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Puerto Rico’s Long-Term Debt Swells By $10 Billion Or 45% In Four Years

Refinancing accounts for major portion of increase in bond sales


October 14, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Since the end of fiscal year (FY) 2000, the long-term public debt has grown by more than $10 billion, from $21.6 billion to $31.8 billion, an increase of about 45% over the four-year period.

A portion of the growth resulted from converting to bonds $1.6 billion in nonpaying loans held by the Government Development Bank of Puerto Rico (GDB). Refinancing old bonds at record low interest rates accounted for the biggest increase over the four-year period. In calendar years 2002 and 2003, for instance, close to $5 billion in refunding bonds was issued, according to the bank.

The long-term public debt totaled $31.8 billion as of June 30, the close of the government’s fiscal year. This amount excludes bonds that aren’t supported by local taxes: approximately $1.2 billion in tobacco revenue bonds and nearly $1.1 billion in Infrastructure Financing Authority bonds, payable from the proceeds of the sale of Puerto Rico Telephone bonds owned by the government.

But, selling long-term bonds is as necessary to government entities as taking out a 30-year mortgage is to first-time homebuyers.

"That’s what the bank is here for," said Antonio Faria, president of the GDB, fiscal agent of and lender to the commonwealth government and its entities.

Without sales of long-term bonds, money wouldn’t be available to build roads, bridges, and public schools. "The GDB acts as a bridge financier," said Faria. For instance, the bank will advance the Highway & Transportation Authority $300 million, knowing the debt will be bonded out, freeing up money to lend for new projects.

The importance of government spending to Puerto Rico’s economy can’t be underestimated. "Public investment continues to be an economic stimulus, particularly during hard economic times," said Standard & Poor’s (S&P). In 2004, public investment in capital improvements is expected to hit a record level of $3.7 billion.

"What’s important is the capability to repay the debt," said Faria during a telephone interview with CARIBBEAN BUSINESS last week.

In its analysis, S&P noted the stabilizing financial and management influence of the GDB, with its improved liquidity assets of $1.8 billion.

Although the commonwealth’s long-term credit rating, a medium investment grade, remains intact, its economic outlook was lowered from "stable" to "negative," according to the leading rating agencies, Moody’s Investors Service and S&P. A negative outlook is a sign of financial trouble.

Such a danger signal is raised when long-term bonds are sold to pay off operating debts, a practice that has resulted in the credit downgrade of large U.S. issuers such as New Jersey and California. Deficit financing doesn’t purchase a new bridge or school or improve a road, but it closes a gap in the annual operating budget, increasing that debt substantially with long-term interest payments.

"We prefer not to lend to cover those deficits, but you have to remember the GDB is part of the government," said Faria. The loans made to cover the budget deficits of the past three fiscal years have a five-year repayment schedule, he added.

This Caribbean Business article appears courtesy of Casiano Communications.
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