Puerto Rico's problems have yet to cause "systemic" problems for municipal borrowers, the Federal Reserve Bank of New York said in a
"Some market participants have speculated that ongoing economic or market stress in Puerto Rico could represent a systemic risk to the U.S. municipal market," the report notes. "Thus far, based on market-based measures of stress such as yield spreads, it does not appear that investor concerns regarding Puerto Rico have spread to other municipal borrowers."
The report calls the commonwealth's high debt level "a dominant feature of the economy and the central focus of its fiscal and economic policy," and warns that if its government doesn't "manage its own economic adjustment," outmigration will "force an even more painful adjustment."
While in the 2000s, rising debt and a "weak economy did not appear to have a major impact on the availability and pricing of public financing for the Commonwealth," but that has changed and "During the course of 2013 and in early 2014 it became increasingly evident that the Puerto Rican government would have to implement fiscal and economic reforms in order to maintain access to debt capital markets on a sustainable basis."
The Fed suggests Puerto Rico take steps to strengthen its economy by taking advantage of "a bilingual and well-educated adult population, an open economy occupying a central position in the Caribbean, wide experience as host to multinational corporations, and close ties to the U.S. mainland economy."
Further, the Fed says Puerto Rico needs "comprehensive" tax reform, improved financial reporting, strengthened "performance and harden[ed] budget constraints for public-sector corporations", a binding balanced budget rule, and a multi-year budgeting process.