* Puerto Rico's yield spread at 300 basis points
* Public pension system has $37.3 bln of unfunded
* Tepid economic recovery
Feb 4 Puerto Rico's new government is rolling
out tax increases and hiking water and electricity rates in a
campaign to fix its finances and win back favor in America's
$3.7 trillion municipal bond market.
A big, usually popular issuer of muni debt because its
interest payments to U.S. investors are free from local, state
and federal taxes, the Caribbean island is weathering a steep
increase in yields driven in part by a Moody's Investors Service
downgrade of its debt to near junk bond-status.
Investors, including some Wall Street portfolio managers who
view Puerto Rican debt as too risky to own, demand rates that
include a 10-year Puerto Rico yield that is 300 basis points
more than Municipal Market Data's benchmark.
That compares to a yearly average spread of 242 basis points
over a market benchmark scale and is much wider than Illinois',
which last week yanked a $500 million muni bond sale amid
worries about the country's most underfunded public pensions
Puerto Rico's public pensions system, with $37.3 billion of
unfunded liabilities, also feeds investor fears about the
government's ability to service its debt. So, too, do a
chronically high jobless rate that was 14 percent in December, a
declining population, and chronic budget deficits.
"Shoring up Puerto Rico's credit is essential as our access
to the bond market is limited," Javier Ferrer, new president of
the U.S. commonwealth's Government Development Bank said Friday.
"We lack investor confidence. We need to take big steps to
address the deficit to be able to go to the bond market."
TAX, TARIFFS HIKE AMID SIGNS OF TEPID RECOVERY
The new administration of Gov. Alejandro Garcia Padilla, who
in November ousted a pro-business reformer, last week spelled
out a plan to increase a controversial tax on multinational
companies operating in Puerto Rico and to raise utility rates.
Top officials said legislation would be filed this week to
increase the commonwealth's Law 154 tax, which is levied on
sales of multinationals in Puerto Rico to offshore affiliates.
In place since 2011, the tax began at a 4 percent rate but
was cut to 2.75 percent this year and had been slated to be
phased out through further gradual reductions. The tax raised
$1.88 billion for the commonwealth in 2012.
The administration announced legislation to revive the 4
percent rate and extend that rate through 2017. Treasury
Secretary Melba Acosta said the change would raise an additional
$245 million to fund central government operations, with
revenues beyond that going to government pensions and related
Private enterprise blasted the development, with the head of
the Puerto Rico Manufacturers Association saying the increased
corporate tax will discourage new investment and jobs creation.
In addition, Acosta said, legislation would be drawn up to
boost a sales and use tax, known as IVU by its Spanish acronym,
aimed at increasing collections by $380 million. Current
Treasury collections are running about $250 million below
Water bills will also go up by an average $20 monthly
starting in July, Puerto Rico Aqueduct and Sewer Authority
(PRASA) President Alberto Lázaro said.
The hike comes after the administration's finance team told
the public corporation and bond issuer there would be no more
subsidies, which had kept water hikes at bay over the last four
years. Prasa has a $250 million deficit, driven by heavy debt
burden and federal regulatory requirements.
Meanwhile, the Puerto Rico Electric Power Authority, through
an adjustment of its fuel adjustment charge, will hike monthly
rates by an average $30 over the next several months.
The moves came as signs Puerto Rico's tepid recovery from a
deep, six-year recession may be sputtering.
An Economic Activity Index reported by the GDB, which acts
as Puerto Rico's fiscal agent, showed the island's economy as
contracting in November and December after expanding slightly
for most of 2012.
Rating agencies have signaled that action on the
government's crippled pension system was essential to skirting a
downgrade of commonwealth credit, as was the introduction of a
structurally balanced budget in 2014.
Under the former administration of Gov. Luis Fortuno, the
government's budget deficit was cut 90 percent to $333 million
from $3.4 billion over four years.
A leading lawmaker said last week that a pension reform plan
aimed at fortifying the finances of the government pension
systems would be ready in March.