By Michael Connor
Sun Jun 9, 2013 8:04am EDT
(Reuters) - Puerto Rico policymakers, desperate to keep the Caribbean island's massive debts out of the junk-bonds bin, are racing against a June 30 deadline to revive sales-tax hikes that are the backbone of the planned budget.
With over $70 billion of general obligation, agency and other debts, Puerto Rico pays the highest interest rates of any big tax-free borrower and has since December been downgraded by the big three U.S. ratings agency to near junk-bond status.
"They have to June 30, but something substantial has to happen, either the governor's plan or a legislative alternative, or there will be hell to pay," said Richard Larkin, director of credit analysis at HJ Sims & Co Inc.
Loss of investment-grade ratings for Puerto Rico's muni debt, which mainland investors like because its interest payments avoid nearly all income taxes, could prompt heavy selling by mutual funds and other institutional investors, analysts have said.
In office since January, Governor Alejandro Garcia Padilla won grudging admiration from Wall Street for pushing through hard-edged pension reforms but now faces a deadline only weeks away to pass a budget reliant on some borrowing and new tax revenues.
The U.S. commonwealth, which also has $35 billion in unfunded pension obligations, has not had a fully funded operating budget free of borrowing in more than a decade.
A key part of the $9.835 billion budget for the coming fiscal year - an expansion to businesstransactions of a sales-and-use tax that would add $1.1 billion to government revenue starting July 1 - was met with protests by business leaders and local politicians.
"If the final package produces significantly less revenue, budget balance will be elusive, and ratingdowngrades may follow," said Janney Capital Markets Managing Director Alan Schankel.
Alternatives to the sale and use tax include increasing taxes on gross receipts at businesses, instituting a 2 percent excise tax on imports and lifting corporate tax rates.
But top administration officials are pushing back, with Treasury Secretary Melba Acosta twice meeting with Senate President Eduardo Bhatia and House Speaker Jaime Perello. Another meeting has been set for this week.
Acosta told reporters following a meeting on Tuesday that there will be changes to the governor's original proposal to dramatically expand the sales tax. Garcia Padilla now agrees with exempting small and medium businesses, she said.
The Treasury chief said that all the alternatives were being analyzed to determine revenue estimates for each, and that a decision on final options would be taken during this week's meeting.
Sergio Marxuach, policy director at the Center for the New Economy, an independent think tank in Puerto Rico, said the $1.1 billion estimate of the administration's original sales-tax plan was "very aggressive."
"I don't believe Puerto Rico should be downgraded, but my gut tells me it will be," said Larkin. "The ratings agencies were concerned that the deficit was not erased by FY 2013, and now it will be extended to 2015. This budget does not make the case to maintain current bond ratings."
(Additional reporting by a Reuters correspondent in San Juan; Editing by Tiziana Barghini and Kenneth Barry)
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Analysis: Puerto Rico faces uphill budget rush as 'junk' rating looms
Reuters By Michael Connor. Sun Jun 9, 2013 8:04am EDT. (Reuters) - Puerto Rico policymakers, desperate to keep the Caribbean island's massive debts out of the junk-bonds bin, are racing against a June 30 deadline to revive sales-tax hikes that are the backbone ... Analysis - Puerto Rico faces uphill budget rush as 'junk' rating loomsReuters UK all 2 news articles » |
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