Puerto Rico’s top public officials held a two-hour conference call on Tuesday that was open to all investors. That may have been a first for the Commonwealth. Previous calls and conferences had been relatively restrictive in who was admitted. The yields on Puerto Rico’s debt have skyrocketed and the Commonwealth’s access into the public debt markets has been basically shut down. The open conference call was a good change of approach.
Bond investors want to hear the facts about Puerto Rico’s fiscal condition and how they will be repaid on their investments. The call made some progress toward that goal.
The economic and fiscal situation in Puerto Rico is still extremely dire. The economy is mired in a six-year malaise that would be worse if the Puerto Rico government had not issued debt to cover government deficits. As the island has moved away from issuing debt to plug holes in the budget, it has simultaneously reduced the amount of fiscal stimulus that has been injected into the economy. The economy shrank 5.4 percent year over year in August. It will likely shrink more as the Commonwealth reduces its deficit financing.
The government has aggressively raised taxes and fees on fuel and electric services. Like, Greece, the government has reduced its workforce, further contracting the economy. Puerto Rico saw increased revenues from corporate taxes in the first quarter of fiscal year 2014, but individual income tax collection was down. Multinational corporations will be allowed to offset those taxes with reduced U.S. federal taxes; a form of backdoor bailout from Washington.
Dick Larkin of H.J. Sims circulated a note after the call:
The best new information provided was positive:
1. Clarification that liquidity does not pose a problem through at least fy 2014, so that market access and cash flow problems are being held at bay until the current muni market hysteria calms down