H.CaleroConsulting Group, Inc.

Facts & Proposals

Puerto Rico at a Crossroads

Size of the PR Economy 2015

1% 1%

47%

7%

37%

7%

Agric/Min Constr. Mfg. Trade Services Gov

GDP Jobs

$103bn

2%4%

8%

24%

43%

19%

1m

PR is a regional economy of US

Real GNP growth, %

Source: PR Planning Board

8.0%

-1.7%

2.1% 2.1%

PR US

0%

Above Linked Below

111%

116%

96%

87%85%

95%

105%

115%

125%

0 1 2 3 4 5 6 7 8 9

It is the worst recessionReal GNP, Base year = 100 (year prior start of recession)

2006-15

82-84

01-02

1975

Yearshcalero.com

Investment went down

Investment as % of GNP

30%

13%

1999 2001 2003 2005 2007 2009 2011 2013 2015

Recession

hcalero.comSource: PR Planning Board

PR’s total exports

2005 2007 2009 2011 2013 2015

Other Pharma

$ Billion

$56.5

$69.4

60%

40%

70%

30%

% growth = 2.1%

Tourism is not a major driver

Caribbean = 22m

# tourists 2014, 000sVisitors’ expenditures, $m

How big is consumption?

90%

68%

PR US

Consumption as % of GNP, 2015

Source: PR Planning Board & BEA

Twins: consumption & debt

$ million

Source: PR Planning Board

14,063

61,911

4,463

22,597

1984 1990 1996 2002 2008 2015

Consumption Debt

Contribution of federal funds

$billion

$0.1

$14.1

2%13%

21%

1970 1980 1990 2000 2010

Net Transfers As % GNP

* Includes Net Transfers plus Federal Grants

‘15

$0.1

1970 1980 1990 2000 2010

Net transfers Grants

$

$17.5 B

19%

81%

‘15

Trends in public debt

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Other Public Corporations

Central Government Municipalities

Does not include $50 B in unfunded pension liabilities.

Congress ends

Section 936

$ Billion

$4

$71.2 B

$14

$48

$5

Source: PR Government Development Bank.

Demographic time bomb in PR

1950 1970 1990 201060+ Less 60

6% 20%15%

2.2 MM2.7

3.53.8 3.7 3.5

23%

PR population, million

673

281

392

Emigration Inmigration Netmigration

2005-2014, 000s

15’

The job challenge

Low participation still a major problem

Source: PR Department of Labor

46.9%

40.5%

10.4% 11.4%

2000 2003 2006 2009 2012 2015

Participation Unemployment

Apr 2016

Inflation is incredibly low

1.1%

-0.2%

10 11 12 13 14 15 16

US PR

Apr 2016

ADJUNTAS

AGUADA

AGUASBUENAS

AIBONITO

AÑASCO

ARECIBO

BARRANQUITAS

CABOROJO

CAGUAS

CAYEY

CEIBACIALES

CIDRA

COAMO

COMERIO

FLORIDA

GUANICA

GUAYAMA

GURABO

JAYUYA

JUANA

DIAZ

JUNCOS

LAJAS

LARES

LAS MARIAS

MANATI

MARICAO

MAYAGÜEZ

MOCA

NAGUABO

OROCOVIS

PONCE

RIOGRANDE

SALINAS

SANGERMAN

SANJUAN

SANLORENZO

SANSEBASTIAN

SANTAISABEL

TOAALTA

TOABAJA

UTUADO

VEGAALTA

VEGABAJA

VILLALBA

YABUCOAYAUCO

Where is Puerto Rico today?

Gross Domestic Product 15 $103b

Gross National Product 15 $68.5b

Population 15 3.5m

Share of Manufacturing in GDP 47%

Income Per Capita 15 $17,629

Total Employment 05/16 1.0m

Inflation 05/16 -0.4%

Unemployment rate 05/16 11.3%

Participation rate 05/16 40.6%

15Source: PR Planning Board, US Census Bureau, PR Department of Labor.

HCCG economic indices% change over previous year, 1Q-2016

-2.3%

-18.1%

-0.3%

-2.5%

-8.5%

-3.2%

Coinc. Constr. Cons. Mfg Banking Leading

Short term liquidity challenge

$ million – debt service

667

29 42 69

397

903

402

29 41

469

71

1,919

Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Source: PR Government Development Bank.

