Posted March 7, 2011 at PRFAA.com
Standard & Poor’s gives Island’s credit its first upgrade in 28 years; Business Monitor International improves its economic forecast for Puerto Rico
In what constitutes yet another endorsement of the Government of Puerto Rico’s management of its fiscal and economic agenda during the last two years, credit rating agency Standard & Poor’s has upgraded its rating for Puerto Rico’s general obligation debt improving it from BBB- to BBB, Governor Luis Fortuño and his economic and fiscal team announced today.
This is the first upgrade S&P has given Puerto Rico’s credit in 28 years.
“In our opinion, Puerto Rico continues to face significant fiscal and economic challenges. However, in the two years since his inauguration, the administration of Gov. Fortuño has made fiscal stability a priority…The fiscal measures adopted by the Fortuño administration, represent, in our opinion, a factor that lends near-term stability to the credit of the commonwealth, and that could yield the projected results by fiscal 2013 if the economy stabilizes and expenditure discipline is maintained,” states S&P in its report issued today.
“Good news and good marks. That’s what we continue to receive. First it was Moody’s, then S&P who changed its perspective to “positive” last November, then Fitch, and now, again, S&P, but this time it gives us the upgrade. These are independent firms of expert financial analysts. They have nothing to do with each other and do not respond to the Government of Puerto Rico…and the three have said essentially the same thing: Puerto Rico has accomplished great progress straightening its finances and has a concrete and reliable plan to complete the work ahead, and it deserves the recognition for the improvement we’ve achieved in the way we’re managing our finances and the economy. A better credit rating allows us to save money—$150 million over the life of the bonds—that we can then put toward other priorities such as health, education, and fighting crime,” Governor Fortuño said.
Between 2001 and 2007, due to mismanagement and the continued erosion of the government’s fiscal situation during those years, S&P took 6 negative actions against Puerto Rico’s credit: from A which Puerto Rico enjoyed in 2000 to BBB- in 2007, the lowest level before being rated as “junk” or non-investment grade.
However, last November, S&P changed to “positive” its outlook on the island’s credit in the wake of 22 months of efforts on the part of the Fortuño Administration to stabilize and restructure its fiscal situation threatened by an inherited budget deficit of $3.3 billion—or 44 percent of the state’s revenues—that pushed Puerto Rico’s credit to the brink of bankruptcy. As a result of the Administration’s fiscal stabilization and restructuring plan, that deficit has been reduced to only 11 percent of revenues and will be completely wiped out by 2013.
In its report, S&P states that the three main factors that support its rating of Puerto Rico’s credit are (1) the island economy’s strong ties to the U.S. economy; (2) the support from the GDB “which in our view provides a stabilizing financial and management influence;” and (3) “[t]he current administration’s commitment to restore fiscal balance and economic growth and the progress made to date, which has required the passage and implementation of what we view as difficult and sometimes politically unpopular measures.”
In its report, S&P also commended the current Administration’s fiscal team stating that “[i]n our opinion, the commonwealth’s budget management framework has improved over the past two years,” resulting in the raising of the score given for performance under its “fiscal management” criterion.
In the report, S&P establishes that the outlook on Puerto Rico’s credit is stable and enumerates the factors that could result in another credit upgrade in the near future.
“The stable outlook is based on our view of the commonwealth’s recent implementation of significant expenditure controls and revenue enhancement measures that we believe could help restore structural budget balance within the next two years. Standard & Poor’s could raise the rating if over the upcoming two years in conjunction with an improvement in the commonwealth’s economic performance, budget controls remain in place and we believe there is continued progress toward achieving balance between ongoing revenues and expenditures as well as in addressing its unfunded retirement benefit obligations,” states S&P in its report.
In April 2010, rating agency Moody’s acknowledged the progress of the Administration’s fiscal stabilization plan when it upgraded Puerto Rico’s credit rating from Baa3—the level right before junk—to A3. The rating agency upped Puerto Rico 3 notches in recognition of the progress being made in managing the island fiscal situation.
Last January, Fitch Ratings—which previously did not rate Puerto Rico’s GOs—gave them a BBB+ rating, very close to Moody’s.
Improved economic forecast
Fortuño also welcomed the most recent report on Puerto Rico by Business Monitor International (“BMI”), an independent economic forecast and analysis organization that evaluates parameters of competitiveness and performance of some 175 economies around the world.
In its report issued February 22, BMI reviewed its forecast for average annual economic growth for Puerto Rico for the next 5 years from 0.9% to 1.7%.
“We are turning cautiously optimistic about the future for the island’s economy, which has been mired in recession for over four years. Drastic measures designed to improve the territory’s business environment could attract considerable amounts of FDI (foreign direct investment), providing a much-needed boost to economic growth over the long term, although the territory still faces considerable challenges,” states BMI in its report.
“The administration’s ambitious plans combined with more positive economic data in recent months have encouraged us to revise up our real GNP growth forecasts modestly, and we are now penciling in average real GNP growth of 1.7% over the next five years, from 0.9% previously,” states the BMI report.