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Standard & Poor’s reacts to governor’s budget veto

Political differences between legislative and executive branches will have to be resolved if Commonwealth seeks to obtain a higher credit rating


August 11, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Standard & Poor’s (S&P) Ratings Services, one of the agencies evaluating the Commonwealth’s credit, reacted Monday to Gov. Aníbal Acevedo Vila’s budget veto and stated it will continue to closely monitor the economic and political situation in Puerto Rico. One of the most critical issues being evaluated by the credit-rating agency is the budget-approval process. The governor’s veto of the budget approved by the Legislature and the ensuing political battle haven’t been positive factors for the Commonwealth’s credit rating. S&P has been closely monitoring events in Puerto Rico since its recent downgrade of the Commonwealth’s general-obligation bonds to BBB with a negative outlook.

"If the Commonwealth’s purpose is to get back into the A-rating category, these political differences will have to be eliminated…There would have to be more harmony between the legislative and executive branches," stated S&P Director Kenneth Gear, adding the agency had anticipated the difficult situation that could arise during the budget-approval process. "At the BBB level, there is less expectation for that harmony and more expectation for financial difficulty, which includes political differences such as passing a budget and reoccurring structural imbalances," explained Gear.

Despite the fact the Commonwealth’s credit isn’t yet at risk of being downgraded once again since the present challenges are expected within its rating range, the political atmosphere on the island, according to Gear, will continue to be critical for future evaluations of credit quality.

"The fact the governor and the legislative branch are at odds leads to more risk in terms of potential default. Although Puerto Rico isn’t on the verge of default, it really reflects lower credit quality. We look at other Latin American and Caribbean countries and, in the past, one of the positive milestones within the Puerto Rico government was that this problem didn’t exist; there was more cooperation and consensus," stated Gear, adding that in recent years the distinguishing smoothness of Puerto Rico’s governmental structure has become increasingly political.

In terms of the steps the government is taking to cut $1 billion in spending, Gear describes the measures as prudent and necessary. Although measures such as cutting the workweek for government employees may be very difficult, from a conservative financial standpoint, these kinds of steps are essential to the Commonwealth’s financial health, according to Gear. "If you want good sound credit in the capital markets, you have to be able to demonstrate the ability to balance financial operations and maintain a sound level of financial reserve," explained the S&P director, who mentioned states such as California have had to take similar steps when faced with fiscal deficits.

Gear described the Commonwealth situation as a necessary effect of evolution. "This may be a reflection of growing pains or a necessary evolution in the way Puerto Rico provides government services, which typically is difficult for any institution, country, or government. It can determine the direction they are going to take for the next 10 to 20 years…It is the evolution of Commonwealth as it is today," Gear stated.

This Caribbean Business article appears courtesy of Casiano Communications.
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