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Moody’s: Delay in P.R.’s fiscal plan underscores growing economic uncertainties

Moody’s Investors Service believes Puerto Rico’s growing challenges may further reduce already low recovery prospects for holders of Puerto Rico’s 17 rated debt types.

The Commonwealth of Puerto Rico’s second delay in submitting its revised fiscal plan to the Financial Oversight and Management Board for Puerto Rico “underscores the growing economic uncertainties it faces as it continues to recover from Hurricane María,” Moody’s Investors Service noted in a new report.

The risks include surging migration to the U.S. mainland, potentially unsustainable operating conditions for the territory’s manufacturers, and federal recovery and rebuilding assistance that may fall short of what Puerto Rico needs to prevent lasting and severe damage to its economic base.

“Together, the growing challenges from these factors may further reduce already low recovery prospects for holders of Puerto Rico’s 17 rated debt types. We rate all of Puerto Rico’s debt either Ca or C, which are our two lowest ratings. A Ca rating connotes an expected 35-65 percent bondholder recovery rate, while a C rating connotes an expected recovery rate of less than 35 percent,” Moody’s stated.

But even before Hurricane María struck on Sept. 20, 2017, Puerto Rico was already losing population at a fast pace, falling by 13 percent from a peak reached in 2004, when manufacturing-sector employment was rapidly dwindling.

Although official figures on how many people have moved away since Hurricane María so far are unavailable, more than  200,000 — about 6 percent of the pre-María population — have likely left for the mainland since September, Moody’s concluded, citing media reports.

“While severe out-migration poses a distinct threat to Puerto Rico’s economic base, it will not necessarily have a direct, linear effect on GDP, which still could shrink at a slower pace, particularly because of the stimulative effect of investments in power generation facilities or other major infrastructure replacement projects,” Moody’s noted.

The analyst firm also noted the potential exit of manufacturing companies in response to the U.S. tax overhaul legislation passed in December, which places a new 12.5 percent excise tax on profits derived from patents and other intangible assets supporting their Puerto Rican plants.

That, Moody’s said, “poses an even bigger threat to Puerto Rico’s economy than sheer population declines. The sector, which is concentrated in subsidiaries of U.S.-based firms, accounted for about 48 percent of state gross domestic product in 2016, far exceeding the national economy’s 17.8 percent manufacturing share.”

In the aftermath of Hurricane María, Puerto Rico’s manufacturers have confronted several challenges. Some experienced damage to their own facilities, and all faced production disruptions — loss of power and water, as well as lack of access to raw materials and transportation infrastructure.

“The manufacturers may weigh options to relocate factories in jurisdictions outside the likely path of future hurricanes, at a time when climate change is increasing both the frequency and severity of such events,” Moody’s noted.

The third growing challenge involves the amount of federal assistance for Puerto Rico, which Moody’s predicted will help determine the territory’s economic trajectory.

Financial assistance will likely consist primarily of recovery funds provided through the Federal Emergency Management Agency. The government of Puerto Rico has requested aid totaling $94.4 billion and also offered to give FEMA approval power over the island’s expenditure of federal disaster relief funds.

“It remains unclear whether the federal government will grant the full request, which incorporates $31 billion for rebuilding homes and $18 billion to rebuild the Puerto Rico Electric Power Authority (PREPA – Ca/negative),” Moody’s noted.

Another avenue for enhanced federal support could involve improving Puerto Rico’s Medicaid reimbursement rate, which is capped at 55 percent despite the commonwealth’s extreme poverty compared with the U.S. overall.

“As a territory rather than a state, Puerto Rico received far less Medicaid funding than its income levels would otherwise indicate. One of the main contributors to Puerto Rico’s projected fiscal pressures in its existing fiscal plan has been the loss of supplemental Medicaid funding connected to the Affordable Care Act, which began this fiscal year,” Moody’s stated.

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