On September 9, 2015, Governor Alejandro Garica Padilla proposed a five-year plan for restructuring the Puerto Rico’s debts.   According to the Working Group for Fiscal and Economic Recovery of Puerto Rico (the “Working Group”), Puerto Rico’s treasury and the Government Development Bank for Puerto Rico “are each expected to exhaust their liquidity before the end of calendar year 2015.”  Indeed, over the next five years Puerto Rico, absent intervention, can expect to have a deficit of $27.8 billion.  The total debt owed by Puerto Rico’s government (not including the unfunded pension liabilities) exceeds $70 billion.

Puerto Rico has already implemented stringent “austerity” measures, including: (i) introducing the sales tax (2007); increasing the petroleum products tax (2013 and again 2015); increasing the sale tax from 7% to 11.5% (2016); closing and consolidating schools (2015); involuntary layoffs of public sector employees (2011); and reduction and elimination of bonuses for public sector employees (2014). Notwithstanding these measures since 2006, Puerto Rico’s public sector debt has increased by an incredible 64%. Puerto Rico can no longer efficiently borrow money from the market.

At the heart of the Working Group’s plan is the recognition that “unless the persistent stagnation of Puerto Rico’s economy that has helped fuel the increase in Government debt over the past decade can be reversed, the public debt is not sustainable.”

During the past week, President Obama has proposed a plan that would allow Puerto Rico’s government entities access to Chapter 9 of the U.S. Bankruptcy Code.

While Puerto Rico and the holders of its debt will no doubt work their way through difficult negotiations and heated legal battles, it will be the local private businesses that will bear the brunt of the liquidity enhancing measures. These local businesses can expect reduced responsiveness from government agencies, increased costs of interaction with the government, and increased tax burdens. Private businesses operating in Puerto Rico should be attuned to their own debt levels, borrowing capacity, and more importantly to the fiscal health and position of their customers. As the Puerto Rico consumer undergoes increasing stress as a result of the government’s actions that will ripple through the entire Puerto Rican economy, businesses that begin planning now will have the best chance to survive what appears to be at least five more years of difficult economic times.