Standard & Poor's Ratings Services said although it believes Puerto Rico Governor Alejandro Garcia Padilla's recent signing of a bill to increase the Commonwealth of Puerto Rico's petroleum tax to $15.50 from $9.25 per barrel will have no immediate effect on rated bond credit quality, there could still be a muted effect on the island economy.
To the extent the tax increase allows the Puerto Rico Highways and Transportation Authority (HTA) to externally refinance $2 billion of unrated subordinate loans from the Government Development Bank for Puerto Rico (GDB), it could temporarily improve GDB liquidity, and hence the bank's ability to provide loans and liquidity in the near future to the central government.
Enhanced GDB liquidity could provide a temporary cushion in the event of unanticipated budget gaps or reduce the large amount of central government external cash flow borrowing. However, to the extent a back-up pledge of the commonwealth's general credit becomes part of the refinancing, it could add to the contingent debt risk profile of Puerto Rico's GO bonds.
Likewise, the agency said it sees the opening of trade relations between the U.S. and Cuba as having little near-term effect on the BB/Negative general obligation rating on Puerto Rico.
The potential positive and negative long-term economic effects would likely take years to develop and be of relatively small magnitude for some time.
The petroleum tax increase likely will not affect rated HTA debt; the agency downgraded the authority to B from BB-plus on July 11, 2014, as the result of the HTA's eligibility under a debt restructuring law enacted last year.
Although HTA has an adequate pledge of gross transportation tax revenues, the commonwealth could potentially restructure HTA debt under the law, especially if considering HTA operating expenses. An earlier increase in petroleum taxes from $3.00 to $9.25 per barrel in 2013 was never pledged to HTA rated debt, but used to pay the subordinate GDB loans, while the new additional petroleum tax revenue will be pledged to the Puerto Rico Infrastructure Financing Authority as part of the proposed refunding of the GDB loan.
The new law does not materially change the HTA's risk of eligibility under the restructuring law. However, the petroleum tax increase also will provide extra HTA operating funding, and spins off the money-losing mass transit operations into a new corporation. This could reduce the need for the authority's operating subsidies.
The petroleum tax increase equals slightly less than 15 cents per gallon. Although the tax is not negligible, the agency does not see it as having a major impact on the economy. Recent declines in the price of oil could at the same time have offsetting beneficial effects, particularly due to the island's reliance on expensive oil-fired electrical generation. The petroleum tax increase does not apply to fuel for electrical generation.
The GDB's contemplated loan refinancing may still be difficult for it to achieve due to the enacted bill's imposition of an interest rate cap on the refinancing.
Relaxation of the U.S. trade embargo on Cuba will likely have only a minor near-term credit impact on the Puerto Rico economy. Although competition in tourism seems the most immediate threat, tourism is only about 6% of Puerto Rico's GDP. At the same time, Puerto Rico could benefit from trade with Cuba, and serve as a regional Spanish language hub for trade relations with the U.S. mainland.
