Release of delayed federal disaster aid will boost Puerto Rico

Moody’s Analytics expects Puerto Rico’s economy will receive a boost of uncertain magnitude from President Trump’s announcement Friday of the release of $13 billion in long-awaited federal disaster aid.

The aid includes $9.6 billion for the Puerto Rico Electric Power Authority to repair and rebuild the electrical grid and $2 billion for the Puerto Rico Department of Education to rehabilitate schools and other educational facilities.

The Trump administration said the funding brings to “approximately $26 billion for Puerto Rico’s recovery from Hurricane Maria.”

Congress has approved almost $50 billion in disaster recovery aid for Puerto Rico as a result of Hurricanes Maria and Irma, but it has been slowly dispersed.

Trump described the $13 billion announced Friday as “the largest emergency relief award in history to rebuild Puerto Rico's electrical grid and educational system.”

Trump did not address the federal delays in approving the funding. He also said he would work to rebuild the island’s pharmaceutical manufacturing industry without offering any specifics.

Moody’s Analytics had expected the commonwealth’s economy to shrink 5% this year primarily because of the COVID-19 pandemic and then grow between 2% and 3% in 2021 and 2022.

That forecast for 2021 and 2022 did not take into account Friday's announcement, said Bernard Yaros Jr., an assistant director and economist at Moody’s Analytics.

His forecast assumed the commonwealth’s economy would begin rebounding “as disaster relief spending starts to ramp up again and a vaccine or effective therapy is developed and widely available, thereby unleashing pent-up demand.”

Yaros won’t have an updated estimate of just how much the commonwealth's economy will benefit until sometime next month.

The Moody’s Analytics forecast is based on the commonwealth’s 2020 certified fiscal plan, which had assumed only $3.4 billion in funding from the Federal Emergency Management Agency for fiscal 2022.

For PREPA, the plan to release $9.6 billion could be credit positive.

Moody’s Investors Service said in a report earlier this month that if approval came before year end -- as it did on Friday -- it would be a factor that might lead to a credit rating upgrade.

That report said the federal funding is expected to be used to bring PREPA’s transmission and distribution system up to code and improve system reliability.

On the other hand, the report by Moody’s Vice President Jennifer Chang also pointed to the possibility that PREPA might seek an extension as it approaches a Sept. 25 deadline to file an updated status report on its Restructuring Support Agreement (RSA) with bondholders.

A PREPA request for an extension would further postpone discussions on the RSA, “adding uncertainty around the final terms and timing of a future debt restructuring plan for PREPA,” the Moody's (MCO) report said.

The Puerto Rico Financial Oversight and Management Board warned in June when it certified its 2020 fiscal plan for PREPA that without restructuring, “PREPA would need to repay approximately $4.5 billion of legacy debt service obligations over the next five years.”

“In the longer term, PREPA’s estimated annual debt service obligation based on term out of all long-term financial liabilities at a 5% interest rate over 25 years, is approximately $657 million per year,” the Oversight Board said.

“PREPA has maintained a growing and unsustainable debt balance over the past decade,” the Oversight Board also said. “As long as PREPA remains in Title III, the utility will not have effective access to capital markets to fund critical grid modernization and improvement plans.”

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