S&P Affirms Rating on Puerto Rico; Outlook Remains Negative

Above: San Juan (CJ Photo)

By the Caribbean Journal staff

Standard & Poor’s has affirmed its “BBB-” rating on the Commonwealth of Puerto Rico’s general obligation and appropriation debt, the New York-based ratings firm announced on Wednesday.

The rating reflected what the firm said were a number of factors, from Puerto Rico’s strong ties to the US economy to a governmental framework that “constitutionally places repayment of GO debt ahead of other expenses, and broad legal authority to adjust revenues and expenditures, although the current administration has said it will not institute layoffs.”

In its note, the firm also pointed to Puerto Rico’s “strong ties to the US economy, resulting in a significant flow of trade and income transfers” and “structural deficits in the commonwealth’s general fund for more than a decade.”

“The negative outlook reflects ongoing negative demographic, economic, and fiscal trends, and the possibility that market access concerns could affect the ability to roll over notes, finance operating deficits, and renegotiate liquidity agreements, if recent tax increases do not prove sufficient to lower operating deficits,” said Standard & Poor’s credit analyst David Hitchcock. “In our view, staying close to the $820 million budgeted deficit in fiscal 2014 and substantially reducing the deficit in fiscal 2015 remains critical to reducing the growth in Puerto Rico’s tax-supported debt, which has risen in our calculation nearly 49 percent in the past four years primarily as a result of deficit financing.”

Hitchcock said the firm believed that the commonwealth’s current administration, led by Governor Alejandro Garcia Padilla, had made “significant structural pension reform, reduced water and sewer operating subsidies through significant rate increases, and taken important tax-raising measures to restore fiscal balance.”

The new administration, since taking office at the beginning of the year, reversed tax cuts enacted under former Governor Luis Fortuno, and expanded the island’s tax base, with a plan for $1 billion of new revenue by fiscal year 2014, the firm said.

The 2014 budget would mean a reduced operating deficit of $820 million.”However,” Hitchcock said, “we believe the resumption of weak economic
results limits the government’s ability to implement additional revenue
enhancements, while expenditures reductions may be constrained by the current
administration’s goal not to conduct layoffs.”

The firm said it could revise its outlook if Puerto Rico’s economy gained positive momentum and budget deficits remained close to budgeted projections through fiscal year 2015, he said, but the outlook could fall another notch if the economy “to the point we believe it significantly hampers the ability to lower budget deficits, the projected deficit for fiscal 2014 widens, it appears that no significant budget reduction will likely occur in fiscal 2015, or the loss of market access significantly hampers the ability to finance deficits or roll over and refinance debt, liquidity agreements, or meet swap termination costs.”