|The GDB is analyzing the possibility of selling GO bonds this year.
(Credit: Víctor Román)
New York-based Fitch Ratings has assigned a “BBB+” rating to the Commonwealth’s outstanding $9.2 billion general obligation (GO) bonds, saying the outlook is stable. However, the long-term rating remains in Fitch’s lower medium grade classification, for a number of reasons.
Its classification comes less than a month after Government Development Bank President Carlos García admitted the Fortuño administration is considering a sale of general obligation bonds sometime in 2011 to finance infrastructure projects.
While the government official did not say when the sale would take place or how much the agency is looking to raise, García said plans also call for selling as much as $2.1 billion in other types of bonds next year.
In its assessment, Fitch pointed out the government’s historic weak record with budgetary and generally accepted accounting principles deficits, as well as unfunded overspending and a tendency to borrow to cover budget shortfalls.
Fitch acknowledged the government’s “dramatic steps to restructure fiscal operations and stimulate the economy. The fiscal stabilization plan, with its emphasis on reduced government spending, was designed to close the structural gap over the course of three fiscal years. Its successful implementation is a positive credit factor.”
Fitch also pointed out the recessionary conditions that have plagued the island for the past four years, but said things are beginning to look up for fiscal 2011, after several years of contractions in the Gross National Product and the loss of more than 100,000 jobs.
Meanwhile, the credit rating agency pointed out the government’s high debt levels and it’s nearly depleted pension fund as stumbling blocks toward achieving full improvements.
“Debt levels are very high, partially reflecting the consolidated nature of the central government’s role, and have increased as the commonwealth has used deficit financing as part of its fiscal stabilization plan,” Fitch said. “Pension funding is exceptionally low and, absent significant action, the main pension fund will run out of resources within a few years.”
The Commonwealth’s Employees Retirement System has been systematically depleting, reaching a funding ratio of just 9.8 percent and an unfunded accrued actuarial liability of $17.8 billion as of June 30, 2009. That means that without appropriate action, the pension fund could be depleted by 2019.
“Although the government is expected to take steps to begin to rectify the pension funding problem, it’s ability to do so may be limited by the ongoing weakness in the economy, narrow financial operations, and already high debt levels,” Fitch further noted.
Fitch touts fiscal reform
On the positive side, Fitch listed the Fortuño administration’s “successful implementation of fiscal and economic reform that results in a balanced budget and emergence from the prolonged recession.”
“The administration has demonstrated its willingness and ability to make significant changes to fiscal operations. It has successfully enacted legislation to implement both temporary and permanent revenue enhancements, stepped up revenue collection enforcement, and dramatically reduced public spending,” Fitch said, while pointing out that the government has had to borrow significantly from the Sales Tax Revenue Financing Corporation, known as COFINA in Spanish, to be able to subsist through 2012.
Finally, Fitch mentioned the government’s focus on tax reform which — along with addressing the pension fund debacle — should help achieve longer-term structural balance.
“The tax reform proposal, which is before the Puerto Rico legislature, would replace revenue lost through significantly lower personal and corporate income tax rates with a temporary excise tax on certain manufacturers and ultimately by implementation of a source income rule for multi-national corporations,” said Fitch, adding that it expects the government will “take additional action to balance the budget should revenue not materialize as anticipated.”