S&P Global Ratings' decision to update to stable from negative its outlook on the Government of Guam’s general obligation debt was driven by a combination of factors including an influx of federal funds and general fund revenue improvements.
On Friday, S&P also affirmed the BB-minus long-term rating on those bonds and revised its outlook to stable from negative and affirmed the BB long-term rating on Guam's business privilege tax (BPT) and section 30 revenue bonds.
The outlook on GovGuam's appropriation-backed certificates of participation was revised to stable, and S&P affirmed its B-plus rating on the COPs.
"The stable outlook reflects our view of recent stabilization in GovGuam's short-term finances despite uncertainties in economic and revenue trends. It also reflects the territory's stronger liquidity position supported by significant influx of federal funds as well as recent improvement in key general fund revenues," said S&P Global Ratings credit analyst, Ladunni Okolo, in a statement.
The territory's ratings remain at speculative grade.
S&P acknowledged that GovGuam “continues to face headwinds as a result of the COVID-19 pandemic and anemic recovery of its tourism sector.” However, the ratings agency said that the territory had shown relative stability in its finances and improvements in the general fund’s total cash balance.
“We believe GovGuam's 2022 projections support a continued trend of fiscal stability, although uncertainty remains,” S&P stated in a release.
Additionally, Guam is expected to receive around $3 billion in federal stimulus, which according to S&P, has helped reduce the pressure on liquidity. Earned income and childcare tax credit payments will also help fund mandates that S&P projects will save GovGuam’s general fund about $80 million a year. S&P additionally noted that “continued construction and military activity also offer some support to the economy.”
“Although its finances have shown relative stability in the past year, we believe the current evolving pandemic and the policy measures to help control its spread, will continue to present unique challenges to Guam, notably its tourism sector,” Okolo said.
S&P also views GovGuam's environmental, social, and governance (ESG) risks as elevated. According to its release, “governance risk stems from system support, the policy and fiscal relationship with the federal government,” which S&P says, differs for territories from those of all U.S. states.
As a result, S&P applied a negative adjustment of three notches to the indicative rating and noted that “GovGuam's significantly negative but improving unassigned fund balance, considerably high debt levels, and limited capacity to grow reserves continue to weigh on the current credit rating level.”
In response to the ratings, Gov. Lou Leon Guerrero pointed to the work of GovGuam’s fiscal team.
“While it is reassuring that our ratings went from negative to stable across all areas, we had hoped for a ratings upgrade and pressed hard to achieve as much,” Leon Guerrero said in a statement.
“Our fiscal team gave great effort to convince S&P of our stability and resilience, and we remain confident that our work is deserving of a ratings upgrade,” Leon Guerrero added. “This will not deter us from continuing to focus on fiscal discipline and responsibility as we support the revitalization of our economy.”
