Governor Alejandro Garcia Padilla (“Commonwealth” Party) began this week by misleadingly giving Puerto Ricans information suggesting that the territory’s economy was improving — and trying to distract attention from bad economic news.
The effort was initiated Sunday when his office leaked favorable data in a new report on the economy — but not the more significant negative facts — to Puerto Rico’s most widely circulated newspaper. This resulted in the front-page headline that the Governor’s Administration wanted.
The favorable data was that the Commonwealth Government Development Bank’s Economic Activity Index increased 1.1% in September and .6% in October (‘spun’ as favorable even though the rate of increase fell from September to October). These were the first increases since October 2012.
The negative facts in the Index withheld from Puerto Rico’s dominant news outlet were that the September economic activity number was 5.2% below the figure a year before, the October number was 5.3% lower than a year before, and the July-October figure was 5.3% below a year earlier.
The Governor’s strategy of focusing attention on the good news and ignoring the more significant bad news was continued with a news conference yesterday morning in which the Garcia said that the economy had reached a “turning point” and was improving.
The economy “was going downward and has started to stabilize to return to growth,” he claimed.
Respected, independent economists and other news media quickly disagreed with the Governor’s assessment. Several economists explained that data from one or two months do not suggest a trend. News organizations reported the year over year drop in economic activity.
The Governor’s statements yesterday also contradicted his own assertion in October that the economy was already improving and “gathering speed and strength.”
At the time, he dismissed negative facts as politically motivated “pessimism.”
His contentions then were disproven not long after when his Administration’s Planning Board predicted that the economy would contract .8% during the fiscal year ending next June 30th.
Garcia’s campaign to convince Puerto Ricans that the territory’s economy is improving also came as his secretary of the Treasury, chairman and interim president of the Government Development Bank, and Office of Management and Budget director met in New York with analysts at Moody’s, one of the three major national firms that assess risks associated with borrowing by governments and big businesses.
Reporters yesterday asked whether the rating agency was expected to issue a new report on the Commonwealth’s bonds. Puerto Rico’s second most widely circulated newspaper today quoted experts as saying that Moody’s might downgrade the Commonwealth’s debt during this fiscal year.
The Commonwealth’s general obligation bonds are rated at one step above ‘junk’ levels, although some Commonwealth bonds are rated higher.
A downgrade to junk levels would force some national mutual funds that own a lot of the bonds to sell. Even though still rated investment grade, however, Commonwealth bonds are already selling at junk bond prices in the public market.
A re-evaluation of the Commonwealth’s ability to repay purchasers of its bonds has been expected after the territory’s fiscal year ends. Observers, however, said that new information on Puerto Rico’s economy and the Commonwealth’s revenue collection and spending could result in an earlier rating alert or action.
The high interest rate that the Commonwealth would have to pay buyers to successfully issue new bonds has kept the Garcia Administration from doing so. The territorial government needs to borrow money to pay at least $820 million in operating expenses this fiscal year and needs much more in addition to pay off previously incurred debt.
Unable to borrow at reasonable rates in the bond market, the government is using Government Development Bank funds, leaving the Bank with low cash margins. It is also borrowing from private banks on a short-term basis, hoping that it will be able to sell new bonds again for prices that are not too high before too long.
A downgrade in would make that even more unlikely.
Another sign of the Commonwealth’s inability to issue bonds at reasonable prices — bad economic news not explained by Garcia yesterday — came today as it was revealed that the Government Development Bank paid Barclays Bank $400 million it borrowed on a short-term basis that it initially planned to repay with proceeds of a new bond offering.
Garcia’s latest effort to convince Puerto Ricans that the territory’s economy is improving also came a day before the Manpower Group’s Manpower Employment Outlook Survey reported that on average employers in Puerto Rico did not expect to hire more workers during the first quarter of calendar year 2014.
The survey a year ago projected an increase of hiring by 3% more employers than would cut or maintain the same number of jobs during the first three months of 2013. In September, it reported a 2% decrease was expected during the current quarter year.
The territory’s jobless rate rose from 13.5% in July to 14.7% in October even though fewer people out of work looked for jobs and Puerto Ricans continued to move to the States.
The increase to 14.7% in October came as the rate in the States dropped to 7%.
The discouraging hiring projections by employers in Puerto Rico contrasted with encouraging estimates of companies in the States. The survey reported that a net of 13% more would increase jobs than stay at current workforce levels or reduce employment.
Garcia has continued to claim that 25,256 jobs have been created during his administration. In fact, the U.S. Department of Labor has reported, 17,115 jobs have been lost in the territory.
A pledge that 50,000 jobs would be created during the first 18 months of his administration was a key factor in Garcia’s narrow election in November 2012.