Puerto Rico Continues To Stabilize

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The Puerto Rico Government Development Bank’s Economic Activity Index (EAI) was flat from January to February this year, showing that the worst of the commonwealth’s recession is hopefully behind it. The EAI level for this February is still down 2.5% from February 2013, but that is an improvement from the 3 – 4% annual drops that were common during 2H13, and year-on-year comparisons are expected to improve by the end of this year.

“The relative stability in Puerto Rico’s economic indicators in recent months should help to allay fears of an accelerating decline in the underlying economy,” write Sterne Agee analysts Todd L. Hagerman and Robert Greene in a March 31 report. “The litmus test for the degree of economic contraction is 2014 as the budget reform begins to ripple through the economy.”

Puerto Rican bond issue a major success

For an economy that was downgraded just a few months ago and whose access to capital markets had been questioned, Puerto Rico has had a great month. In addition to the steady EAI numbers, Puerto Rico managed to place $3.5 billion in general obligation bonds earlier this month (coming out ahead of already high expectations) with an 8.727% yield when just three months ago there had been speculation that it might have to offer double digit yields to get investors interested.

The bond issue will keep Puerto Rico liquid for at least two years – even a $2 billion bond issue might have been enough, and the commonwealth’s government expects to be deficit-neutral in 2015. Public sector pension reform should also ease some of the pressure on the island’s finances, and it has certainly given investors confidence that the government is serious about getting its finances in order.

“On balance, the volatility surrounding Puerto Rico-linked securities should subside, and allow additional time to demonstrate measurable improvement in the Puerto Rico economy as well as the timely closure of the outstanding budget deficit,” write Haberman and Greene.

Puerto Rico banks just waiting for a catalyst

Haberman and Greene are bullish on Puerto Rico, giving Popular Inc (NASDAQ:BPOP), First Bancorp (NYSE:FBP) and OFG Bancorp (NYSE:OFG), all Buy ratings. Now that the immediate concerns have passed and long-term structural trends are looking good, they argue that the banks are just waiting for a catalyst for improving sentiment to rally behind and drive their share prices up.

Clearly they’re not alone, since all three banks have seen their stock prices start to recover recently.


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