The U.S. Virgin Islands will confront the threat of a debt downgrade when one of the region’s largest oil refineries shuts down this month, doubling joblessness on St. Croix, the archipelago’s poorest island.
About 2,000 workers will lose their jobs when the 350,000- barrel-a-day Hovensa LLC refinery, a partnership of Hess Corp. (HES) and Petroleos de Venezuela SA, closes in mid-February to stem $1.3 billion in losses over the last three years. The decision leaves the Virgin Islands without its biggest private employer and facing a widening budget deficit and higher energy costs as some of its best-paid jobs disappear.
“People are already wondering how we’re going to pay utility bills,” Donna Christensen, the U.S. Virgin Islands’ delegate to Congress, said in a Feb. 1 phone interview from Washington. “But this isn’t only going to affect the Virgin Islands, it will have an impact across the nation.”
Faced with weaker demand for their fuels, Caribbean refineries are shutting down or scaling back production, a move that is straining island budgets while threatening higher energy costs along the East Coast. The closure means ratings on bonds sold by the Virgin Islands, a winter beach destination known for its Captain Morgan rum distillery, are under review, said Marcy Block, an analyst at Fitch Ratings.
East Coast Fuel
The Hovensa refinery provided 83,000 barrels a day of gasoline and 47,000 barrels of distillate in October to the U.S. Northeast, according to the Energy Department. U.S. East Coast gasoline demand averaged 3.06 million barrels per day in November, down from 3.31 million barrels five years ago, according to the latest data from the U.S. Energy Information Administration.
Gasoline futures rose 2 percent to a four-month high of $2.8254 a gallon on the New York Mercantile Exchange after the Jan. 18 announcement to close Hovensa. The news followed decisions by Sunoco Inc. (SUN) and ConocoPhillips (COP) to shutter two Pennsylvania refineries.
The loss in tax earnings from the refinery will drain $60 million annually from the Virgin Islands’ $700 million budget, which was facing a $67 million operating deficit this year before the announcement, according to government estimates.
The closing may prompt a downgrade on about $650 million of BBB-rated Virgin Islands Public Finance Authority debt secured by gross receipts taxes, Fitch said in a Jan. 19 report. About $1.2 billion in bonds backed by federal excise taxes on rum sales to the U.S. are less likely to be affected, the report said.
“This one closure will be a devastating blow to the Virgin Islands,” Block said in a Feb. 2 interview from New York. “They’re in a tough spot.”
The islands’ bonds are rated Baa1, the third-lowest investment grade rating, by Moody’s Investors Service and aren’t under review for a downgrade, spokesman David Jacobson said. Standard and Poor’s rates the debt BBB.
Virgin Islands’ debt has returned 3.1 percent this year, compared with 3.7 percent for Puerto Rico and 2.1 percent for municipal bonds overall, according to Barclays Capital. The tax- exempt bonds’ higher yields have helped them outperform other munis, said Matt Dalton, who manages about $1 billion of municipal debt, including Virgin Islands’ debt, as chief executive officer at Belle Haven Investments Inc. in White Plains, New York.
The yield on the Public Finance Authority’s 5 percent bonds maturing in October 2020 have fallen 15 basis points, or 0.15 percentage point, this year to 3.6 percent, according to data compiled by Bloomberg. U.S. Treasuries maturing in November 2020 yield about 1.76 percent.
“People are desperate for yield,” said Dalton.
The U.S. Virgin Islands, which were purchased from Denmark for $25 million in gold in 1917, lie east of Puerto Rico and form part of the same archipelago as the British Virgin Islands. The islands, which include St. Croix, St. Thomas and St. John, are a U.S. territory and its 106,000 residents, who elect a governor and a 15-member senate, are U.S. citizens.
Out of 1,200 full-time workers and 950 contract employees employed by the refinery, only 100 will be retained, Alex Moorhead, a Hovensa spokesman, said in an e-mailed statement. Refinery workers who made as much as $32 an hour will have to compete for jobs in hotels or restaurants that pay about $11 per hour, said Jerry Jackson, the St. Croix representative of the United Steelworkers union.
St. Croix’s unemployment rate will jump to 18.7 percent, the highest among U.S. island territories, from 9.6 percent as a result of the closing, Labor Commissioner Albert Bryan Jr. said. The U.S. unemployment rate was 8.3 percent in January.
‘Fear and Anxiety’
Governor John de Jongh, who cut public salaries by 8 percent and fired 500 state workers last year to cope with budget shortfalls, said there could more dismissals, shorter work weeks, additional school closings and fewer police.
“The Hovensa announcement has caused a universal shudder of fear and anxiety to pass through our islands,” de Jongh, 54, said in his Jan. 30 State of the Territory speech. “Unlike a hurricane, we had no warning this was coming, no time to prepare, to adjust to the possibility that we might be hit.”
The Virgin Islands isn’t alone in struggling to sustain refinery operations. Valero Energy Corp. (VLO) has reduced production at its 235,000 barrel-a-day Aruba refinery because it isn’t profitable, Bill Day, a San Antonio-based spokesman for the company, said Jan. 26.
The demise of Caribbean refineries comes as regional economies are still recovering from the 2008 global financial crisis, as well as the lingering damage from hurricanes and the 2010 earthquake in Haiti, the hemisphere’s poorest country.
When measured as a proportion of gross domestic product, four of the 11 most indebted nations in the world are in the Caribbean. St. Kitts & Nevis leads the region, with debt-to-GDP of 185 percent, ahead of Greece at 165 percent, according to the World Bank. Antigua & Barbuda, Jamaica and Barbados round out the list.
“The region has not been very lucky with natural disasters,” said Auguste Kouame, an economist at the Washington-based lender, in a Jan. 27 phone interview. “When a hurricane hits, they tend to borrow to respond to the shock.”
Michael Dembeck, executive director for the St. Croix Chamber of Commerce, said the refinery closing will have a ripple effect throughout the economy, harming trucking companies, restaurant business and cutting enrollment at private schools.
The government offers discounts on property and excise taxes of as much as 100 percent, along with other benefits, to help lure new investment, he said.
“We have to target light manufacturing and financial management firms, but those won’t come close to matching the loss in employment from Hovensa,” Dembeck, 64, said in a Feb. 2 phone interview from St. Croix. “It’s going to take time.”