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Public Debt As A Strategy To Enhance Puerto Ricos Competitiveness
Islands public debt is manageable but still high relative to personal income
by Jeffry Valentin-Mari
May 25, 2000
"Issuing public debt is the principal function of the Government Development Bank, because its a fundamental investment tool to advance the progress and economic development of Puerto Rico," Lourdes Rovira, president of the Government Development Bank (GDB) for Puerto Rico, said last week during a speech to the Puerto Rico Financial Analysts Association.
"The objective of economic development through infrastructure investment is definitively the main justification for issuing government debt. At the GDB we regularly assess the borrowing margins not only of the central government but also of the different public corporations and municipalities," Rovira added.
The principal activities within the process of debt issue can be grouped in three categories: (1) the construction of new permanent works; (2) reconstruction and improvements; (3) acquisition of new equipment and technologies.
"All these factors help to enhance Puerto Ricos competitiveness in the new global market that we are facing nowadays," Rovira said.
The GDB has two main functions, Rovira indicated, first as a fiscal agent where the GDB evaluates and approves short and long terms loans and issues debt and its guarantees. Secondly, the GDB is also viewed as a financial consultant for the central government, public corporations, and municipalities.
Puerto Ricos constitution limits the central government debt service of General Obligations (including payments on guaranteed obligations) to a maximum of 15% of the average revenue of the prior two fiscal years. According to GDB figures, the estimated debt margin for FY 2000 stands at 9.7%, the lowest level in the past 30 years.
Public corporations debt is controlled by the limitations imposed by each corporations trust agreements and is subject to the flow of revenue that the public corporation generates. However, there are some corporations that receive tax revenues. Municipalities are mostly dependent on property tax income and debt issue is limited by state legislation.
Puerto Ricos gross public debt reached a total of $22.7 billion in FY 1999. This represents an increase of 1.6%, when compared to $22.3 billion registered during FY 1998. The distribution of Puerto Ricos total outstanding public debt was 22% for the central government, 6% for municipalities, and 72% for public corporations.
From FY 1998 to FY 1999, total municipalities obligations surged by 23.8%, the central government by 5.8%, and public corporations edged down by 1.0%. (See Table).
As of December 31, 1999, the five municipalities with the highest public debt (in millions of dollars) are San Juan with $333.6; Carolina, $136.7; Guaynabo, $103.3; Bayamon, $94.5, and Ponce, $86.6.
Two of the most prestigious bond rating agencies, Moodys and Standard & Poors, have indicated that the debt load remains manageable in terms of annual servicing burden relative to government revenue, but is very high relative to personal income.
In fact, Moodys reaffirmed last March its Baa1 rating, but improved the Commonwealth government credit outlook from stable to positive. Meanwhile, Standard & Poors also reaffirmed its single A rating. (See Table).
Normally, bonds with ratings higher than A are classified as high quality credit, while bonds with a rating lower than B are classified as high-risk credit.
According to Rovira, the improved ratings are the result of initiatives implemented by the administration, including the reduction of government employees through privatization, the closing of Health Facilities and Services Administration, the reduction of the islands rate of tax evasion, and financial improvements in the government employees retirement fund.
In addition, she said Moodys report looked favorably on the economys successful adaptation to the phase-out of Section 936 tax benefits available to U.S. corporations operating in Puerto Rico. Other contributing factors included the significant benefits expected to result from the sale of the Puerto Rico Telephone company, which enabled creation of a $1.2 billion "permanent fund" to support water and sewer capital needs, and should also boost private-sector investments in the islands communication infrastructure, and the island's continuing economic growth and job diversification.
From FY 2000 to the first half of FY 2001, the GDB expected to issue $4.8 billion in bonds. This will include $500 million for the Highway and Transportation Authority, $300 million for the Puerto Rico Electric Power Authority, $1 billion for the Infrastructure Financing Authority, $200 million for the University of Puerto Rico, $377 million for the super aqueduct, and $400 million for the Childrens Trust.
The GDB is financing a variety of projects such as the Puerto Rico Coliseum, the Museum of Art, the Urban Train, new roads (PR-10, PR-53), the diversification of energy production with the construction of a new cogeneration plant in Penuelas (Ecoelectrica), and a coal-fueled power station built in Arecibo, and improvements in several university facilities.
Table 1. Credit Rating
Note: NC- no classification by Moodys. The GDB is rated A by Thomson Bankwatch. Moodys highest and lowest bond ratings are Aaa and C, respectively. Standard and Poors highest and lowest bond grade are AAA and D, respectively.
Source: Government Development Bank
Table 2. Puerto Rico Gross Public Debt: Fiscal Years (In billions of dollars)