SAN JUAN, Puerto Rico (AP) — Puerto Rico is crafting a new financing plan as it seeks to reassure investors that it will not default on its obligations after announcing cuts in bond sales amid concerns about a record yield.
The Government Development Bank, which oversees bond sales, said this week that it is taking steps such as strengthening its liquidity through private deals in a bid to return to the market in upcoming months.
The announcement comes after a more than 10 percent yield on Puerto Rico bonds led the bank to reduce debt issuance to between $500 million and $1.2 billion for the rest of the year.
It's a move that some economists praised with caution, noting that Puerto Rico is a main issuer of bonds in the U.S., and that the bonds are popular because they are exempt from federal and state taxes.
"Puerto Rico is not going to default in the short term," Gustavo Velez, a prominent local economist, told The Associated Press on Friday. "The concern is how Puerto Rico is going to pay in the long term."
The island has a $70 billion debt divided between 15 debt issuers, including the state's power and water companies. Velez said the agencies have sufficient revenue to back up bonds for at least the next five years, and he noted that Puerto Rico's constitution requires the central government to make bond payments before meeting other obligations, including payroll, in case of a financial emergency.
Tanya Valle, a spokeswoman for OppenheimerFunds Inc., said the company believes that Puerto Rico is on the right path to improving its fiscal outlook, and that the decision of less-or-more debt is at the government's discretion.
"We believe that less debt is always more appropriate from an investors' vantage," she said. "However, whatever course of action follows, we are confident that Puerto Rico will continue to meet its existing obligations."
Still, many investors remain wary of the general obligation bonds' near-junk status and of Puerto Rico's ongoing economic crisis.
The island of 3.7 million people is in its seventh year of recession and has a 13.5 percent unemployment rate, the highest compared with any U.S. state. "It's unacceptable" under those circumstances for Puerto Rico to be paying a 10 percent yield on a new bond issuance, Velez said.
He said it is unclear how long Puerto Rico can afford to lean on a reduced debt issuance after scrapping plans to issue about $3 billion in bonds by December. He said that would depend on how much liquidity the government needs, information that has not been made public.
A spokeswoman for Gov. Alejandro Garcia Padilla did not immediately return requests for comment.
In an economic forum organized by the Puerto Rico Chamber of Commerce earlier this week, Garcia said liquidity should not worry anyone.
"Puerto Rico pays its debt because it has a responsible government," he said.
The bank issued a statement earlier saying the government has sought to stabilize the economy by revamping its crumbling public pension system, privatizing the administration of the island's main international airport and increasing water rates, among other things.
"Puerto Rico has made major advances since its debt was downgraded in December 2012, and is confident in its plan to grow the economy," it said.
Betsy Nazario, a Government Development Bank spokeswoman, did not respond to messages Friday seeking further details about the plan except to say that officials would soon meet with investors.