund reports wherever possible, such as IMF Article IV Consultation reports. These models were augmented with sales taxes, use taxes, expenditure cuts and other policy levers to better describe the economic environment of Puerto Rico. This reporting has empowered the Commonwealth to forecast transfers from the federal government and the resulting improvement of its fiscal position.
Further, DevTech developed economic forecasts for the U.S. Treasury and the PROMESA Federal Oversight Management Board in 2016 on behalf of Puerto Rico, in discussing a federal crisis response. DevTech used innovative econometric techniques including stochastic forecasting frameworks relative to the contemporaneous forecasts of institutions such as the Bank of England and the Congressional Budget Office.
DevTech’s work in the Commonwealth of Puerto Rico has also included critical reviews of the creditworthiness of the water and electricity companies of Puerto Rico (PRASA and PREPA), both of which hold their own debt and have entered into their own parallel restructuring program. DevTech conducted a comprehensive review of these utilities in order to make a determination of their creditworthiness, which has required an understanding of the internal deficiencies of these institutions such as inadequate public prices for their services or insufficient investment.
What our clients say
- [Thank you to] the DevTech team for all [their] work on behalf of the people of Puerto Rico. Most of the achievements over the past three years would not have been possible without [DevTech’s] dedication and commitment to Puerto Rico.
— Mohammad Yassin, former Fiscal Agency Director and Chief Legal Officer of Puerto Rico Fiscal Agency and Financial Advisory Authority
Success Story - Hurricane Maria Response
Background
Puerto Rico began its restructuring process in 2016, when President Obama signed PROMESA to establish a Federal Oversight Board and give the Commonwealth a path out of its government debt crisis through a formal restructuring framework. DevTech worked with the Commonwealth and its financial and legal advisors through 2016 and 2017 to put together a Fiscal Plan outlining forward-looking fiscal sustainability and economic stability and participate in mediation seeking an agreement with creditors.
On September 20, 2017, Hurricane Maria made landfall on Puerto Rico as a Category 4 hurricane with 155 mph winds. The damage was extensive, with some estimates of losses exceeding $100 billion. The island’s power grid was destroyed, leaving Puerto Rico entirely without electricity. Power would not be fully restored for eleven months. It was clear that the impact of the hurricane meant that the projections in the 2017 Certified Fiscal Plan were no longer realistic or attainable and would need to be updated as swiftly and accurately as possible to incorporate the new reality of a long recovery from the hurricane damage into Puerto Rico’s restructuring process.
Solution
DevTech’s macroeconomic projections underpin the Commonwealth’s Fiscal Plan, so the economic model would first need be reworked to include the effects of a devastating hurricane strike and long recovery. DevTech reviewed economic literature and worked with experts in the field of damage estimations.
DevTech modeled the impact of the hurricane strike on the economy in several different simultaneous ways. First, the hurricane temporarily interrupted normal economic activity, lowering economic activity directly. DevTech used the relationship between damage reports from previous storms and economic activity along with preliminary damage estimates from Hurricane Maria to estimate the direct loss in economic activity. Winds and flooding from the storm also caused the destruction of capital stock on the island. Capital stock describes the durable physical assets that contribute to the production of goods and services. This damage would have a persistent negative effect on growth as it would need to be rebuilt or replaced. For example, a factory would need to repair a damaged roof and replace machinery before resuming production. DevTech used damage estimates produced by experts in combination with the historical relationship between capital stock and economic growth to estimate this impact.
At the same time, Puerto Rico would receive large inflows of billions of dollars in disaster relief spending. This included federal government funds for rebuilding, as well as payments like insurance claims for damaged homes and automobiles. This funding has a positive impact on the economy, through two different channels: a portion of the relief funding rebuilds the capital stock destroyed in the storm, contributing to improved growth potential in the short- and long-term, while another portion of funding does not directly contribute to capital rebuilding but is spent in the local economy with a positive impact on economic activity (for example, money spent in the local economy by reconstruction crews).
Impact
The first post-hurricane Fiscal Plan was certified by the Oversight Board on April 19, 2018. As official statistics in Puerto Rico are produced with a significant lag, DevTech produced the first published estimate of the economic impact of Hurricane Maria on the island. While data have since been updated to reflect more comprehensive and sophisticated damage estimates produced over time, as well as the now nearly five years of actual data on economic growth and recovery spending, the model developed by DevTech in the first weeks after the hurricane strike in fall 2017 remains in use in the Commonwealth’s latest Fiscal Plans.
