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Puerto Rico Economy Forecast to Shrink 0.8% in Fiscal 2014

Puerto Rico officials project the commonwealth’s economy will shrink by 0.8 percent this fiscal year, a reversal from an earlier estimate calling for an expansion.

The flagging growth is a blow as the island of 3.7 million struggles to turn around its finances. The Planning Board, which released the data today, previously said the economy would expand by 0.2 percent in the year that began July 1.

Governor Alejandro Garcia Padilla, 42, who took office in January, is trying to keep the commonwealth’s investment-grade rating. It is currently ranked one step above junk, and its securities are on pace for their worst year since 2008 on concern that a contracting economy may make it harder for the territory to repay its debts.

Standard & Poor’s has threatened to lower Puerto Rico by one level “if the economy deteriorates to the point we believe it significantly hampers the ability to lower budget deficits,” David Hitchcock, an analyst at the New York-based company, said in an Oct. 23 report.

“We are confident in our ability to continue to make significant progress on our fiscal and economic development plans, and remain focused on creating a platform for sustainable economic growth,” commonwealth Treasury Secretary Melba Acosta said by e-mail.

Nationwide Demand

Garcia Padilla is trying to bring the commonwealth out of a prolonged recession. The island’s economy has declined each year since 2006, except for 0.1 percent growth in fiscal 2012, according to Robert Donahue, a managing director at Concord, Massachusetts-based Municipal Market Advisors.

The fiscal health of Puerto Rico affects the $3.7 trillion municipal market because more than three-quarters of U.S. muni mutual funds hold the island’s obligations, according to Morningstar Inc. (MORN) The securities are tax-exempt nationwide. The commonwealth and its agencies have $70 billion of debt, double the amount in 2004 as officials borrowed to plug deficits.

While the outlook for 2014 deteriorated, the projection for fiscal 2013 improved. The Planning Board estimated the economy declined 0.03 percent last year, compared with an earlier projection of a 0.4 percent drop.

The commonwealth plans to sell as much as $1.2 billion of sales-tax debt by Dec. 31 to help finance deficits. It may postpone the issuance if borrowing costs are too high, Puerto Rico administration officials said last month.

Puerto Rico debt has lost 15 percent this year through Oct. 31, more than seven times the decline in the broader municipal market, Standard & Poor’s data show.

Puerto Rico general obligations maturing July 2041 traded today with an average yield of 7.97 percent, the highest level since Oct. 21, data compiled by Bloomberg show. It’s still down from about 9.3 percent on Sept. 11, the highest since the bonds were first sold in March 2012.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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