Hedge funds that own certain bonds issued by Puerto Rico’s Commonwealth government have circulated a report which asserts the territory’s economy is better than all other reports indicate.
Highly-regarded economists in Puerto Rico dismissed the report.
Word of the report was first publicized in a Financial Times article.
The report concludes that Puerto Rico’s economy may have grown between three and 11 percent in real terms since 2005, instead of shrinking 11 percent, as the article says government data shows.
The report attributes the difference to some government estimates of the economy using the inflated values that some companies put on products made in the territory and shipped for sale elsewhere, primarily in the States.
The firms are “foreign” pharmaceutical and computer software manufacturing subsidiaries of corporations in the States. The values of the products are inflated by the corporations transferring to the subsidiaries the patents and brand names of the products developed in the States that account for much of the value of the products.
The corporations transfer the patents and brand names to the subsidiaries to avoid Federal taxation of income due to the ‘intellectual property.’ The Federal government does not tax the income until the subsidiaries transfer ownership of the profits to the parent corporations — if they ever do. Some subsidiaries — totally controlled by the parent corporations — never transfer the income legally. They just deposit it in banks in the States from which the parent corporations borrow it at low interest rates.
The income is money that never circulates in Puerto Rico’s economy other than in paper transactions. So, it’s inclusion in Puerto Rico economic statistics distorts the picture of the territory’s real economy.
The Commonwealth government is revising its methods of calculating the territory’s economy.
Some observers have questioned the motives for the report. The financial markets would probably value the bonds that the funds own if the Commonwealth economy is not as bad as all other reports indicate. The value of bonds owned by the funds increased after the story broke, presenting a profitable selling opportunity for those who bought at recent lower prices.
All of these metrics registered terrible declines during the period covered by the report.
The same source shares the drop in air traffic (-39,213 in 2013), the net decrease in population (-a record 45,674 in 2013), and more of the Government Development Bank’s dismal economic activity figures.