March 20 (Reuters) - Fitch Ratings on Wednesday cut its rating on $10.6 billion of Puerto Rico general obligation bonds to BBB-minus from BBB-plus, saying the U.S. commonwealth was facing a large budget imbalance caused by a weak economy and revenues.
Fitch was the third major ratings group to cut the credit ratings of Puerto Rico, a large borrower in America’s $3.7 trillion municipal bond market, to near junk-bond status. Standard & Poor’s did so a week ago.
Moody’s Investors Service reduced Puerto Rico’s general obligation rating rating by two notches to Baa3 in December.
Fitch said in a statement that it had a negative ratings outlook for Puerto Rico, that the island’s government will likely fall short of structural budget balance in fiscal 2014, and that its under funded pension system was nearly depleted.
“Despite aggressive cost cutting and other fiscal restructuring measures over the past four years, economic recovery and budget balance have proven elusive,” the Fitch analysts said.
Puerto Rico’s current-year deficit is coming in well above initial forecasts of $1.1 billion and budget-gap narrowing steps being taken by the government will still leave an estimated $490 million shortfall, the Fitch analysts said.
“With only tepid growth in revenues anticipated and additional spending pressure, the administration is also likely to face a considerable budget gap for fiscal 2014,” the analysts said.
In addition to commonwealth GO bonds affected by the two-notch downgrade, Fitch said the cuts applied to $1.38 billion of Public Building Authority government facilities revenue bonds, $658 million of Puerto Rico Aqueduct and Sewer Authority (PRASA) commonwealth guaranty revenue bonds and $2.948 billion Employees Retirement System of the Commonwealth of Puerto Rico pension funding bonds.
Puerto Rico’s new governor, Alejandro Garcia Padilla, last week described S&P’s ratings downgrade as a “wake-up call” for the island whose economy was stuck in recession for six years and has only begun to show small, tentative signs of recovery.
Elected as a critic of government austerity, Padilla has yet to present a budget for the fiscal year starting July 1 but is expected to propose tax increases and spending curbs. Moody’s Investors Service last week said it may be fiscal 2016 before the government can balance its annual budgets without borrowing.
The new government has also pledged to step-up tax enforcement and has proposed pension reforms that would increase retirement ages for government workers.
Top Puerto Rico finance officials, Government Development Bank President Javier Ferrer, GDB board Chairman David Chafey and Treasury Secretary Melba Acosta, were scheduled to meet privately in New York on Friday with institutional investors.
Details of the meeting were not known.
Puerto Rico’s $52 billion of tax-supported bonds are widely held by mutual funds and other big U.S. investors very likely worried by the flurry of ratings cuts and the prospect of the island’s debt being labeled non-investment grade by ratings firms.
Puerto Rico already pays the highest interest rates of any large issuer of tax-free debt.