Fitch Ratings downgraded Puerto Rico’s debt to ‘BBB-‘ from ‘BBB+, a notch above “junk,” matching the decisions by its colleagues at Moody’s and Standard & Poor’s in recent weeks.
In its report, Fitch noted the downgrade to ‘BBB-‘ reflects economic and revenue underperformance that it “believes has significantly increased the size of the operating imbalance for the current fiscal year and the gap presented to the commonwealth as it develops a budget for 2014.”
“Fitch does not believe that structural budget balance will be achieved in fiscal 2014, and meeting this goal will remain challenging thereafter,” the agency said in its assessment.
It’s decision to downgrade affects $10.6 billion Commonwealth general obligation (GO) bonds; $1.3 billion Public Building Authority government facilities revenue bonds guaranteed by the commonwealth; $658 million Puerto Rico Aqueduct and Sewer Authority (PRASA) commonwealth guaranty revenue bonds; and, $2.9 billion Employees Retirement System of the Commonwealth of Puerto Rico pension funding bonds.
“Puerto Rico’s bonded debt levels are exceptionally high and pension system assets are expected to be depleted in the foreseeable future. These high liabilities both limit Puerto Rico’s ability to use additional leveraging for capital improvements or as a budget solution and create spending pressures that will be difficult to absorb within slowly growing revenues,” the agency said.
Despite the negatives, Fitch acknowledged that Puerto Rico’s prior and current administrations have made progress in restructuring fiscal operations, but have fallen short of achieving structural balance.
“Despite aggressive cost cutting and other fiscal restructuring measures over the past four years, economic recovery and budget balance have proven elusive,” it said. “Fitch has noted steady progress in stabilizing the commonwealth’s finances; however, with a reduction in near-term expectations for the economy and revenue underperformance in the current fiscal year to date, the budget challenge facing the new administration has expanded considerably compared to original estimates.”
The current-year deficit is now projected to more than the $1.1 billion originally forecast by the former Gov. Luis Fortuño administration. Although the economic team now in place has identified gap closing solutions for a significant portion of the current year deficit, it will still have a $490 million gap to address.
“Fitch anticipates that it will be difficult to close this gap during the few remaining months of fiscal 2013 and additional borrowing from the Governmental Development Bank of Puerto Rico will be the most likely contingency,” Fitch said.
Fitch’s decision drew quick reaction from GDB President Javier Ferrer, who insisted “In two and a half months, we cannot solve the economic problems that have accumulated for decades. Accrediting agencies have granted us the space and time needed to implement our strategies.”
“Now is the time to come together as one to implement the measures to be taken. It’s time to stop looking at this issue as one that impacts interests or groups and to understand that what is at stake is our development,” Ferrer said.
He said Puerto Rico does not “deserve to be downgraded to junk” and is “very hopeful that this will not happen.”
To avoid that Puerto Rico lawmakers must approve the retirement reform as soon as possible, improve revenue collections, balance the budget and grow the economy simultaneously.
“Most of what we have to do to save our finances is in our hands. We can do this but we have to take action, we’ve run out of time to talk,”
Meanwhile, Treasury Secretary Melba Acosta said Fitch’s decision was “foreseeable” because credit ratings agencies tend to remain consistent in their classifications.
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