SAN JUAN, Puerto Rico (AP) — Puerto Rican officials on Wednesday rushed to propose new measures aimed at boosting the island’s economy and appeasing concerned bondholders a day after credit rating agency Standard & Poor’s downgraded the U.S. territory’s debt to junk status.
Gov. Alejandro Garcia Padilla said he is renegotiating the payment of short-term debt and has ordered all government agencies to reduce their current budgets by 2 percent. He also submitted legislation to eradicate $170 million in deficit from the current budget, hoping to cut the deficit to $75 million.
“Given the unprecedented fiscal situation that we find ourselves in, I’m sending this project to legislators and trust they will address it with the urgency it warrants,” he said.
Puerto Rico is entering its eighth year of recession while struggling with $70 billion in public debt accumulated over decades and a 15.4 percent unemployment rate, higher than any U.S. state.
Garcia said he would make other announcements in upcoming days to offset the fallout of S&P cutting the U.S. territory’s rating one notch to “BB+,” one level below investment grade. S&P said the downgrade would have been greater if Garcia’s administration had not taken steps to strengthen the economy, such as increasing taxes and authorizing changes to crumbling public pension systems.
Puerto Rico’s bonds are popular with U.S. investors because they are exempt from federal, state and local taxes. Puerto Rican debt is held by roughly 70 percent of U.S. municipal mutual funds, according to Morningstar.
Amid Garcia’s announcements, opposition legislators filed a bill to create a commission that would evaluate all fiscal measures approved by the governor, as well as analyze government agency budgets and the use of public funds.
“We need to establish a new mechanism to regulate public spending,” said Rep. Maria Milagros Charbonier.
The downgrade, which will make it harder for Puerto Rico to borrow money, comes as the island prepares to re-enter the bond market this month.
Tuesday’s announcement by S&P had not had a substantial impact on the market by Wednesday morning, in part because many had already anticipated the downgrade, said Alan Schankel, managing director of Janney Capital Markets in Philadelphia.
“It may be a little early, but so far I haven’t seen any drastic movements,” he said. “The rating downgrade had been already factored into recent market levels.”
Schankel said bond mutual funds probably had already lightened their load amid ongoing pessimism about Puerto Rico’s economy, with weaker bondholders likely selling in the past six months.
However, he warned the market could change if more downgrades are announced.
“It wouldn’t surprise me if Moody’s or Fitch followed suit soon,” he said.
Moody’s Investors Service warned in late December that it could downgrade Puerto Rico’s debt, while Fitch Ratings issued a similar alert in November.