Following Moody’s Investors Service double notch downgrade of Puerto Rican debt in December, Fitch Ratings placed a variety of Puerto Rico government obligations on rating watch negative Thursday afternoon.
Fitch’s action affects the BBB-plus rating of the commonwealth’s general obligation bonds, Puerto Rico Building Authority government facilities revenue bonds guaranteed by the territory’s government, Puerto Rico Aqueduct and Sewer Authority commonwealth guaranteed revenue bonds, and Employees Retirement System of the Commonwealth of Puerto Rico pension funding bonds.
Fitch’s action reflects “Fitch’s expectation of a significant increase in the commonwealth’s estimated operating imbalance for the current and coming fiscal years, based on reported revenue results through the first half of the current fiscal year and public statements by the new administration.”
Puerto Rico’s debt levels are very high and pension funding is exceptionally low, Fitch senior director Karen Krop wrote.
The Great Recession hit Puerto Rico harder than it did the mainland U.S., Krop wrote. “After signs of stabilization in 2012, recent performance has shown some weakening.”
With some weakening in economic and revenue expectations, new Governor Alejandro García Padilla is now facing an expanded budget challenge, Krop wrote. The current fiscal year deficit appears to be well above the $1.1 billion originally forecast.
A government transition report released in mid-February indicated that the deficit was expected to be between $2.2 billion and $2.9 billion this year, according to MMA Weekly Outlook.
The test of future policy will be its ability to bring economic growth to Puerto Rico, Krop wrote.
“Fitch expects to resolve the rating watch early next month following meetings with representatives of the commonwealth,” Krop wrote.
Moody’s rates the island’s GO debt at Baa3 with a negative outlook. Standard & Poor’s rates the GO debt BBB.