Standard & Poor’s downgraded Puerto Rico’s general obligation debt rating to BBB-minus from BBB Wednesday evening. The outlook remains negative.
S&P senior director David Hitchcock wrote that the downgrade was the result of a new estimate of the fiscal 2013 budget gap that is larger than originally budgeted.
The shortfall will make it difficult for Puerto Rico to achieve a structural balance in the next two years, Hitchcock wrote. “If, in that time frame, only limited progress is made to reduce what we consider large structural budget gaps, we could lower the rating further.”
When the fiscal 2013 budget was adopted in mid-2012 the commonwealth’s government anticipated an operating deficit of $332 million, or 3.7% of budgeted expenses of $9.08 billion. It also anticipated a structural budget gap of about 10% of expenditures.
“The new preliminary commonwealth estimate is for a much larger $2.157 billion structural operating deficit, absent corrective action, which would produce what we calculate as structural gap of about 22% against a new, higher estimate of expenses,” Hitchcock said.
The operating deficit is equal to the revenues minus expenditures for a given year. The structural budget gap is S&P’s determination of “on-going revenues” minus “on-going expenditures” in a given year.
The Government Development Bank for Puerto Rico is offering a $750 million line of credit to the island’s government for the current fiscal year. “The $2.157 billion structural deficit projection in fiscal 2013 would be for an actual deficit $775 million less than that, if the GDB credit line were fully drawn upon,” Hitchcock wrote.
Puerto Rico Gov. Alejandro García Padilla is considering budget actions to address the deficit, he wrote, but the size of the deficit made the agency take action on the rating.
S&P’s action comes after Moody’s Investors Service downgraded Puerto Rico’s GO debt to BBB-minus from BBB-plus in December. On Feb. 21 Fitch Ratings placed its BBB-plus rating on the GO debt on negative watch.
In response to Standard & Poor’s action, García Padilla said: “This new report by S&P is a wake-up call to all Puerto Ricans and all interest sectors, as it makes clear the seriousness of the financial situation facing the island today. It is also a clear example of the irresponsibility of those in the past who did not take necessary corrective action.
“The report does recognize that our administration is evaluating important budget measures and a major reform of the government retirement system,” he added. “But this must go beyond mere proposals. They expect action. The island deserves action. We must rescue our nation. We must join forces in that effort, all of us. We must act decisively and with great sensitivity.”
Hitchcock noted that S&P did not lower the rating on the Puerto Rican government’s appropriation debt, which is typically rates one notch below the GO rating. That’s because the current law prioritizes the repayment of debt and gives the government flexibility in budgetary matters to do so.
Meanwhile, Fitch on Thursday put the BBB-plus rating of the Puerto Rico Electric Power Authority’s revenue bonds on rating watch negative. Based on unaudited fiscal year 2012 figures, Fitch believes that the authority’s cash flow was inadequate to cover operating and debt service costs. Fitch is also concerned about the recession’s continuing impact.
Also on Thursday Standard & Poor’s downgraded the Government Development Bank for Puerto Rico to BBB-minus from BBB and cited the downgrade of the GO debt. S&P pushed the bank’s short-term rating to A-3 from A2.
