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S&P: Impressed But Still Concerned

The new economic team made a good first impression, but the challenges they face may overshadow their potential in the eyes of the credit-ratings agency


March 10, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

On March 1, Standard & Poor’s (S&P) met for the first time with the new economic team at the helm of Puerto Rico’s finances. William Lockwood, president of the Government Development Bank (GDB), Ileana Fas Pacheco, director of the Office of Management & Budget (OMB), Secretary of the Treasury, Juan Carlos Méndez, and Secretary of the Department of Economic and Commercial Development, Jorge Silva, all seemed to make a favorable impression on the four analysts visiting the island at Lockwood’s invitation. "We were very impressed," said S&P analyst Kenneth Gear referring to the economic team members. Citing their excellent credentials, Gear observed that in the six years he has been covering Puerto Rico he has noticed a steady improvement in the caliber and management capacity of the individuals who have occupied these positions.

Gear praised the team for their willingness and desire to be transparent regarding budget challenges faced by the new administration. "They were very clear, they stated this is what it is, and this is what we have to do. They didn’t point fingers, but rather took responsibility for the problem, which is very valuable," explained Gear. Although the positive remarks with regards to the team were abundant, S&P’s concerns over the government’s budget situation were just as strong. "The structural deficit jumped from $550 million, which was taken out as a loan from the GDB, to $1.4 billion. There was some serious hemorrhaging there. Lets face it, revenues are down, expenditures are up; there’s no control on spending. They are facing a big challenge," Gear pointed out.

GDB states that the current budgetary insufficiencies total $1.37 billion, including $992 million in excess of expenditures over income, and $375 million in other nonrecurrent income or nonbudgeted items already shared publicly and with the Legislature. In the excess spending, $550 million was identified originally when the budget was prepared, and $442 million could become additional excess spending if corrective measures are not taken before June 2005.

S&P assigned a negative outlook for the general obligation bonds (GO). Although the outlook does not imply an obligatory rating downgrade, it warns of the imminent possibility of such a negative change. Gear explained that despite the presentation prepared by the economic team, S&P stands by its outlook. " We are still very comfortable with the outlook. Between one and three years there remains a possibility of a downgrade," said Gear.

When asked if the plans presented by the economic team seemed efficient and could potentially be enough to battle the current budgetary crisis, Gear seemed doubtful. "They were very sketchy plans they laid out for us. Some measures are still in the proposal stage pending legislative approval," explained Gear, refraining from commenting on details of the plans because of their unofficial condition. However, he did point out that a big portion of the proposals depended on the implementation of a consumption tax, which would at the earliest affect the 2006 budget. In terms of the present situation, he pointed out that the team may not have enough time to accomplish any significant changes. Despite the difficult situation, Gear did indicate that the agency was keeping an open mind. "We want to give the team an opportunity to put in place some changes. Although legislatively it will take more time than they have in this fiscal year."

Gear made clear the March 1 meeting was the first of many to come. He anticipates that the next meeting between the analysts and the economic team will take place sometime between April and May, once the fiscal 2006 budget is prepared. In the meantime, Gear concluded, "We are going to be watching this very closely."

S&P will surely not be alone in closely monitoring Puerto Rico’s structural deficit situation. Moody’s credit rating agency is scheduled to meet with the economic team on March 11 for the same purpose. On the same day of the S&P meeting, Moody’s published a report on the sizable gap of the Commonwealth’s operating budget. The report states, "The revenue shortfalls reportedly relate mainly to disappointing new initiatives, as opposed to shortfalls in core income and excise taxes…At this point, to Moody’s knowledge, specific measures have not been identified to close the sizable budget gap."

The report also stated they consider the size of the gap to be fluid at this point but that it requires significant actions on both the revenue and spending sides of the budget. On account of the gap Moody’s does not seem to be optimistic about the budget for fiscal year 2006, which they expect to be finalized by April. Making reference to the negative outlook the agency assigned to GOs, the report states that the option of borrowing more money from the GDB is not favorable for the Commonwealth’s overall financial condition.

During the meeting with S&P, Lockwood made clear that his first priority is to explore the implications that the proposed actions could have for the well being of the Commonwealth’s good credit. "I want to be very humble with this. I will not be satisfied with their positive impressions about the team. The important thing for us is to be able to pass the proposed measures. I am very optimistic," explained the GDB president.

As another of his goals Lockwood mentioned to CARIBBEAN BUSINESS he hopes to eventually collaborate with and contribute to the rating agencies’ reports before they are made public, adding that to win that kind of trust would be a proud accomplishment for the team. The GDB president also made clear his desire to establish more open communication with investors in both the mainland U.S. and Puerto Rico, attempting to make information access as sophisticated as possible. However, Lockwood explained that the presentation made to the agencies could still not be made public because it includes remedial measures that are still pending the governor’s approval and must be kept confidential for the time being.

Secretary of State Marisara Pont Marchese, the interim governor who was also present during the meeting, reaffirmed to the analysts the commitment of Gov. Aníbal Acevedo Vilá to achieving excellence in management and fiscal stabilization. Achieving both goals within the current structural deficit will surely be a test for the new administration, and will surely put to the test the potential and experience of all those involved.

This Caribbean Business article appears courtesy of Casiano Communications.
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