MuniLand

Puerto Rico mired in troubling economic news

By Cate Long
September 12, 2013

Some Puerto Rico bonds traded with yields north of 10% yesterday, again on no new news. That’s a federally tax free 10%.

— Rochester Funds (@RochesterFunds) September 10, 2013

Most financial reporting about Puerto Rico in the U.S. is centered around its skyrocketing bond yields and the announcement from the government’s fiscal agent, the Government Development Bank, that it will scale back their borrowing in the municipal bond market this year. But there is not much reporting about the underlying economic conditions of Puerto Rico. These conditions have a lot of bearing on the ability of Puerto Rico to service the massive debt load it carries. Reuters Miami bureau recently filed a piece about emigration from the island and its effect on the weakening economy:

For generations, Puerto Ricans have been migrating to the mainland United States in search of a better life. But the Caribbean island’s long recession has turned a steady flow into a torrent, stripping the territory of its young and educated population and pushing its economy into a deeper rut.

How many are leaving the island?

In 2011 alone, the island lost a net 54,000 people, or nearly 1.5 percent of its population, as the economy weathered a sixth year of a recession that only ended in 2012.

“This is a worrisome picture for Puerto Rico,” said Deepak Lamba-Nieves, research director at San Juan’s Center for the New Economy think tank, who added that Puerto Rico’s economy has shrunk by nearly 14 percent since 2006, and its labor force participation is among the lowest in the world.

The population exodus combined with economic contraction and the 2008 financial crisis has caused ripples throughout the economy. Several big PR banks failed and left the banking system wounded. Bankruptcy filings year to date through June have increased 4 percent year over year. Caribbean Business reported that “there are 18,870 residential properties in the foreclosure process, with a total loan value of $1.6 billion, an amount described as ‘significant.’” Overall there is low demand for local credit:

For Arturo CarriĂłn, executive director of the Puerto Rico Bankers Association, the local banks’ lending activity has to be evaluated in relation to the state of the local economy. ”There’s no other way to analyze this, because if you compare total [lending activity] against previous years, you’ll see a decline. I think we need to look at this within the context that banks don’t create demand, they finance it.

There is also a connection between the Puerto Rico and local governments and the banking system. For example the island’s largest bank, Popular, with bank capital of approximately $4 billion has loans to the government of about $749 million (page 33).

Popular also owned about $218 million in debt issued or guaranteed by the Puerto Rico Government, its municipalities and public corporations as part of their investment securities portfolio. So Popular alone had about $970 million of exposure to PR governments and public corporations.

The Puerto Rican economy shrunk about 5 percent in July according to the GDB and there are few signs in the macro data that would suggest that this will reverse. 27 percent of the GDP comes from federal transfer payments. Recent tax rate increases, although increasing government revenues, could be a body blow to the weak economy and further reduce consumer spending (88 percent of economy). So as bondholders cheer the newly appointed anti-fraud tax collectors and increased tax collection data it will likely have a slowing  effect on future economic growth.

The Puerto Rico government desperately needs to publish their 2012 financial data (CAFR). Investors are flying blind now. It is a positive that they will be hosting an investor conference open to everyone in the next few weeks. They should live stream this event for all market participants. Muniland needs to be flooded with data from the government. Otherwise the broader economic data will become more widely disseminated and examined. And the broader data is not promising.

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