“We strongly disagree with Moody’s decision, and we will not relent in our plan to strengthen our fiscal situation.”
Sounds familiar? You bet. How many times in the past 18 to 20 months have you heard a somewhat similar statement uttered by Barbados Government officials about the state of the island’s finances and credit rating? Answer: quite a lot.
That’s because the Freundel Stuart administration and the people of Barbados have suffered the indignity of seeing their once stellar credit rating reduced to junk bond status by Wall Street firms.
But the words quoted above didn’t come from anyone in the English-speaking sovereign state. Chris Sinckler, Barbados’ Minister of Finance, and Dr DeLisle Worrell, Governor of the Central Bank, weren’t the authors.
Instead, the words were used by Melba Acosta Febo, Puerto Rico’s Secretary of the Treasury, and David H. Chanley Jr, chairman of the American territory’s Development Bank, after Moody’s Investors Service had done to their country what it did to Barbados several weeks before: downgraded its rating to junk.
And as in the case of Barbados, both Moody’s and Standard & Poor’s slapped a “negative outlook” on Puerto Rico’s rating, an indication that another downgrade was on the horizon, much like Barbados.
“In our view, the Commonwealth’s credit profile is no longer consistent with investment grade characteristics,” was the way Moody’s put it.
The question on many people’s minds in the Commonwealth of Puerto Rico was straightforward enough, while being eerily identical to the scenario in Barbados: how did it come to this? The island of 3.7 million people, with an additional 4.6 million living on the United States (US) mainland as American citizens, has been on the slippery economic slope for some time.
The decline can be traced to the fallout from the US economic crisis, poor financial management by the local government, a slide in outside investment and high debt service.
Here are some of the other key contributing factors to the looming crisis there, according to Business Insider and other sources: The island has been in and out of a recession since 2006, and Federal tax concessions which were a magnet for manufacturing enterprises expired about eight years ago, triggering an exodus of some firms.
Again, like Barbados, Puerto Rico has been uncompetitive for years. Its labour force participation is in the vicinity of 40 per cent and government is responsible for 20 per cent of all employment. Joblessness was pegged at 15.4 per cent in January, up from 12 per cent in 2009.
Long a staple of US municipal bond funds, Puerto Rica’s debt load stands at US$70 billion, which makes it higher than any state in the union except New York and California.
Puerto Rican bonds have become increasingly expensive, trading at about US60 cents on the dollar while yields have surpassed the nine per cent mark. That explains why it has become expensive for Puerto Rico to borrow money.
Fitch, another credit rating firm, downgraded the island shortly after Moody’s made its move. The recent recession in the US and Europe helped fuel a problem in Puerto Rico that’s shared by many tourism destinations: a drop in tourist receipts.
Deficit financing, borrowing money to pay bills was a regular occurrence in Puerto Rico. Little wonder that an analyst asked if Puerto Rico was the “Greece of the Caribbean”.
A somewhat similar question was asked about Barbados.
The depressing picture in San Juan has become so worrisome that more and more educated people there are leaving in search of greener pastures in the mainland where they believe job prospects are brighter.
The administration of Governor Alejandro Garcia Padilla is travelling along the same path as Barbados: budget cuts, higher taxes, and increased borrowing. Moody’s response to all of this seems to have come from the same playbook Wall Street is using for Barbados.
“We do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends,” Moody’s complained.
The hard part for Barbados as it looks at Puerto Rico’s nightmare is that the American-controlled island has something in its hip pocket that Barbados doesn’t possess: the backing of the US Treasury.
As a matter of fact, some Puerto Rican banks received US bailout funds a few years ago and Washington let it be known it is keeping its eyes on the looming financial crisis on its territory.
Barbados, once described by a Caribbean Prime Minister as the “best managed black society in the world” and told by Kofi Annan, at the time by UN Secretary General, that it punched above its weight, doesn’t have any uncles on whom to fall back in times of trouble.
It must survive on its own.
