Moody’s: Earthquakes Could Delay Puerto Rico Recovery
Rating agency says ‘frequency of natural disasters’ could scare away investors
SAN JUAN — The recent earthquakes off the southern coast of Puerto Rico could worsen the island’s challenges as it tries to rebuild its already bankruptcy- and hurricane-battered economy, according to the latest Moody’s report on the commonwealth’s situation.
While acknowledging that the federally established Financial Oversight & Management Board (FOMB) for the island authorized $260 million in emergency reserve funding for related expenses, the rating agency’s report states the earthquake damage “will increase infrastructure improvement needs,” as the commonwealth continues to recover from the catastrophic damage wrought by hurricanes Irma and Maria in 2017.
Moody’s said “real economic output” on the island grew for the second straight year in 2019. It noted as positive economic trends a 1.3 percent increase in non-farm jobs—including manufacturing employment—over 2018, as well as the first slight increase in the population after a decade-long downward trend.
However, Moody’s says damage from last week’s earthquakes “is likely to blunt” this incipient post-hurricane recovery and “increase the risk of more residents and corporations looking to relocate.”
The island’s south coast has been rocked by hundreds of tremors since Dec. 28’s magnitude 5 earthquake, the most destructive of which occurred in the morning hours of Jan. 6 and Jan. 7, registering 5.8 and 6.4 on the Richter scale, respectively.
The earthquakes have damaged or demolished hundreds of homes, public buildings and businesses in the region—with most destruction located in the municipalities of Guánica, Guayanilla, Yauco, Ponce and Utuado. More than 8,000 people have been forced to leave their earthquake damaged or collapsed homes. As of Thursday, there had been 27 magnitude 4.5 or greater temblors since seismic activity began in the area Dec. 28, according to the U.S. Geological Survey.
An island-wide blackout followed the Jan. 7 earthquake, which heavily damaged Prepa’s key oil-and-natural-gas-fired Costa Sur powerplant in the southwestern municipality of Guayanilla. The 50-year-old power complex, which covered a quarter of the Puerto Rico Electric Power Authority’s (Prepa) grid capacity, may take up to a year to repair, Prepa Executive Director José Ortiz said.
“[P]rospects for a stronger recovery are hurt by an increase in the types and frequency of natural disasters,” the report states. “Disasters contributing to population erosion will likely remain on the minds of corporations looking to locate or expand to Puerto Rico.”
Moody’s report notes that on Jan. 8 the federal government declared an emergency in Puerto Rico related to the earthquake event and will provide 75 percent of the equipment and resources necessary for emergency recovery costs.
Estimates of earthquake damage losses range from a $110 million estimate, provided by the administration of Gov. Wanda Vázquez, to $500 million, according to reports of what the mayors of the affected municipalities have told the State Emergency & Disaster Management Agency. Economists say damages could top $1 billion when taking into account affected road and utility infrastructure as well as lost business activity.
The damage to the Costa Sur plant adds to the challenges facing Prepa, the report states, noting, however, that the public utility “has adequate liquidity to meet its needs.”
The rating agency points out that the commonwealth is in the final stage of evaluating proposals from private entities interested in taking over Prepa’s transmission and distribution operations, adding that a final decision will be announced “in the coming weeks.”
The report notes Puerto Rico is still recovering from hurricanes Irma and Maria, adding that key utility infrastructure assets, especially the electrical grid, remain “unreliable and earthquake damage posing further risks.”
While federal funding to rebuild and repair many assets was approved before the earthquakes began, the report states, the commonwealth has only received a fraction of the funds. The U.S. Congress approved $20 billion in Community Development Block Grant-Disaster Recovery (CDBG-DR) program assistance in 2018 to help rebuild after the catastrophic 2017 storms. Yet, only $1.5 billion has been released by the U.S. Department of Housing and Urban Development (HUD), which placed restrictions on further disbursements due to last year’s developments involving federal corruption arrests on the island and the massive protests leading to the resignation of Gov. Ricardo Rosselló.
The report states that HUD Secretary Ben Carson is “reportedly waiting on process improvements before releasing the remaining $18.5 billion for remediation and mitigation projects across the island.”
In fact, HUD published Wednesday the mitigation guides that the commonwealth must use to establish how CDBG-DR funding may be distributed. The commonwealth will have 90 days to submit its plan and the federal agency will have 45 days to evaluate and approve or reject them.
Moody’s report states that the commonwealth is also working with the Federal Emergency Management Agency (FEMA) to allocate additional disaster recovery funds. FEMA estimated recovery costs could reach $48.4 billion. To date, it has obligated $16 billion to start paying for approved projects, with $12.6 billion actually disbursed to fund construction and individual assistance, the report says.
Moreover, according to Moody’s, the economic situation on the island could be further complicated by the U.S. Treasury Department’s stated intention to phase out the creditability of Act 154’s 4 percent excise tax on the profits U.S.-based controlled foreign corporations on the island send back to their parent companies.
Calling the Internal Revenue Service tax credit a “favorable business tax credit for American companies based in Puerto Rico,” the rating agency said the ultimate outcome of the tax credit issue remains unknown given that the U.S. Treasury has not made a final decision. Act 154 revenues accounted for 15 percent of own-source commonwealth revenue in fiscal year 2019, ended June 30, the report says.
“[I]f the uncertainty results in corporations leaving, the likely result is fewer jobs for remaining residents and a decline in a key revenue source for the commonwealth,” Moody’s report reads.