Citing Puerto Rico’s ongoing budget gap, New York-based Standard & Poor’s Ratings Services on Wednesday lowered the government’s general obligations rating to ‘BBB-‘ from ‘BBB’ — one notch above junk. The outlook is negative.
“We base the downgrade on the result of an estimated fiscal 2013 budget gap, which we view as significantly larger than originally budgeted, absent corrective action,” said Standard & Poor’s credit analyst David Hitchcock. “We believe the shortfalls against budget in fiscal 2013 will make it difficult for the commonwealth to achieve structural balance in the next two years.”
“If, in that time frame, only limited progress is made to reduce what we consider large structural budget gaps, we could lower the rating further,” he said.
While the agency acknowledged that the Gov. Alejandro García-Padilla administration is considering a number of corrective budget actions, and has proposed what it views a “major reform of Puerto Rico’s poorly funded pension system” S&P still feels the size of the potential fiscal 2013 budget gap and potential future years’ structural deficits warrant a rating action at this time.
“We have not lowered the rating on the appropriation debt, which we typically rate one notch below the GO, reflecting current law that allows the governor or budget director to first, prioritize the payment of principal and interest corresponding to public debt, and second, to bind obligations to safeguard the credit, reputation, and good name of the government, when available funds for a specific fiscal year are not sufficient to cover the appropriations approved for that year,” Hitchcock said.
Given this structural feature, S&P does not believe at this time that Puerto Rico’s appropriation credit is speculative-grade, the agency said in a statement issued earlier today.
“The negative outlook is the result of projections of what we view as large shortfalls against budget in fiscal 2013, absent corrective action, that will make it difficult for the commonwealth to achieve structural balance in the two-year outlook horizon,” the analyst said.
If only limited progress is made in upcoming budget cycles in significantly reducing large structural budget gaps, S&P could lower the rating further.
The new administration is considering a number of corrective budget actions, and has proposed what S&P described as a “major pension reform” of the commonwealth’s poorly funded pension system, which S&P will monitor, specifically for its fiscal effects that will determine future credit trends.