Puerto Rico recently had it's debt downgraded by the S&P Tuesday from BB+ to BBB-. This decision was made because the country is having a difficult time raising funds in the capital markets. Moody's and Fitch are expected to follow shortly. Puerto Rico has a municipal market that sits around $3.7 trillion and investors have been anticipating this downgrade for months. The Islands Government plans to sell bonds to help fix financial deficits they are having. Municipal bonds from Puerto Rico are popular in the mainland US because they are tax free, which gives investors an incentive to purchase them.
The Islands Governor says that "Decades of financial irresponsibility can't be fixed in twelve months," which seems pretty accurate. He will release a new budget that has no deficit spending that relies on borrowing, something that has not been done in Puerto Rico for over 10 years. He hopes this will revive the nations economy. The economy of Puerto Rico has contracted in 6 out of the last 7 years, so their economic situation is certainly not helping their financial situation.
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ReplyDeleteAs mentioned in one of your articles,the Labor Participation rate is 40% only which is under participation by the economy and over borrowing by the country. Also one third of Puerto Rican labor force works for the government , thus the borrowed money is stuck in salaries and it makes it harder for the government to repay its debt.
ReplyDeleteAlso, as Puerto Rico is an unincorporated territory of USA, Puerto Rico is restricted in it's trading activities especially the shipping industry. Also as it does not have many natural resources, it is highly dependent on imports. Thus manufacturing and service industry are the only main drivers of the economy.
Puerto Rico has been suffering recession for the past 6 years, and one of the reasons for this recession is the expiration of section 936( US Internal Revenue Record) which allowed tax exemption to US corporations settled in Puerto Rico.
Thus, federal regulations, it's inability to perform independently, incapable government has resulted into such huge deficits.
I agree that Puerto Rico’s financial situation cannot be fixed in the next twelve months and their recent economic history of contraction is not helping their financial troubles. Robert Amodeo’s has a good point that “It’s all about them finding liquidity…will relieve some pressures in the immediate future”. In order for Puerto Rico to alleviate their economic situation they must relieve their financial pressures. It will be important for Puerto Rico’s governor to follow through on his statement “I can assure you that Puerto Rico will not default”. The second article states Vallamil’s comments about the subject, which demonstrate why the Island cannot default on its debt: “The deeper Puerto Rico sinks into debt and stagnation, the more difficult it’s going to be to climb out…The longer the contraction, the more intractable the situation becomes”. Another factor of Puerto Rico’s debt problem is that much of the borrowed money is tied up in salaries due to one third of their labor force being employed by the government, which means little of the borrowed money has been going into economic development.
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