SAN JUAN — Nearly one year after Puerto Rico implemented its fiscal reconstruction plan to reduce operating costs, generate more tax revenue, and curtail borrowing, investors are both optimistic and cautious.
Fund managers Thursday at the 2010 Puerto Rico Credit Conference weighed in on the island’s fiscal progression since Gov. Luis Fortuño took office in January 2009.
The new administration is currently reducing its workforce by more than 14,000 to decrease payroll costs, restructuring agencies to generate savings, and calculating more conservative revenue projections. Additional changes include a potential tax-reform initiative to reduce taxes for all Puerto Ricans as well as developing public-private-partnerships to foster economic growth and job creation, among other mid- and long-term goals.
Officials at the Government Development Bank for Puerto Rico Thursday said the administration has realized 60% of its needed $2 billion of savings to help bring spending in line with revenue collections. For Joe Rosenblum, senior vice president and senior municipal credit analyst at Alliance Bernstein, that 60% reflects his take on the commonwealth’s fiscal state.
“I would say I’m about 60% satisfied on what Puerto Rico has done,” Rosenblum said during an investor panel discussion. “Certainly, compared to a year ago, there has been progress, but the challenges from our perspective are still fairly significant on the credit side, and then there are as well many good improvements in terms of disclosure. But there are still things that we would really like to see that we think ought to be done by the commonwealth as well.”
Ruth Levine, principal and senior analyst at Vanguard Group, said that “encouraging” progress has been made. She will be watching how the tax-reform plan develops and if it will be revenue-neutral, along with any fallout from reducing the government’s workforce, as the commonwealth already faces an unemployment rate of 15%.
“As the rest of the plan comes to fruition there’s a countercyclical element to it, and we all know that there are issues just generally in terms of the recession and the economy,” Levine said “And so we’re concern with the short term. We’re concerned about how P3s and other things develop in terms of the intermediate and the long term.”
Others had a sunnier outlook on what has happened during the last year and Puerto Rico’s potential going forward. Paul Hopgood, senior vice president and chief investment officer at Santander Asset Management, and Leslie Highley, director of asset managers at UBS Securities, offered more optimistic viewpoints.
“In my 33 years in dealing with Puerto Rico, I have never felt more confident that Puerto Rico will resolve its problems,” Highley said. “It will take time and [Puerto Rico’s] debt is out of control. There are very serious problems we have to address.”
Hopgood pointed to the administration’s unpopular push to slash the government’s workforce as a key turning point in the commonwealth’s long-term fiscal health.
“What really changed my perception towards Puerto Rico was the fact that the administration had the political will to go through with the payroll reduction plan,” he said.
In looking at state and local government credits throughout the U.S., Levine said Vanguard is keeping an eye on municipalities with structural imbalances and any local governments that are talking about or considering bankruptcy.
While Rosenblum said he is aware of fiscal challenges facing states and municipalities, he said such governments as a whole have been mistakenly categorized as risky.
“In reality most municipalities do manage well, but they’ve been broad-brushed with that type of negative criticism,” Rosenblum said. “And so you can’t believe how much time we spend with our individual clients, having to reassure them because they truly think it is the end of the world in terms of municipalities. Our own expectations are that we expect to see, here and there, some real potential bankruptcies, but for the most part municipalities will manage through this crisis that is very much economically driven. And so we’ve sort of repositioned our portfolio just to be more defensive, but it’s not as if we’ve withdrawn from the municipal market.”
If there is one common theme among fund managers, it’s transparency. While they acknowledge that Puerto Rico has become more accessible to investors and more transparent over the last year, many investors seek still more details and insight into the commonwealth’s finances.
