Puerto Rico Gov. Alejandro García Padilla's proposed budget is a credit positive but that the commonwealth government still has potential challenges, Moody's Investor's Service said May 19.
After years of budget deficits, the budget would take a major step towards balance, wrote Moody's vice president Ted Hampton. Though it relies on $280 million from this winter's $3.5 billion bond sale to cover debt service (2.8% of spending), it does not require any borrowing during fiscal 2015 to cover deficits, he noted.
Puerto Rico's budget deficit has generally declined from fiscal year 2009 to fiscal 2014.
Whereas it was $2.864 billion in fiscal 2009, the budget projects a roughly $280 million deficit in fiscal year 2015, if adopted as currently proposed.
"Even if the governor's proposals to avoid increased deficit financings are implemented, however, the commonwealth will remain very highly leveraged, with debt equal to roughly 350% of revenues," Hampton wrote.
The government budget includes measures to cut $1.36 billion in spending. Many of these reduce employee compensation by cutting pay and benefits or through employee attrition. The proposals demonstrate the government's commitment but could meet political resistance, the analyst wrote.
The budget also proposes measures to add $652 million in new revenue. These measures are likely to be politically unpopular. A possible renewed economic contraction would also threaten Puerto Rico's revenue expectations. Revenue forecasts may not be met, as was the case with April revenues, Hampton wrote.
The government's steps to make its public corporations more financially independent are credit positives, Hampton wrote. Historically the largest authorities required government support, often in the form of Government Development Bank of Puerto Rico loans.
Finally, Hampton said despite March's $3.5 billion bond sale, the commonwealth still has liquidity and market access risks. The commonwealth expects to sell $500 million in municipal sales tax backed bonds in fiscal year 2015. The failure of this sale could create liquidity or budgetary strains, he said.
Hampton also noted that Puerto Rico-based Doral Financial Corporation is seeking $230 million from the Puerto Rico Treasury Department.
On May 27 a bank liquidity facility on $200 million in Puerto Rico Highway and Transportation Authority variable rate demand obligations bonds will expire. The GDB is discussing with the letter of credit provider, Bank of Nova Scotia, to come up with a way to avoid the acceleration of the debt.
Moody's rates Puerto Rico GO bonds Ba2.
