SAN JUAN Oct 1 A protracted shutdown of the
U.S. government would hurt many states but would have an
outsized impact on the debt-ridden territory of Puerto Rico,
where federal funding provides nearly 40 percent of all
government revenue, economists said on Tuesday.
The threat to the Caribbean Island's economy, already
sliding into recession, stems from the first shutdown of the
U.S. government in 17 years over a political standoff between
Democratic President Barack Obama and congressional Republicans.
About half of the 10,000 federal government workers in
Puerto Rico will be affected by the shutdown, which began on
Tuesday, said Alexander Alvelo, president of the local chapter
of the American Federation of Government Employees (AFGE).
Even the temporary loss of as many as 5,000 jobs could be
enough to raise the unemployment rate on an island with fewer
than 900,000 jobs. The unemployment rate is already the highest
of any U.S. state or territory at 13.9 percent. And the economy,
which last year emerged briefly from recession after six years,
contracted by 5.4 percent in August from its level a year
With a projected deficit of $820 million for this fiscal
year, Puerto Rico is a major issuer of bonds that are exempt
from federal, state and local taxes. Puerto Rico's debt amounts
to nearly 2 percent of the $3.7 trillion municipal bond market.
Heightening worries about the territory's shrinking economy,
its jobless rate and per capita debt far higher than that of any
U.S. state prompted a bond sell-off with some yields spiking as
much as 10 percent.
A 2039 Puerto Rico general obligation carrying a 6 percent
coupon was traded on Tuesday at 71.5 cents on the dollar,
yielding 8.81 percent, little changed from 8.98 percent on
"Around 27 percent of Puerto Rico's personal disposable
income depends on federal government payments," said Gustavo
Velez, an economist at Inteligencia Economica. "I am concerned
that in this environment, Puerto Rico's economy looks very
vulnerable to any change of these federally funded programs."
He added, however, that for the time being at least most of
these programs are not affected by the shutdown.
Puerto Rico relies on federal funding for 39.6 percent of
the money it spends, according to a report by Bank of America
Merrill Lynch. That's more than any state and the U.S. average
of 26.2 percent.
"I am worried about my finances. As a single mom, head of
household with three kids, I don't know how long I will be able
to sustain this," said Brenda Reyes, an employee of the
Environmental Protection Agency and a member of the AFGE union.
Reyes and other federal employees in Puerto Rico have
already been coping with mandatory furloughs, or unpaid days
off, stemming from automatic spending cuts to the federal
budget, known in Washington as "sequestration."
Under the across-the-board cuts, Puerto Rico has lost $129
million over a six-month period, and is slated to lose $260
million during the next federal fiscal year, according to the
Office of Management and Budget. The cuts have affected many
branches of government such as the Health, Education, Housing
and Labor Departments.
Tuesday's government shutdown could impact important federal
spending programs in Puerto Rico like the Temporary Assistance
to Needy Families and Special Nutritional Supplemental
Assistance for Women, Infants and Children.
Authorities are, however, studying options to keep providing
these services using surpluses from previous years.
The federal shutdown will mainly affect non-essential
government services that depend on discretionary spending
Less than half the $6.6 billion Puerto Rico receives through
several federal spending programs are considered discretionary,
said Ingrid Vila Biaggi, chief of staff to the territory's