Puerto Rico faces a $28bn financing gap over the next five years, top officials and outside advisers to the government warned on Wednesday.
The highly anticipated report, delivered to Governor Alejandro Garcia Padilla on Tuesday, showed that economic reforms and budget cuts would not be enough on its own to keep the commonwealth from running a deficit through at least 2020.
Officials and restructuring advisers tasked with creating a plan to jump-start economic growth, the so-called Working Group, added that the Treasury’s single cash account and Government Development Bank would exhaust available liquidity before the end of the year, creating a cash shortfall in late November or early December.
While the government will be able to manage around those year-end issues, the cash crunch will come to a head in June, when officials on the Working Group conceded it would be nearly impossible to tap financial markets. Even with extraordinary liquidity measures, the report projected the Treasury’s cash balance would be more than $500m in deficit in nine months’ time.
The plan, which will be scrutinised by investors who have just agreed a restructuring with Puerto Rico’s electric power authority, included proposals to consolidate the commonwealth’s education department, reorganise the Department of Economic Development and create a fiscal control board.
The five-member board, which would be created in consultation with a third party put forth by creditors, would have the power to impose measures drafted by the Working Group and would have an independent staff and budget.
The report showed that when taken together, the measures would still leave a substantial deficit of roughly $14bn that would need to be at least partially addressed through restructuring Puerto Rico’s $72bn debt load.
The Working Group, which includes the head of the Government Development Bank, Melba Acosta-Febo, and Victor Suarez, Mr Padilla’s chief of staff, targeted $47bn of the territory’s bonds for restructuring, including general obligation bonds, which are considered sacred by municipal bond investors, COFINA sales tax obligations and GDB debts.
The report, which excluded debts issued by public agencies including the island’s water and power utilities, estimated $18.2bn in principal and interest payments were due by 2020.
Officials recommended that “commonwealth advisers begin work on a voluntary exchange offer to be made to its creditors as part of the implementation” as the legislature begins debate on economic reforms. They added that the political challenges remained ahead of a gubernatorial election in 2016, and that the measures could face pushback from residents.
In its effort to bolster economic growth, the Working Group argued for exemption from minimum wage requirements for people under 25 in an attempt to create lower paying jobs on the island of 3.5m as well as federal support to cover more of its mammoth healthcare expenses.
Cost cuts identified included a continued salary freeze for government employees and a request for a waiver from the Jones Act, which requires shipping to and from US ports to be conducted with American crews and vessels, increasing the territory’s transportation expenses.
The plan did not identify a level of debt that would be sustainable for Puerto Rico to carry, as the commonwealth struggles with recession, migration to the US mainland and a rapidly declining tax base.
The proposal also sought to increase the US territory’s reliance on its value added tax system in an effort to impede tax evasion and buoy government revenues.
The economic overhaul was projected to cut Puerto Rico’s financing gap by nearly $12bn over the next five years.
The wrenching situation faced by the US territory was underlined by the fact that the Working Group assumed growth measures would shave $1.9bn off its financing gap by 2020, reliant on the commonwealth reversing nearly continuous economic decline since the financial crisis.
Speaking in San Juan on Wednesday, Mr Padilla said that if creditors were not willing to partake in the process, the commonwealth would have no option but “to proceed without them”.
“That path doesn’t suit us, nor them, and will result in years of litigation and defaults and a major humanitarian crisis. It will force us to choose between paying a creditor, a teacher, a policeman or a nurse. These are decisions I’d prefer not to make, but I will make them if I have to,” he said.
Officials on the Working Group said the proposal largely validated a report from Anne Krueger, a former top International Monetary Fund official who has written on Puerto Rico’s unsustainable debt burden.
Last month, the commonwealth defaulted on some of its debts for the first time after battling for years to stay current on its obligations.
The decision to skip two payments on its Public Finance Corporation bonds — Puerto Rico this month missed a September 1 payment, according to the Municipal Securities Rulemaking Board — has been viewed by investors as the commonwealth prioritising some of its debts over others.
Creditors have argued that the restructuring will harm retail US investors, a point highlighted by Treasury Secretary Jack Lew, and that the territory should identify greater cost cuts to avoid haircuts on its debt.
Bonds issued by the commonwealth maturing in 2035 sold off after the report was made public, trading at less than 73 cents on the dollar.