ERS, UPR, GOs, PREPA,

PRASA, PBA, HTA

GOs, PREPA,

PRASA, PBA, HTA

$1.7B

$1.9B

PR debt – The end game

Source: Press

Fore Research

Claren Road

Solus Alt.

Background for US action 1. PR has begun defaulting on its debt

2. It no longer has access to credit markets

3. Essential services have been cut since govt.

cannot pay its bills

4. Hospitals are closing floors

5. Business are leaving the Island

6. Tax refunds withheld from citizens

7. Pension assets depleted

8. Lawsuits have begun

9. GDB is undercapitalized

10.Central govt. could be force to shutdown

11.PR lacks tools to solve this crisis

Powers of Control Board

Restructure debt with Court √

Approve fiscal plan & budgets √

Issue stay on all proceedings √

Obtain financial audited

statements √

Freeze or reduce pension benefits √

Issue bonds √

Review Acts of Legislature √

Exclude 25yr old from min. wage √

Subpoena powers √

Prohibit public strikes √

Establish new personnel system √

Not subject to Judicial review √

Impact of Financial Control Boards

21

Indicator NYC DC Detroit PR

Start Date 1-Sep-75 17-Apr-95 1-Mar-13 TBD

End Date 30-Jun-86 30-Sep-01 Active TBD

Duration (years) 11 7 3 TBD

# of members 7 5 9 5

Deficit prior FCB ($M) $2,200 $722 $300 $740

Population loss -10% -29% -62% -9%

Population 2014 (M) 8.5 0.7 0.7 3.5

Credit rating

Start FCB Caa1 Ba1 Caa2 TBD

End Baa Baa1 B2 TBD

Upgrade notches 9 3 3 TBD

Terms - Financial Control Boards

22

Terms NYC DC

AssistanceGovt. assumed cost of

university, courts

Financial control of courts

& prisons

Covered city’s finances

Postponed pmts. on short-term

debt

Raised Medicaid

$1.4b infrastructure

$300million grants &

incentives

Finance$2.5b to buy MAC bonds Allowed borrowing from

Treasury

$2.3b short-term Fed loans

Pensions Untouched

Assumed $5b unfunded

liabilities

Pension Funds bought MAC

Taxes plus $200million new taxes IRS collected taxes

Raised tuition at CUNY

Raised transit fares Saved $117million to DC

Public layoffs after FCB

23

Number of layoffs 5yrs after FCB & % of total

100,000

35,900

7,000

16% 16%

8%

NYC DC Detroit

Layoffs % of total govt. jobs

What needs to be done?

• Develop & implement Economic Growth Plan

with:

• Poles of Growth and Investments for

infrastructure thru PPP

• Expansion PR-22 connecting Lufthansa

• Bridge Ceiba – Vieques

• Start redevelopment of Roosevelt Roads

• Train connecting Aguadilla to Ceiba

• Port of the Americas Ponce – Redistribution

• Gas fired power plants – Aguirre in Ponce

Aguadilla

Ceiba

Ponce

What needs to be done? cont.

• Ensure payment of GOs’ debt service

• Restructure other public debt

• Cut some government expenses

• Restructure some public corporations

• Privatize some public corporations

• Restore PR’s investment grade to

resume lending

Full recovery will take time…Forecast of US and PR real GNP growth

FY

Forecast

Source: PR Planning Board & HCCG PR Macroeconomic Model

Forecast as of November 2015

Years to return to 2005 GNP

2,901

7,315 7,329 7,224

1970 1980 1990 2000 2010 2020 2030

Actual Forecast @1% Forecast 3.4%

Real GNP, $ million

15 years

hcalero.comSource: PR Planning Board & HCCG estimates

4 years

Unemployment remains high

Baseline

History Projected

% change, real 2013 2014 2015 2016 2017 2018

Unemployment 14.0% 14.3% 13.0% 11.9% 12.0% 12.8%

28hcalero.comSource: PR Department of Labor & HCCG PR Macroeconomic Model

Inflation will rise

Baseline

History Projected

% change,

real

2013 2014 2015 2016 2017 2018

Inflation 0.9% 0.9% -0.3% -0.2% 1.0% 2.3%

29hcalero.comSource: PR Department of Labor & HCCG PR Macroeconomic Model

PR at a Crossroads

Stagnation Growth

Fiscal Control Board

PREPA’s restructure

Loss of population

VAT & more taxes

Political decision