WASHINGTON — Puerto Rico Governor Alejandro Garcia Padilla suggested Tuesday the commonwealth’s central government may not be able to borrow from the $3.7 trillion municipal bond market any time soon, as the uncertainty of restructuring the island’s $70 billion debt and its continuing recession weigh on its shrinking population.
“I think it would take a couple of years, maybe two years for the bond market to open to Puerto Rico if we do the right thing,” Garcia Padilla said Tuesday after speaking at a municipal finance event held at the Brookings Institution.
The governor, not running for re-election in November, said for Puerto Rico’s economy to grow, the White House needs to give Puerto Ricans a larger share of benefits from Medicare and Medicaid. He also said that Congress needs to grant new corporate incentives to the island similar to the now expired Section 936 of the tax code, which exempted U.S. companies from paying federal tax with revenue originated from U.S. territories, including Puerto Rico.
President Barack Obama signed a bill on June 30 to create a seven-member federal board to oversee the commonwealth’s finances, restructure its $70 billion debt, and shield the island from creditor lawsuits. Puerto Rico defaulted on July 1 on about half of the $2 billion bond payments due. Puerto Rico cannot file for bankruptcy protection under current law.
Bond investors in the U.S. went on a purchasing binge on tax-free Puerto Rico bonds for years, which led to the island’s over-reliance on borrowing money to balance its budget.
Its economy has contracted every year except one since 2006, according to Puerto Rico Fiscal Agency and Financial Advisory Authority. Puerto Rico’s population shrank about 7% to less than 3.5 million in 2015 from 2010, according to the Census Bureau. About half of Puerto Ricans lived under the poverty line in 2014.
Short-term uncertainty and volatility in the market stem from the unshaped federal oversight board, the Commonwealth’s own agenda and a gubernatorial election in Puerto Rico, according to Daniel Solender, who oversees $20 billion, including Puerto Rico securities, as leader of municipals at Lord Abbett & Co. in Jersey City, New Jersey.
“We don’t know who’s going to be on the board, how long it’ll take, what’s their plan, and we don’t know how Puerto Rico is going to react to bondholders going forward too,” Solender said in an interview. “There’s a lot of uncertainty from an investor’s perspective.”
Photo at top: Puerto Rico Governor Alejandro Garcia Padilla speaks Tuesday at the Brookings Institution in Washington. (Harvard Zhang/Medill News Service)
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