Can Puerto Rico pay its bills?
The commonwealth’s government doesn’t think it can. Major creditors, however, paint a different picture.
Citing a decade-long economic slump, significant debt and high unemployment, coupled with laws and regulations that inhibit growth, Puerto Rico says it needs relief. Gov. Alejandro Garcia Padilla set off a firestorm recently by saying Puerto Rico’s $73 billion debt “is not payable” and wants a restructuring.
Yesterday, in a public meeting – the first since the governor’s remarks – commonwealth officials said they were working on a broad reform package, though it’s too early to speculate on how debt holders will fare.
“A credible economic recovery and fiscal adjustment plan is central to our turnaround effort and while that plan remains in development, it would be premature for me to suggest the manner and extent the debt of the commonwealth and its various related issuers may need to be adjusted,” Melba Acosta, president of the Government Development Bank, told about 300 creditors in a meeting in New York, which was also broadcast online.
“I ask for your patience while we develop a credible plan that meets all of our stakeholders’ objectives.” A draft of the plan is expected by Sept. 1.
Creditors: Puerto Rico can pay
Many creditors, however, say Puerto Rico has the means to pay and is generally on track in improving its finances.
OppenheimerFunds successfully challenged a new law that would have allowed its public corporations to restructure their debt. In a conference call last week, the fund managers made their case.
Puerto Rico’s debt service represents about 17% of its revenues on a consolidated basis – consistent with other sovereign debt.
Additionally, the sales and use tax has grown year-over-year for eight consecutive quarters. Funds for the Aug. 1 payment on the bonds backed by the sales and use tax (COFINA bonds) had been fully collected by year-end 2014.
The private sector has been growing while overall unemployment, though still higher than in the continental United States, has dropped by 2 percentage points.
Also, per-capita income has increased in recent years, though the economy has been relatively flat, and hotel tax revenues have grown by an estimated 5% to 8%.
“We believe these figures, among others, support our contention that the ability to pay remains intact,” the Oppenheimer fund managers said, though they noted “an apparent shift in the administration’s willingness to pay.”
The fund managers contend Puerto Rico’s administration has taken positive steps in the last several years and “significant austerity measures” wouldn’t be necessary. Puerto Rico, they noted, remains a low-tax environment.
“Liquidity in the market remains strong, and sellers of bonds issued in Puerto Rico are finding buyers. Headline risk created volatility in the prices of Puerto Rico securities, but the impact on other muni sectors was limited,” they said.
They conclude: “We believe Puerto Rico bonds will contribute to very strong total returns going forward and that, at current prices, there is far more upside than downside. Volatility risk and headline risk are likely to continue, but we anticipate outcomes that are favorable.”
Puerto Rico, the third-largest issuer of state and local debt in the United States, has endured a decade-long economic slump. Its manufacturing has suffered as Congress phased out an important tax credit, several large military bases were closed and previously high oil prices were acutely felt in the commonwealth, where about 70 percent of if its generating capacity relies on oil. Tax revenue has plummeted and residents are leaving.
Meantime, Puerto Rico has a flourishing underground economy that goes untaxed and the government’s payroll is generally recognized as bloated.
Acosta said the working group assigned to develop the plan will provide updates.
“With a credible plan in hand, we expect to sit down to negotiate a consensual adjustment of that part of the debt necessary to ensure that we have adequate time and resources to turn Puerto Rico’s economy around so that we can honor our financial commitments over the long term,” she said.