Puerto Rico’s economic activity index posted the 11th-straight year-over-year drop in October, as the commonwealth struggles to halt a slide that is contributing to the worst year for its debt since 1999.
The index fell 5.2 percent in September from the same month of 2012, and by 5.4 percent in October, according to the commonwealth’s Government Development Bank, or GDB. U.S. Treasury Department staff traveled to the territory last week to help Governor Alejandro Garcia Padilla’s administration boost the island’s economy with already promised federal aid.
Garcia Padilla, 42, who took office in January, is trying to keep the island’s investment-grade rank after Fitch Ratings last month threatened to cut the the commonwealth by June 30 if it’s unable to borrow through the capital markets. The territory is graded one step above junk by the three biggest rating companies, with a negative outlook.
“All of the economic development plans that they’ve been talking about are interesting and they’re good, but they’ll take a long time for realization,” said Alan Schankel, managing director at Janney Montgomery Scott LLC in Philadelphia.
The commonwealth’s fiscal stability affects the $3.7 trillion local-debt market because more than three quarters of U.S. municipal mutual funds hold the securities, which are tax-exempt nationwide. Debt sold by Puerto Rico and its agencies has lost 17.4 percent this year, the worst performance since at least 1999 and more than six times the decline of the broader muni market, Standard & Poor’s data show.
S&P has threatened to reduce Puerto Rico’s bond grade “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.
The economic activity index has contracted in six of the last seven fiscal years, according to the GDB.
Garcia Padilla has pledged to create 90,000 jobs by 2016 by expanding pharmaceutical and medical-device manufacturing, tourism and agriculture. He wants to end recurring budget deficits in the fiscal year starting July 2015.
Investors are demanding more yield to buy commonwealth securities as they question the island’s ability to repay its liabilities.
Puerto Rico general obligations maturing in July 2041 traded today with an average yield of 8.73 percent, about 4.6 percentage points more than benchmark munis, the biggest difference since October, data compiled by Bloomberg show. Yields on some island borrowings reached record highs this year, drawing the interest of hedge funds. The purchases helped stabilize the $70 billion market for Puerto Rico debt.
The economic activity index showed improvement on a month-over-month basis. The index rose 1.1 percent in September from the prior month, and by 0.6 percent in October. It marked the first consecutive monthly gains since 2012.
“I don’t think it’s enough for a trend, but it’s mildly encouraging,” Schankel said.
Alix Anfang, spokeswoman for the GDB at Washington-based SKDKnickerbocker; and Betsy Nazario, a GDB spokeswoman in San Juan, didn’t respond to an e-mail seeking comment.
The economic index includes nonfarm payrolls, cement sales, gasoline consumption and electric-power production, according to the GDB. The bank handles Puerto Rico’s debt transactions.
To contact the editor responsible for this story: Stephen Merelman at firstname.lastname@example.org