The highly anticipated report, delivered to Governor Alejandro Garcia Padilla on Tuesday, showed that economic reforms and budget cuts would not be enough on its own to keep the commonwealth from running a deficit through at least 2020.
Officials and restructuring advisers tasked with creating a plan to jump-start economic growth, the so-called Working Group, added that the Treasury’s single cash account and Government Development Bank would exhaust available liquidity before the end of the year, creating a cash shortfall in late November or early December.
While the government will be able to manage around those year-end issues, the cash crunch will come to a head in June, when officials on the Working Group conceded it would be nearly impossible to tap financial markets. Even with extraordinary liquidity measures, the report projected the Treasury’s cash balance would be more than $500m in deficit in nine months’ time.
The plan, which will be scrutinised by investors who have just agreed a restructuring with Puerto Rico’s electric power authority, included proposals to consolidate the commonwealth’s education department, reorganise the Department of Economic Development and create a fiscal control board.
The five-member board, which would be created in consultation with a third party put forth by creditors, would have the power to impose measures drafted by the Working Group and would have an independent staff and budget.
The report showed that when taken together, the measures would still leave a substantial deficit of roughly $14bn that would need to be at least partially addressed through restructuring Puerto Rico’s $72bn debt load.
The Working Group, which includes the head of the Government Development Bank, Melba Acosta-Febo, and Victor Suarez, Mr Padilla’s chief of staff, targeted $47bn of the territory’s bonds for restructuring, including general obligation bonds, which are considered sacred by municipal bond investors, COFINA sales tax obligations and GDB debts.
The report, which excluded debts issued by public agencies including the island’s water and power utilities, estimated $18.2bn in principal and interest payments were due by 2020.
Officials recommended that “commonwealth advisers begin work on a voluntary exchange offer to be made to its creditors as part of the implementation” as the legislature begins debate on economic reforms. They added that the political challenges remained ahead of a gubernatorial election in 2016, and that the measures could face pushback from residents.
In its effort to bolster economic growth, the Working Group argued for exemption from minimum wage requirements for people under 25 in an attempt to create lower paying jobs on the island of 3.5m as well as federal support to cover more of its mammoth healthcare expenses.
Cost cuts identified included a continued salary freeze for government employees and a request for a waiver from the Jones Act, which requires shipping to and from US ports to be conducted with American crews and vessels, increasing the territory’s transportation expenses.
The plan did not identify a level of debt that would be sustainable for Puerto Rico to carry, as the commonwealth struggles with recession, migration to the US mainland and a rapidly declining tax base.
The proposal also sought to increase the US territory’s reliance on its value added tax system in an effort to impede tax evasion and buoy government revenues.
The economic overhaul was projected to cut Puerto Rico’s financing gap by nearly $12bn over the next five years.
The wrenching situation faced by the US territory was underlined by the fact that the Working Group assumed growth measures would shave $1.9bn off its financing gap by 2020, reliant on the commonwealth reversing nearly continuous economic decline since the financial crisis.
Speaking in San Juan on Wednesday, Mr Padilla said that if creditors were not willing to partake in the process, the commonwealth would have no option but “to proceed without them”.
“That path doesn’t suit us, nor them, and will result in years of litigation and defaults and a major humanitarian crisis. It will force us to choose between paying a creditor, a teacher, a policeman or a nurse. These are decisions I’d prefer not to make, but I will make them if I have to,” he said.
Officials on the Working Group said the proposal largely validated a report from Anne Krueger, a former top International Monetary Fund official who has written on Puerto Rico’s unsustainable debt burden.
Last month, the commonwealth defaulted on some of its debts for the first time after battling for years to stay current on its obligations.
The decision to skip two payments on its Public Finance Corporation bonds — Puerto Rico this month missed a September 1 payment, according to the Municipal Securities Rulemaking Board — has been viewed by investors as the commonwealth prioritising some of its debts over others.
Creditors have argued that the restructuring will harm retail US investors, a point highlighted by Treasury Secretary Jack Lew, and that the territory should identify greater cost cuts to avoid haircuts on its debt.
Bonds issued by the commonwealth maturing in 2035 sold off after the report was made public, trading at less than 73 cents on the dollar.
Eric Platt
Puerto Rico faces $28bn shortfall
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