Puerto Rico recently had their debt downgraded to junk status earlier this month. Some suggest that one of the reason for Puerto Rico’s economic woes may include an increasingly unfriendly business environment, including rising taxes on the island’s small business owners. The solution Puerto Rico’s government is proposing? Borrow more money.
According to a New York Times report, senior officials in the Puerto Rican government have suggested that the commonwealth still has the capacity to borrow another $3 billion. Although some have admitted concerns about maintaining the current debt load, Puerto Rico’s legislature has proposed raising their debt limit. Should Puerto Rico raise their debt ceiling and borrow, much of the incoming funds would likely be used to refinance their current debt load.
According to a Reuter’s report, Puerto Rico will likely seek to sell $2.86 billion in municipal bonds next month. Any municipal bond sales are likely to cost the island commonwealth dearly, as the junk status of their debt is expected to command high interest rates.
While the US Congress discusses the possibility of eventual statehood for Puerto Rico – another measure many Puerto Ricans believe could help their economy – the governor, legislators and other officials are busy seeking ways to pull the island’s economy up by the boot straps.
While they’ve weathered their share of economic storms, not everything is doom and gloom for the tropical island’s economic outlook. According to an MSN Money report, the private business sector has committed to creating 21,000 jobs by the end of summer. This represents a 50 percent increase over last year’s job growth numbers. About a third of the new jobs are expected to come from small or medium sized businesses.
The new jobs – which are expected to bring in significant amounts of additional tax revenue – are expected to range over a wide variety of fields, including tourism, aerospace and research science-related jobs. Until recent years, Puerto Rico was seen as one of the more attractive locations for manufacturing businesses due to tax incentives. The island has a long history as a popular tourist location.
Puerto Rico looks to have little trouble finding investors if its legislature gives the green light to bond sales. According to the New York Times, the chief executive of Municipal Market Advisors, Tom Doe said, “Judging from everyone we talk to in the high-yield space, there is tremendous demand.”
This is in large part because the bonds are expected to pay at least 10 percent and may bring in after-tax returns as high as 20 percent because of tax advantages associated with purchasing municipal bonds.
What do you think? Can Puerto Rico borrow its way back to prosperity?