While recognizing that the Gov. Luis Fortuño administration’s financial strides “have been large and comprehensive,” Bank of America Merrill Lynch said in a recent report that Puerto Rico still has challenges ahead before achieving a full recovery.
The financial conglomerate said given that the Commonwealth has made progress on the financial front, the recent decision by Standard & Poor’s to assign a negative outlook to the government’s “BBB” credit rating was “inopportune.”
“S&P has established the ground rules for going forward that may make it challenging to get back to a ‘stable’ outlook, but the potential downside is limited to one notch,” Merrill Lynch said. “We are comfortable with the probability that appropriation obligations would also be maintained at investment grade.”
“Although the rating warning is clear, we do not believe that, given the potential scenarios, there will not be a great impact on trading. We believe that the Commonwealth with careful assistance from its advisor, the Government Development Bank, will be able to manage the financial side barring any unforeseen events,” the report stated.
In its analysis, BofA Merrill Lynch said it has been “favorably impressed” by how the present administration has steered the course over the past three years, and how it has addressed various fiscal and economic challenges in its multi-year plan.
“It is no small feat that the deficit has been decreased in steps from $3.3 billion in fiscal 2009 to $610million in fiscal 2012. The latter is subject to change since we are just a couple of weeks away from the fiscal year end at June 30. The forecasted imbalance for fiscal 2013 is at $333 million,” the group said.
The company went on to mention how the government bridged this year’s $610 million deficit with Sales Tax Revenue Financing Corporation bond issues, saying that as a result, revenues are running below budget by “only a marginal 1.4 percent.”
“The basic concept is that within four years a very significant imbalance has been reduced so that budgets going forward will be easier to accomplish,” Merrill Lynch said.
In its report, the financial firm said the administration’s Tax Reform, including the 4 percent excise tax on foreign corporations, have helped stimulate the economy, which is already showing signs of recovery.
Still, the company also mentioned that the government has to take action regarding pension fund and other retirement benefits to address the Commonwealth Retirement System’s critical underfunding status.
“The Employee Retirement System is only 6.8 percent funded at this time and at the present pace of payouts to beneficiaries, the assets of the system may be depleted as early as 2014. The ERS has come to market with public and local Pension Obligation Bonds in the past to assist in funding the system,” the report stated. “However, there is a critical need to take more action at this juncture.”
“It will be up to the legislature and the administration to implement an efficacious plan in regards to the employee benefit consideration,” it said. “There are some nascent signs of modest improvements in the economy that may assist in the effort over time.”