SAN JUAN, Puerto Rico (AP) — Puerto Rico on Thursday was hit with its second debt downgrade in a week as the U.S. territory's government pushes to overhaul its tax system to help generate more revenue amid an economic recession.
Moody's Investors Service downgraded $48 billion worth of Puerto Rico debt, warning that the island might default on its debt in the next two years.
"Tax reforms now before the legislature, which are uncertain in their timing and their results, further signal a rising degree of political risk that could ultimately cause outcomes unfavorable to bondholders," the agency stated.
Moody's also said that slow economic growth has led to a drop in tax revenues that could worsen Puerto Rico's liquidity issues.
Standard & Poor's downgraded the island's general obligation bonds last week.
Both downgrades seem to indicate a breakdown in communication between the territory's government and credit rating agencies, said Triet Nguyen, founder of Axios Advisors LLC, an Illinois-based municipal research and investment advisory company.
"Tax reform is probably a good idea over the long term, but unfortunately in the short term it may cause a lot of confusion," he said in a phone interview. "People are very skeptical about the government's ability to pull it off."
Gov. Alejandro Garcia Padilla is seeking to implement a 16 percent value-added tax that he projects could generate up to $1.5 billion in additional revenue as the government struggles to reduce $73 billion in public debt. Puerto Rico also is expected to soon issue an estimated $2 billion in bonds backed by a proposed excise tax increase on crude oil.
Despite those actions, concerns over how the government plans to deal with its debt grew after a U.S. federal court ruled earlier this month that a local debt-restructuring law is unconstitutional.
On Thursday, Puerto Rico's delegate to Congress, Pedro Pierluisi, announced that a U.S. House subcommittee will hold a hearing next week on his proposal to allow the island's state-owned corporations to restructure their debt under Chapter 9.
"I believe this is in the best interests of all stakeholders, including creditors, who are craving stability in a time of deep uncertainty," Pierluisi said.