PUERTO RICO'S OWN DEFICIT FORECAST
SEEN HIGH BY MORGAN STANLEY NEWS
REPORT BY LAURA J. KELLER…
USA, September 17, 2015. Puerto Rico officials have
overestimated the U.S. territory’s anticipated budget deficit over the next
five years by about 60 percent, according to an analysis by Morgan
Stanley’s debt-trading team.
Puerto Rico will be confronted with a $5.57
billion financing gap through its fiscal year in 2020, according to a report
distributed Sept. 11 by Ryan Brady, an analyst on Morgan Stanley
municipal-debt trading desk in New York. That’s less than the $14 billion
shortfall the Puerto Rico government estimated in its banner restructuring and
economic plan released this week.
Puerto Rico’s government has sanctioned two
different deficit figures for between 2016 and 2020. Former International
Monetary Fund economists led by Anne Krueger concluded in a study commissioned
by the U.S. territory that the financing gap would be $9.6 billion. And a day
before Brady released his report, Morgan Stanley’s research analysts led by Michael
Zezas, who work separately from the trading desk, put out a note stating that
“we could not patch together a budget baseline with a strong enough degree of
confidence.”
The gap between the estimates is particularly
important to Puerto Rico bond investors because the deficit will help define
how aggressive the government can be in seeking concessions in
debt-restructuring talks. Governor Alejandro Garcia Padilla said in a
Sept. 9 speech that he expects creditors to
“share these sacrifices” so “Puerto Rico can return to a sustainable path of
economic growth.”
Seeking Ammunition: As the island prepares to
enter multiple negotiations to restructure its $72 billion of debt, the more
dire the deficit appears to be, the stronger the ammunition for Puerto Rico’s
negotiators. Officials are targeting the Government Development Bank as the
place to begin talks. Citigroup Inc., which is helping oversee the
financial restructuring, has been preparing to enter into confidential
discussions with holders of that agency’s debt, people with knowledge of the
matter said last week.
Lauren Bellmare, a spokeswoman for Morgan
Stanley, declined to comment on the investment bank’s trading desk analysis.
And Scott Helfman, a spokesman for Citigroup, declined to comment last
week on the GDB negotiations.
Brady’s report, which was distributed
privately to institutional investors and Morgan Stanley clients and was
obtained by Bloomberg, challenges some core assumptions Puerto Rico officials
have used in calculating the depth of their debt dilemma. It says the island’s
deficit would be lowered by increasing the government’s expected efficiency in
collecting taxes, restoring funds collected under an excise tax known as Act
154, and reducing the impact of the loss of Affordable Care Act funding from
the U.S. federal government.
The analysis also reduces Puerto Rico’s cash
burn by accounting for fewer payments to public agencies and extending payback
dates on some cash reserve accounts.
The island’s 8 percent general obligation bond
maturing July 2035 rose about 0.8 cent Tuesday to an average of 73.3 cents
on the dollar, according to data compiled by Bloomberg. The average yield was
11.4 percent.
The most actively traded Government
Development Bank security, the 4.375 percent notes maturing February 2019, climbed
0.1 cent Tuesday to an average of 40.1 cents on the dollar, according to data
compiled by Bloomberg. The notes traded at 32.8 cents a week ago on Sept. 8,
the data show. (An earlier version of this story corrected the distribution
date of the trading desk report in the second paragraph.) News Report by Laura J Keller. Of Bloomberg
Business..
