Puerto Rico: coronavirus will cut ability to service debt

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The coronavirus pandemic has dramatically reduced Puerto Rico's capacity to pay central government debt it has coming due through fiscal year 2025, the territory's government said.

Puerto Rico Governor Wanda Vazquez
Puerto Rico Gov. Wanda Vázquez and its Fiscal Agency and Financial Advisory Authority say new revenue expectations mean the proposed plan of adjustment must be reconsidered.

That's according to the proposed fiscal plan the Puerto Rico Fiscal Agency and Financial Advisory Authority released to the Puerto Rico Oversight Board Sunday. FAFAA is the debt agency of Gov. Wanda Vázquez.

The last board-approved version of the fiscal plan, from May 2019, projected enough surplus revenue to pay all contractual debt service due from fiscal 2020 through fiscal 2025.

Revenues, according to the new plan, will be dramatically lower because of the damage to expected economic growth and tax revenues because of COVID-19.

In its baseline scenario, the government now projects to have a total of $193 million in surplus revenues to pay the central government debt from this fiscal year through fiscal year 2025. This is 2% of the total of $8.78 billion of contractual central government debt service due in the period, excluding COFINA.

In its fiscal plan FAFAA said that if the surplus available to pay debt is lower than the debt capacity derived by state debt levels, the surplus level must prevail in determining debt payments.

The COVID-19 virus will sharply impact the island’s economy, FAFAA stated.

In its fiscal plan it said, “In view of what most certainly will be significant changes to the current FOMB-certified fiscal plan for the commonwealth dated May 9, 2019 … the government strongly believes that the FOMB will have to reconsider its proposed plan of adjustment for commonwealth, dated February 28, 2020.”

On March 24 the El Nuevo Día new web site quoted Puerto Rico Oversight Board Chairman José Carríon as saying, “It is evident that Puerto Rico is facing a situation of such magnitude that it is necessary to reevaluate [revenues and expenditures] and that would imply also reevaluating the amount we would pay in debt and the entire adjustment plan.”

Beyond surplus revenues, Puerto Rico also has savings to pay its debt. It reported $8.1 billion in its central bank account on April 17.

Puerto Rico projection of $193 million of surplus to pay its debt service is the baseline scenario. FAFAA also provides an “upside scenario” that would have a $2.48 billion surplus through fiscal year 2025 and “downside scenario” that would have a $3.27 billion deficit in the period.

The proposed fiscal plan assumes, in the baseline scenario, real gross national product changes in Puerto Rico of -3.6% in the current fiscal year, -7.8% in FY2021, 1.5% in FY2022, -0.3% in FY2023, 0.8% in FY2024, and 0.7% in FY2025.

FAFAA’s fiscal plan is a proposal designed to serve as a basis for all board budgets and proposals for adjusting the debt and pensions and other obligations.

The Oversight Board has complete authority over approving fiscal plans and creating plans of adjustment for the debt.

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