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Government Development Bank for Puerto Rico Investor Presentation
February 10, 2009
GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO
Overview and New Financial and Economic Team
Local Economic Trends and FY 2009 Budget
Roadmap to Fiscal and Economic Reconstruction
Investor Relations and Transparency
New Financial and Economic Team
• Experienced team of professionals who understand the challenges of the Commonwealth of Puerto Rico
Carlos M. García
Chairman and President Government Development Bank
Former COO Santander BanCorp (NYSE: SBP)
Juan Carlos Puig
Secretary of the Treasury
Former US IRS Executive and PR Treasury Deputy Assistant Secretary of Internal Revenue Area
Director Office of Management & Budget
Héctor Morales President Puerto Rico Planning Board
Former PR Planning Board Associate Member and Licensed Engineer
Government Financial and Economic Team
Former CFO of Marsh Saldaña, Inc.
José Pérez-Riera, Esq. Director Dept. Economic Development & Commerce
Former Barclays Capital, UBS municipal finance Banker
Fernando L. Batlle
Executive VP Financing & Treasury Government Development Bank
Former Executive VP First BanCorp (NYSE: FBP)
Executive VP Fiscal Agent Government Development Bank
Former GDB President Former Fiscal and Econ. Reconstruction Advisory Board Member
New Financial Management Team • GDB is developing a comprehensive approach to achieve the financial objectives of the Commonwealth Financing • Public • Private Fiscal Agent • Metrics and Monitoring • Fiscal Compliance • Public Corporations • Central Government Objectives Fiscal Reconstruction Economic Reconstruction Sustainable Development • Treasury and ALM* • Asset Management • Investment Strategies • Macro & Regional Analysis • Economic Modeling • Statistical Reliability Capital Markets * Asset and Liability Management Economics 3 .
Created consensus by communicating the severity of the fiscal challenges facing the Commonwealth 6. as well as federal and local stimulus packages 4. Planned investor outreach initiatives for 1Q-2009 * PEC = Plan de Estímulo Criollo 4 . Developed a local stimulus package (PEC by its Spanish acronym*) 7. loan disbursements and CAPEX 8. Completed due diligence on key public corporations and established new GDB oversight controls on operations.Accomplishments in the first 30 days 1. Completing the evaluation of the fiscal deficit 5. Implemented Fiscal Emergency Executive Order 3. Revised and projected GNP figures up to FY 2010 to allow for policy decisions on fiscal measures. Enacted legislation approving 4 urgent fiscal measures on January 15 2.
Local Economic Trends and FY 2009 Budget 3.Index 1. Overview and New Financial and Economic Team 2. Investor Relations and Transparency 5 . Roadmap to Fiscal and Economic Reconstruction 4.
* E = Estimates. 6 . Puerto Rico fiscal years consist of the twelve month period ending on June 30 of every year. Estimates correspond to the Base Case Scenarios. Planning Board.Increasing productive capital investment is key to growth • The local economy entered into a recession during FY 2006 • Revised forecasts show recession for FY 2009 and FY 2010 Annual Growth in Real Puerto Rico GNP (fiscal years) Official Base Case Forecasts Source: Puerto Rico.
Planning Board. * E = Estimates. 7 . of overestimation Fiscal Years Source: Puerto Rico.5 Actual Real GNP Growth (%) percentage pts. Projections and Actual GNP (% Growth) Previous 2-Yr. Estimates correspond to the Base Case Scenarios.Local Economic Trends and FY 2009 Budget • The Planning Board and GDB are working to conduct thorough economic projections that minimize unrealistic forecasts Over-optimistic forecasts of local economy increase the likelihood of overstating forecasts for tax revenues. which lead to budget deficits Comparison of 2-Yr. Puerto Rico fiscal years consist of the twelve month period ending on June 30 of every year. GNP Projections (%) 5.
