Many of you have been reading my articles with the US Virgin Islands are familiar with their issues and my concerns with the US Virgin Islands turning into another Puerto Rico. Unfortunately, it seems that my fears are about to be realized thanks to Hurricane Irma:
Hurricane Irma was still a Category 5 storm when it ravaged the U.S. Virgin Islands last week. Damage to the territory’s tourism infrastructure may compel the government to use the bankruptcy process that Congress created for neighboring Puerto Rico last year.
The islands of St. John and St. Thomas — which have most of the territory’s hotel rooms — were devastated. Tourists had to be evacuated on cruise ships to Puerto Rico, and it is unclear when they will be able to return. With the storm destroying much of St. John’s lush flora, it may be a long time before the island becomes an attractive destination again.
Since tourism is the territory’s major industry, Irma’s long-term impact is likely to be a sharp decline in tax revenues. Aside from lost hotel occupancy taxes and reduced income tax revenues from tourist-sector employees, resorts may be unable to make property tax payments.
The U.S. Virgin Islands was already in deep financial trouble before the hurricane hit. In its 2016 financial statements, the government reported $2.1 billion in outstanding bonds and loans — about $20,000 per capita, far in excess of any U.S. state. Although the central government balanced its budget in 2016, the public power authority, government hospital and university all ran large operating deficits.
In August, S&P and Fitch lowered their ratings on the Virgin Islands to CCC+ and CCC respectively — deep in junk territory. Later in the month, the Virgin Islands government informed the rating agencies that it would no longer supply them with information needed to evaluate the territory’s liquidity, making the withdrawal of credit ratings likely.
All of this suggests that, without a federal bailout, a default on Virgin Islands debt is likely. Although the federal government will undoubtedly provide large amounts of near-term disaster assistance and help with rebuilding, it is less clear that U.S. taxpayer money will be used to fill the empty coffers of the Virgin Islands government. With billions being spent on Harvey and Irma relief in the politically potent states of Texas and Florida, Congress may be less inclined to provide funding for a small, out-of-the-way territory that does not have its own representative.
It is difficult to overstate how badly the destruction of St. John in particular will impact the Virgin Islands’ tourism industry. St. John was the smallest of the three islands, with a population of around 5,000, a low crime rate in comparison to St. Thomas and St. Croix, and lush vegetation and beautiful beaches. It was one of the premiere Caribbean vacation destinations.
Reports indicate that the island’s resorts have been essentially wiped out, and the vegetation and beaches were mostly destroyed by the hurricane. The place looks more like a blasted wasteland ravaged by fire than a victim of a hurricane. Additionally, the reports of looting and disorder also generate negative headlines and concerns about safety. These reports will contribute to scaring tourists off right when the islands need them most.
The islands’ economy has taken too many body blows. In the last fifteen years, they’ve lost their tax breaks which attracted many businesses to the islands, they’ve lost the HOVENSA oil refinery which brought in a tremendous amount of revenue, they’ve had their credit ratings downgraded deep into junk status, and now the remaining critical pillar of the islands’ economy, the tourism industry, has effectively been wiped out. At this point, what is left for the Virgin Islands?
Then there is the violent crime issue. Before the hurricane, St. Thomas and St. Croix were dangerous, with some of the highest murder rates in the country. With the tourist industry gone, I expect crime rates to get even worse than they already are. Joblessness and poverty will skyrocket.
Without a federal bailout, the Virgin Islands has no chance of ever repaying its debt with its economy in shambles. I think a direct bailout by Washington very unlikely, because it would set a precedent and cause Puerto Rico to demand a bailout as well. Unfortunately, it seems very likely that a bankruptcy will happen and is going to happen soon.