Standard & Poor’s Ratings Services has revised its outlook for the Puerto Rico government’s general obligation (GO) and appropriation debt ratings to negative from stable.
The outlook revision is based on what S&P believes is “a challenging economic and fiscal environment, which has the potential to delay structurally balanced budgets beyond fiscal 2013.”
In its view, attaining structural balance by the end of fiscal 2013 remains “critical” to reducing the growth in the commonwealth’s tax-supported debt, which has increased nearly 44 percent over the past three years primarily as a result of deficit financing.
“In our opinion, the current administration has taken decisive measures to restore fiscal balance,” said S&P credit analyst Horacio Aldrete-Sanchez. “However, a steady economic recovery has failed to take hold, which we believe limits the government’s ability to implement additional expenditure cuts and revenue enhancement measures in the near term.”
In its assessement, the agency noted that Puerto Rico’s “disproportionate” reliance on federal transfers — which could be significantly reduced through the implementation of the Federal Budget Control Act of 2011 — could produce “additional headwinds for the island’s economy.”
S&P also pointed out that the upcoming November elections could stall the progress of the adoption and implementation of a meaningful solution to the commonwealth’s unfunded pension and retirement obligations, which could further complicate the achievement of structurally balanced budgets.
On Wednesday, S&P assigned its “BBB” rating to the Puerto Rico Public Buildings Authority’s series U refunding bonds, guaranteed by Puerto Rico, and its “BBB-“ rating to the Puerto Rico Public Finance Corporation’s series 2012A refunding bonds.
In addition, the agency affirmed its “BBB” rating on Puerto Rico’s GO debt and its ‘BBB-‘ rating on the commonwealth’s appropriation debt. The commonwealth’s full faith and credit pledge, including a constitutional requirement that provides a first claim on available commonwealth resources, secures the GO bonds.
“In our opinion, Gov. [Luis] Fortuno’s $9.08 billion proposed fiscal 2013 budget continues to build on the same tenets of fiscal discipline of the last three fiscal years,” S&P said.
The reduction of the government’s payroll by nearly 38,000 people will slash total public expenditures by nearly 34 percent in fiscal 2013, compared to fiscal 2009. However, despite the improvement, S&P said structural budgetary balance remains a long-shot.
Puerto Rico’s deficit funding needs for fiscal 2013 are estimated at $908 million, or approximately or 10 percent of general fund expenditures.
“In our view, structural balance by the end of fiscal 2013 remains critical to reducing the growth in the commonwealth’s tax-supported debt, which has risen nearly 44 percent over the past three years primarily as a result of deficit financing,” S&P said, adding that the absence of a steady economic recovery has limited the government’s ability to implement additional expenditure cuts and revenue enhancement measures in the near term.
“We could lower the rating by one notch if the economy deteriorates, the projected deficit for fiscal 2013 widens, or decisive action on pension reform is delayed beyond fiscal 2013,” S&P warned.