1.2. Estimates correspond to the Base Case Scenarios.5% .3** Source: Puerto Rico. * E = Estimates. Planning Board.8.9.9% 1.1% .5% .11.1.6% .0% 0.3.0.5% $96.9% . P = Preliminary.3% Largest segment in local economy turned negative in F08 mainly due to record oil prices Fixed investment also affected by oil prices and previous overheating of the construction sector Record oil prices heavily impacted the consumers and small and medium-sized businesses Govt.4 .8.10.3** .5% .1% .1.2.8 . Puerto Rico fiscal years consist of the twelve month period ending on June 30 of every year.3% $63. economy have been taking a toll on the local economy GNP Main Variables F2007 r F2008 p Base Case F2009 F2010 Real GNP Personal Consumption Construction Investment Equipment Investment .6% 0.2.Local Economic Trends and FY 2009 Budget • High oil prices and downturn in U. 8 .9% .9% .8% .S.11.2% .4% .0.4% $47.7.8% $65.6. Spending Average Oil Prices* .
6% -6.9% -5.6% -4.0% -2.4% -1. Planning Board.5% -2.7% -2.3% -1.4% -2. Puerto Rico fiscal years consist of the twelve month period ending on June 30 of every year.5% 2. * E = Estimates. P = Preliminary.5% -4.Local Economic Trends and FY 2009 Budget • Economic performance can be explained by the effects of U.3% -5.2% -8.3% 0.7% -6.7% -1.9% -2.3% Source: Puerto Rico.3% -0.1% -2.9% -2.8% -3.1% -4.0% 0. growth and oil prices Matrix of estimated effects of U.0% -1. Estimates correspond to the Base Case Scenarios.4% -0.1% -0.5% $30 FY 2010 $45 $55 -2.0% -1.0% -4.5% -0.5% -2.0% 1.6% -8.7% 0.9% -3.3% 0.4% -5.S.6% -5. Growth and oil prices on the local economy Oil Prices* U.3% -1.S.2% -6.9% 0.1% 1.8% -5. Real GNP Growth -2.8% -4.4% -7.9% -1.3% -4.4% -4.5% 0.6% -1.8% -2.1% -1.5% -1.2% -4.6% -3.5% FY 2008 $95 $100 $150 -2.4% -3.2% -0.7% -5.3% -3.3% -2.2% -1.7% 1.2% -3.7% -3. 9 .9% -3.2% -5.S.0% -0.5% -2.0% 1.1% FY 2009 $65 $75 $85 -3.5% Puerto Rico Real GNP Growth -1.1% -2.0% 2.0% -8.0% -1.9% -1.3% -0.8% 0.
198 $3.000 $1.000 $7.000 $6.000 $6.000 $10.000 $0 F96 F97 F98 F99 F00 F01 F02 F03 F04 F05 F06 F07 F08 F09p Source: Fiscal and Economic Reconstruction Advisory Board Report (Jan-08-09). which accelerated beginning in FY 2004 Trend in Recurrent Activity of the General Fund $ millions $12.000 $8. Government 2008 Transition Reports.200 $5.999 $11.000 $3.Local Economic Trends and FY 2009 Budget • The Commonwealth has experience a historic trend of overspending. 10 .000 $5. PR Planning Board. P = Projected.000 $7.000 Deficit $2.801 $4.000 $4.000 $10.000 Recurrent Expenses Recurrent Revenues Deficit $3.000 $7.000 $9.350 $5.248 $5.000 $8.
Local Economic Trends and FY 2009 Budget • Recurring deficiencies were frequently “corrected” by nonrecurring activities • The current fiscal team will seek to minimize or avoid this practice to reduce specific market and execution risks $ M = million Retained Earnings AFICA $30 M Revenue Forwards $83 M Basis Swap $100 M Refinance of extra-constitutional debt $368 M Cash Flow Transaction $150 M Emergency Fund $64 M GDB Loan with the SUT as re-payment source $741 M Savings from Health Reform $107 M SUT revenues $137 M Cash Flow Transaction $100 M Loan from FSE $180 M Relief from debt service on extra-constitutional debt $522 M Taxes Receivables $60 M Real estate sales $150 M General Obligations Refinancing $207 M Cash Flow Transactions $100 M Tobacco Bonds $175 M Reimbursement Federal Funds Cash Flow $287 M PRIFA Bonds (Rum Taxes) $317 M Tobacco Bonds $317 M GDB Loans $550 M 11 Source: Fiscal and Economic Reconstruction Advisory Board Report. Jan-08-09. .
