Puerto Rico's blueprint for escaping its fiscal crisis paints a rosier picture of its economic future than an earlier forecast by the federal board overseeing the U.S. territory's finances, but still presages big haircuts for creditors.
The fiscal turnaround plan, unveiled by the island's government on Wednesday morning, sees $1.2 billion a year available to service the island's debt, 50 percent higher than the $800 million the board projected in January.
Yet Governor Ricardo Rossello's team arrived at the higher figure despite falling short of certain of the board's recommended spending cuts. That's because his model forecasts higher baseline revenues and lower expenses, pegging the overall 10-year funding gap at $56 billion, lower than that board's $67.5 billion projection.
The plan needs approval by the board, which is under no obligation to rubber-stamp it and can develop its own model. The board has said it wants to approve a plan by March 15.
"The most important thing at this point is how the board responds to the assumptions made by the Rossello plan, including a lower baseline fiscal gap," said Keefe Bruyette & Woods analyst Chas Tyson.
The governor's projections take into account cost-saving reforms through laws and executive orders he has signed this year, said Gerardo Portela, director of Puerto Rico's Fiscal Agency & Financial Advisory Authority, in an interview on Wednesday.
A requirement of the federal Puerto Rico rescue law known as PROMESA, the plan will form the basis of upcoming debt restructuring talks with holders of some $70 billion in bonds.
If consensual talks fail, Puerto Rico can enter a court-supervised workout, akin to U.S. bankruptcy.
It needs a restructuring to fend off economic strife in the form of a 45 percent poverty rate, unemployment more than twice the U.S. average, and borderline insolvent public pensions and healthcare systems.
Rossello would save another $550 million a year in healthcare spending and $63 million in pension costs, below the board's annual savings targets of $1 billion and $200 million, respectively. Rossello has stressed the need to protect the island's most vulnerable residents.
Public retirement systems are underfunded by $45 billion, thought to be the largest gap ever for comparably sized U.S. public pensions.
Thanks to its territory status, Puerto Rico gets proportionately less federal Medicare funding than U.S. states. Rossello has said he plans to lobby the U.S. Congress to increase that funding, a move he says would boost the island's annual debt service capacity to $2.7 billion.
"We're very confident we'll get at least some of that funding," Elias Sanchez, the governor's liaison to the oversight board, said in a phone interview on Wednesday.
Even with the more robust debt service capacity Rossello envisions, Puerto Rico bondholders will be asked to take big cuts. The $1.2 billion figure represents a 69 percent discount on the $3.8 billion or so the island owes next fiscal year.
The governor's proposal cites the possibility of a debt restructuring that could include new tradable securities or cash flow bonds, or a structure that ties creditor recoveries to economic growth.
The island is asking the board to lobby Congress for an extension of PROMESA's freeze on lawsuits against Puerto Rico over debt defaults. The freeze ends on May 1, and the island says it needs more time to negotiate consensual deals with creditors without the specter of litigation.
The plan's focus on boosting revenue instead of austerity seems politically motivated, said investor David Tawil, whose fund, Maglan Capital, traded out of its positions in GO debt in part over political uncertainty.
"I wonder whether this plan is an opening salvo from the governor to the board ... or whether the board will take offense to this plan, because it ignores the guidance they’ve previously provided," Tawil said.
The presence of the board is a source of tension in Puerto Rico, where many locals view it as an unwelcome extension of U.S. imperial control.
(Reporting by Nick Brown; Editing by Lisa Von Ahn and Phil Berlowitz)