Will Puerto Rico ever see economic growth?
Puerto Rico now faces a $495 million revenue shortfall for the year. Revenues have come in less than projected, and having pared government jobs under the former governor Luis Fortuño, Puerto Rico is now resorting to one-off financial maneuvers to fill the budget hole. Moody’s describes the moves in a May 15 report:
In our issuer comment of March 18, 2013, Puerto Rico Faces Large Mid-Year Budget Gap, we noted that full year revenues for fiscal 2013 were likely to be $910 million or 10.4 percent below initial estimates of $8.750 billion and 9.3 percent below fiscal 2012 revenues. Revised estimates showed the shortfall to be slightly larger at $965 million as of January 31, 2013. In response, the commonwealth has implemented a number of corrective measures, including modest expense reductions.
Puerto Rico’s revenues are likely to decline 9 percent from 2012, and it has no time to raise taxes to capture more. The commonwealth has resorted to refinancing debt and moving debt between entities. It brings to mind how shell games are played.
From the Moody’s report again:
The commonwealth also executed a number of deficit financing measures, as originally contemplated in the fiscal year 2013 budget. It executed a $333 million deficit financing via a bond anticipation note (BAN) with a private bank that it expects to take out with a future COFINA bond issue.
This is the mystery EMMA filing of April 30, 2013. The commonwealth borrowed money from a private bank and will replace it with an upcoming bond issue. It then intends to make $775 million of debt service payments with money from the PR Government Development Bank, (GDB) which will turn around and issue more debt:
[A]s of June 30, 2013 will have paid $775 million of debt service payments with a GDB line of credit that it expects to take out with a future G.O. bond issue.
See how one part of the government borrows and loans to another part?
A bonus $240 million in monies was freed up from swap deals where the underlying variable rate debt was rolled off:
The commonwealth further identified approximately $240 million in swap collateral reserve funds that could be released given the significant reduction in the commonwealth’s general obligation variable rate debt and swap portfolio.
And then a final lump of money from pulling future revenues into this budget period:
$280 million in advance payments by companies subject to the non-resident withholding tax.
Finally, a few little odds and ends as the cupboard is entirely emptied:
…Including an estimated expense overrun of $50 million identified by the Office of Management and Budget (OMB) as of March 31, 2013, that leaves an estimated remaining budget gap of $495 million, which the commonwealth hopes to close before the end of fiscal 2013 with a variety of measures, including a tax amnesty program and the potential sale of certain performing income tax payment plans.
Credit is due for a government that is out scraping up revenue to meet the budget shortfall. But of greater importance is the “fragility” of the Government Development Bank (which borrows from the bond market and loans these monies to different parts of the Puerto Rico government) and the underlying economic condition of the commonwealth.
The Government Development Bank is officially the “fiscal agent” for the commonwealth, but it actually appears to operate as an off-balance sheet structured investment vehicle (SIV). The GDP’s independent status has allowed it access the municipal market, borrow funds and then turn around and loan those funds to the government, authorities of the commonwealth such as the Highway Authority and local governments. Bloomberg’s Michelle Kaske has an informative interview with Javier Ferrer, President of the GDB:
Puerto Rico’s government and its agencies owe the [GDB] $6.9 billion as of March 31, with $3.2 billion of that payable from commonwealth revenue or legislative appropriation, Ferrer said.
The highway authority, which oversees roads and bridges, owed almost $2.2 billion as of March 31, the most it has ever borrowed, and amounting to 24 percent of the development bank’s loan portfolio, Ferrer said. The road agency also has $5 billion of munis, Ferrer said.
Ferrer’s statement of GDB loans doesn’t include $2.1 billion of GDB loans to local governments as of June 30, 2012 (page 35). This would bring the level of GDB assets that are intergovernmental to $9 billion, or 64 percent of the GDBs assets. Ferrer sounded rather worried in the Bloomberg interview about the highway loans:
“We need to resolve this situation by June 30,” the last day of the fiscal year, for accounting purposes, Ferrer said. “We want to make sure we preserve our equity, our capital base.”
Reuters reported that repayment of PR highway bonds was in doubt, which was immediately rebutted by Ferrer. But it is interesting to consider Ferrer wanting resolution of the highway issue by June 30 next to the bond payment due date of July 1. Just a coincidence, perhaps?
But underneath the storm of bond payments is the question of how Puerto Rico will grow again. News Is My Business, a Puerto Rico business news site, reported on a talk by Puerto Rico economist Heidie Calero, who discussed the need for public and private investment for the economy to grow:
Over the past decade, Puerto Rico’s real growth rate has averaged 0.4 percent, a scenario exacerbated by a protracted recession that began in 2006. In that time, there has been a significant drop in private sector investments and an increased reliance on federal transfers and grants — which totaled $22 billion in 2010, representing 34.2 percent of the Gross National Product.
“Public sector investment dropped by 33 percent in 2011, while private sector investment dropped by 22 percent. The heart of economic growth is in investment. Without investment, there is no productive capacity,” Calero said.
Calero then addressed the condition of the Puerto Rican banking sector:
Another key point in economic wellness has to do with how banks are doing. Between 2005 and 2012, Puerto Rico banks saw a 33 percent drop in total assets and a 16 percent reduction in loan production to $48.5 billion last year from $57.8 billion prior to the recession.
“If the financing engine doesn’t start aggressively, we won’t pull out of this recession,” she said.
The GDB is currently rated Baa3. It could be downgraded to junk and see its borrowing costs soar. The government intends to raise taxes on corporations to help with the massive public deficit, and banks are lending at a lower level, both of which can inhabit private sector growth. What will provide growth for Puerto Rico and allow the commonwealth’s $58 billion of tax-supported debt to be serviced?