* Includes other deficits + increases in debt service + increase in debt service GDB.Local Economic Trends and FY 2009 Budget • Recurring structural deficit has grown to an estimated $3.484 $7.801 $500 $8.488 ( $487) ($200) Expenses are expected to be higher than budgeted (16% more than budget) Revenues Expenses Budget Net Revenues FY09 Reduction in Recurring Revenues Tax Credits Projected Net Budgeted Revenues FY09 Expenses FY09 ASES Deficit Other deficits & Increase in Debt Service* Accounts Payable Projected Expenses FY09 Source: Fiscal and Economic Reconstruction Advisory Board Report (Jan-08-09).999 $750 $265 $9.2 billion The Commonwealth Faces an Unprecedented Deficit of $3.198 M Revenues are expected to be lower than budgeted (8% less than budget) $10. 12 .2 B in FY 2009 $ millions Deficit = $3.
088 $911 $864 $362 $670 $8.2% -9.688 - $ Ch.7% 7. -0.2 - % Ch.2% - Grand Total $8.253 - Revenue Sources Individual Corporations Non-Resident Withholdings GF Sales and Use Tax (1) Excise Taxes Federal Excise Taxes on Rum Other Total Tax Receivable Financing Budget FY2009 $2.8% 2.0% 23.000 % Ch.5 -$28.5 -$46.3 -$8.9% -7.770 $1.9 -$201.751 $1.253 $9.273 $687 $423 $369 $408 $207 $321 $3.2% Source: Puerto Rico Treasury Department.8% 11.2% 6.8% 1.889 $1.488 $1.3% -11.015 $977 $922 $372 $681 $8.7% -5.Local Economic Trends and FY 2009 Revenues • The budget for FY 2009 included a proposed sale of a portfolio of $1.5% sales and use taxes 3.0% -18.688 -$201.4 $38.7 -$86.0% $3. but market conditions have not allowed for the sale to materialize • The trend in revenues for the 1H of FY2009 reveal a nominal drop of 5.7% 2.566 $1. $3.7 -$73.488 15.793 $1.0 bn of tax receivables. 0.1% -2.8% -6.6% below FY 2008 YTD 13 .8% - Jul-Dec Jul-Dec FY2008 FY2009 $1.2% Actual FY2008 $2.270 $774 $469 $397 $416 $169 $395 $3.889 $3.2 -5. (1) Aggregate 5.
Special “SUT Rainy TaxHoliday” in September 2008 14 .Local Economic Trends and FY 2009 Budget • The gross revenues of the Sales and Use Tax (SUT) remain in line with the average monthly revenues for the first 6 months of FY 2009 Monthly Trend in Gross Sales and Use Tax Revenues (SUT)* $ in millions $93 million The SUT area is subject to enhancements in tax enforcement and compliance Avg. Monthly SUT Revenues 6M FY 2009 $95 million Avg. * Gross without excluding the assignment to COFINA. Monthly SUT Revenues Dec06-Jun08 Source: Puerto Rico Treasury Department.
751 $1. * Forecast as of Feb-02-09.770 $1.5% Source: Puerto Rico Treasury Department.2% -13.488 $7.7% -2. **Aggregate 5.4% -29.5% • Sharp decline in corporate revenues mainly due to losses in local banks and slowdown in global sales of pharmaceutical products General Fund Tax Revenue Forecast FY 2009 (forecast as of Feb-02-09) $ in millions Forecasts by Revenue Sources Individual Corporations Non-Resident Withholdings Sales and Use Tax** Motor Vehicles Permits Fees and Penalties Other Initial Forecasts F09 $2.5% sales and use taxes 3.3% -18.015 $977 $414 $195 $1.432 $879 $911 $342 $137 $1.601 ($887) -10.4% -6.366 New Average Forecasts F09* $2.569 $1.Local Economic Trends and FY 2009 Budget • General Fund revenues are expected to decline by 10.8% -17.6% Total $8.331 $ Change ($201) ($319) ($136) ($66) ($72) ($58) ($35) % Change -7.6% below FY 2008 YTD 15 .
