Although liquidity and fiscal concerns are weighing on the credit quality of the commonwealth of Puerto Rico (BB/negative), underlying economic trends are the root cause of the island's credit problems, according to a report published by Standard & Poor's Ratings Services.
"Puerto Rico's poor economic growth prospects remain a key factor in our speculative-grade general obligation rating on the commonwealth," said Standard & Poor's credit analyst David Hitchcock. "Furthermore, we think the island's economy needs to grow if Puerto Rico is to manage long-term costs such as health program deficits and retirement contributions," Hitchcock added.
The article entitled, "Weak Economic Growth Prospects Could Constrain Puerto Rico's Credit Quality," examines the impact that the phase-out of tax breaks has had on the island's manufacturing sector, which accounts for almost half of the commonwealth's GDP. It also explores Standard & Poor's view of other areas of the economy the island might need to expand or develop to accelerate growth.
Standard & Poor's rating on Puerto Rico assumes stagnant or lackluster economic growth in the next year thanks to continued softness in the manufacturing sector that growth in the smaller tourism and service sectors only partly offsets. Current economic uncertainty, is one reason why the rating outlook remains negative.
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook, the agency said.
