Analysis: Puerto Rico's economy may get worse before it gets better

Wed Apr 24, 2013 7:06am EDT
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By Michael Connor

(Reuters) - Puerto Rico's new governor is trying to heal the Caribbean island's wounded public finances with an austere budget heavy with new taxes that could sap life from a wobbly economic recovery.

When Governor Alejandro Garcia Padilla presents his first budget on Thursday, he will be closely watched by America's $3.7 trillion municipal market, which is ever more worried about the U.S. commonwealth's ability to finance its public debts.

All three leading Wall Street credit-rating agencies have in recent months knocked Puerto Rico's credit rating to near junk-bond status, pointing in part to an economy sapped by a six-year recession that only ended in 2012. Further ratings cuts are possible.

The island's unemployment rate is 14.2 percent. It is a major worry for Puerto Rico's government as it presents a fiscal 2014 budget plan that will rely on borrowed money to close gaps. Officials don't expect a balanced budget for another year, at best. The budget plan is expected to face little opposition from legislators.

"As government tightens its belt, one can see the unemployment rate going higher," said Dan Heckman, senior fixed- income strategist at U.S. Bank Wealth Management, a firm that owns very little of Puerto Rico's $53 billion of muni bonds.

"That's one big challenge," Heckman said. "And they are talking about tax increases that can affect hiring and business. You can have unintended consequences when you raise taxes."


Last year, the commonwealth's economy expanded for the first time since 2005, but Puerto Rico's tepid economic recovery now shows substantial signs of sputtering - a turn that would aggravate worries among bond investors about chronic budget deficits and its $53 billion of debt.   Continued...