c. public hearings report before Treasury Commission. 3. Stronger analysis and monitoring of public agencies Gain control of Federal Grants process Thorough analysis and specific measures for agencies and public corporations in more difficult situation 16 Source: Office of Management and Budget. 2. * Includes other deficits + increases in debt service + increase in debt service GDB. 3. Elaborate longer-term budgets to bring about more stability to the fiscal planning process Introduction and implementation of zero-based budgeting Expense control measures: a. House of Representatives.Local Economic Trends and FY 2009 Budget • Implementation of expense reduction measures and steps towards multi-year budgeting Executive Order # 1 (Jan-08-2009) – (EO #1) 1.4 million by the 2nd half FY 2009 Multi-Year Budgeting 1. . Prohibits the creation of new government positions and eliminates vacant positions 30% reduction in non-career government positions 10% annualized reduction (5% in FY 2009) in operational expenses • There has been 877 non-career positions already eliminated • 70% of public agencies have reported progress in implementing EO #1 • Potential savings of $91. b. Feb-2009. 2.
Local Economic Trends and FY 2009 Budget 3. Investor Relations and Transparency 17 . Overview and New Financial and Economic Team 2.Index 1. Roadmap to Fiscal and Economic Reconstruction 4.
Roadmap to Reconstruction Economic Reconstruction 1 Federal and Local 1 Fiscal Reconstruction Expense Reduction and Government Efficiency STRATEGIC PROJECTS Stimulus Packages 2 Public-Private TAX REFORM Partnerships (PPPs) 3 GDB Loan Program 2 Increase Tax Compliance Revenue Measures $ 4 3 4 Diversification and Biosciences deepening Gross National Product Temporary Financial Measures 18 .
5% of revenue 3.Roadmap to Reconstruction Legislature approved Act 1 of 2009 (on Jan-15-2009) : a. * SUT = Sales and Use Tax. c. b.5% Other Revenue Structure Previous to Act 1 2009 Approved change Act 1 of 2009 2% of assignment in lieu of 1% 1.5% assignment in lieu of 4. Pledges an additional 1% of the SUT to the Dedicated Sales Tax Fund (2% in total) Enhances access to the bond market through a “single-A” credit Existing COFINA bonds will not be affected by new COFINA bonds How does it works? SUT* 7% Revenue 5. . General Fund 4.5% 19 Source: Government Development Bank.0% or Basic Amount It allows for the issuance of bonds to stabilize the fiscal situation and support economic stimulus.5% Municipalities COFINA (BGF) 1.
3 Debt Repayment Additional 1% SUT pledge increases issuance capacity $55.0 PR Sales Tax Financing Corp.2 BN debt repayment • $1.8 BN deficit financing and local stimulus $3.3 BN Net debt increase: $710 million or 1.0 Public Debt + $4.3% Source: Government Development bank for PR * Non-recourse to central government = 20 .Proposed measures barely impact total debt levels $ Billion $55.0 BN • $2. Transaction - 83% Debt Repayment $3.
performance measurement and faster audit cycles Monthly monitoring will enhance fiscal control • • • • Each agency will have specific financial ratios to comply with by certain dates All agencies will share the same underlying assumptions for economic trends and future revenue growth Risk management will be integrated into all decision-making on investment. operational. accuracy. real time data. infrastructure technology and asset management 21 . cash flows.Roadmap to Reconstruction • GDB is fully collaborating with Treasury and OMB and enhancing its role as Fiscal Agent • • Fiscal management will be centralized and supported by optimal use of information technology for reengineering and savings Public agencies will be required to develop multi-year budgets with specific milestones for operations. capital investment and asset management • Integration to PRIFAS will lead to comprehensiveness. financial.
