Dec 18 - Fitch Rating's current 'BBB+' rating on The Commonwealth of Puerto
Rico's general obligation bonds reflects the significant progress made by the
outgoing administration in implementing widespread reforms despite economic
underperformance. Maintenance of the rating will require policy decisions that
continue this progress and achieve budget balance and a slowing in the growth of
long-term liabilities, including passing significant pension reform.
The weak pace of economic growth makes reaching these goals more challenging.
The change in administration following the November 2012 election has not in and
of itself caused Fitch to reconsider Puerto Rico's general obligation and
related bond ratings; however, initiatives by the new administration will be
monitored to assess the direction of policy as it evolves and any implications
for the financial stability of the commonwealth.
Despite Progress, Fiscal Balance Challenging: Structural budget balance has not
yet been reached despite four years of aggressive cost cutting and other fiscal
restructuring measures. The outgoing administration made significant progress in
reducing the operating deficit from 47% of general fund revenues in fiscal 2009
to 3.8% in fiscal 2013, excluding the additional impact of debt restructuring
for fiscal relief. Maintenance of the current rating will be contingent upon
meeting current year budget estimates, which included some borrowing to balance,
and enacting a budget for fiscal 2014 that does not rely on borrowing to achieve
balance beyond some limited ongoing refunding.
Very High Liabilities & Poor Pension Funding: Puerto Rico's bonded debt levels
are exceptionally high and pension system assets are expected to be depleted by
the end of this decade absent significant reform. 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 commonwealth's ability
to take action that supports the solvency of the pension system while not
significantly increasing the demands that pensions place on the budget will be
critical to long-term rating stability.
Risk of Reliance on Market Access: The commonwealth has relied heavily on
borrowing under its various bonding programs in order to fund operations.
Although such borrowing has been reduced, continued reliance on capital markets
to refinance debt for current-year budget savings introduces risk to operations
and increases the already high debt burden. Fitch will be looking to the use of
sustainable solutions to balancing the fiscal 2014 budget rather than reliance
on capital market solutions.
Looking for Traction in Economic Growth: As it begins to emerge from the
prolonged recession, Puerto Rico faces a longer term question of how to grow and
diversify its economy, increase employment and workforce participation levels,
enhance wealth and income, and address contraction in its existing
pharmaceutical and electronic producing industries. The ultimate test of the
success of future policy will be whether or not Puerto Rico is able to find a
sustainable path to economic growth, growth that is necessary to support the
commonwealth's high debt levels and other long-term liabilities, as well as to
maintain a structurally balanced budget going forward.
Additional information is available at 'www.fitchratings.com'.