Communities quality of living Infrastructure Strategy Higher Hurdle Return Rate for Infrastructure CAPEX PPPs vs. technology and competitiveness Improved Tax Information ( real time data. capture at source. Public Investment Land Based Strategy 22 .New Approach Economic Strategy Emphasis on global relevance. etc. web filing and payment) Economic Development Opportunities and Risks Execution and Performance Measurement PRITAS Fiscal Strategy Improved Tax Revenue Estimates and Knowledge for Incentives Full OMB knowledge over each entity’s expenditures PRIFAS IT Controls Payroll Procurement. third party . Intragovernment A/P Avoid use of Budgetary Fund and imprudent measures DEFICIT Reduction Social Strategy Strategy on Families Education Safety Labor Market entry and reform Integrated Economic and Financial Strategy Stabilize and Improve GO rating to sustain Infrastructure Investment Infrastructure Priorities. technology and physical location Externalities Biodiversity Conservation Watersheds.
Roadmap to Reconstruction • Strategic projects that will enhance competitiveness of local economy Key Infrastructure Projects: Aguadilla Airport Key Reforms: Health Reform Energy Reform Permitting Process Non-profit sector Golden Triangle Development Roosevelt Roads Mayaguez 2010 Martin Peña Canal Port of the Americas Others projects: Biosciences projects Highway Network Potable Water Projects Housing Projects Massive Transportation Agricultural Projects 23 .
Legislation will be introduced in FY 2009 a. Alternate financing mechanism to fund needed infrastructure investments Reduce debt issuance by the central government and public corporations Ongoing P3 efforts at HTA and Ports Authority will be pursued within the new legal framework 24 . b.Public-Private Partnerships • New Public-Private Partnerships Legislation Will Provide A Clear Legal Framework to Execute Agreements 1. c.
Index 1. Overview and New Financial and Economic Team 2. Investor Relations and Upcoming Credit Conference 25 . Roadmap to Fiscal and Economic Reconstruction 4. Local Economic Trends and FY 2009 Budget 3.
gobierno.S.jp.gdb-pur.com • English translations of legislation: www.oslpr. and local market transactions: emma.org • Monthly General Fund Net Revenues: www.gobierno.Investor Relations and Transparency • The New Administration is committed to improving Investor Relations and provide transparency • Commitment to release financial information on timely basis • Carry out investor calls on regular basis • The following information is posted on the internet: • Official statements for U.hacienda. 26 .pr • Investor presentations and Fiscal and Economic Reconstruction Advisory Board Report: www.pr • Economic data from the Puerto Rico Planning Board: www.org/english • We welcome your feedback to help us establish disclosure best practices.msrb.
./Commerce DAY 2. FISCAL RECONSTRUCTION FRIDAY. Econ. FEBRUARY 19TH SPEAKER / PARTICIPANTS President GDB Planning Board President Sec. Vision BREAK Public-Private Partnerships MUSEUM TOUR TOPIC / MEETING Welcome Multi-Year Budget Plan Tax Compliance BREAK Panel of Experts Fiscal Update & Financial Measures Credit Challenges What to Expect from PR? LUNCH Private Sector Coalition President GDB Rating Agencies Panel Investors Panel Networking DINNER Rating Agencies / Investors 27 . Secretary TOPIC / MEETING OPENING Economic Forecasts Economic Dev. Dev. FEBRUARY 20TH SPEAKER / PARTICIPANTS Governor of Puerto Rico Office of Budget & Mgnt. Director Treasury Dept. ECONOMIC RECONSTRUCTION THURSDAY.Upcoming Credit Conference (Preliminary Agenda Subject to Change) DAY 1.
Summary Remarks 28 .
3 The local recession has affected revenues and has aggravated the financial condition of the Commonwealth The recurring fiscal deficit is no less that $3. 4 4. 5. 5 6. 2 3. 1 The new Economic and Financial Team understands the challenges ahead and is committed to a reconstruction roadmap The new administration has made significant progress in its first 30 days in office 2. 6 GDB will continuously reach out to investors in order to provide transparency 29 .2 billion for FY 2009 The roadmap to fiscal and economic reconstruction has already been drafted and we are moving ahead diligently with further analysis and definition of implementation phase.Commitment to Sound Fiscal Management 1.
2009 GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO 30 .The Path to Fiscal and Economic Reconstruction Government Development Bank for Puerto Rico Investor Presentation February 10.
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