Investor rating agency downgrades NMI

Moody’s Investor Service has downgraded the CNMI’s rating on its general obligation bonds from Ba3 to B2, citing several key factors that include the demise of the garment industry.

According to its decision published Monday, the rating downgrade reflects the substantial economic deterioration in the CNMI resulting from changes in the minimum wage laws that drove out the garment industry that had been a dominant sector in the local economy.

“The loss of this entire industry is a substantial blow to an already weak and narrow economic base,” Moody said.

This situation, the report states, was exacerbated by years of operations based on “outdated” budgets, resulting in 13 consecutive years of general fund deficits, and by the global recession that has resulted in a downturn in tourism.

Even the CNMI’s exploration of possible bankruptcy for the NMI Retirement Fund—with its unfunded liability amounting to 358 percent of the CNMI’s 2007 revenues—was a factor in the lowered rating, Saipan Tribune learned.

The CNMI, according to the agency’s website, has roughly $109 million in general obligation bonds outstanding, of which $2.6 million is rated by Moody’s Investors Service.

Commonwealth Ports Authority executive director Efrain F. Camacho said the rate downgrading did not come as a surprise, given that the CNMI has been experiencing financial difficulties for several years.

“What is important, however, is we have implemented actions to address expenses, increase efforts to collect receivables and sound management practices to put our course for eventual recovery,” he told Saipan Tribune yesterday.

He admitted that recovery will not happen overnight and may take a year or two depending on how soon the CNMI can get out of the economic slowdown it is currently experiencing.

‘Federalization will harm NMI’

Moody’s said the federal takeover of local immigration, set to take effect November this year, creates additional uncertainty in the already beleaguered tourism sector.

The Fitial administration seized on this to bolster its arguments against federalization, saying it is damaging to an already fragile CNMI economy.

“Federalization has harmed and will further harm our economy and tourism industry,” said Lt. Gov. Eloy Inos. “And this will result in less economic activity and less revenues to address our government’s budget and pension crisis.”

Inos points out, for example, that the CNMI government has had to substantially reduce its operating budget below $160 million. “If we had a stronger economy that brought in $200 million in government revenues, as we did before, we could then allocate $40 million or more to the Retirement Fund,” said Inos.

Federalization, Inos said, makes CNMI economic growth very difficult and this is supported by the Conway-McPhee report, a First Hawaiian Bank economic report, two GAO reports, and a Moody’s Investor Service report.

‘Staggering population decline’

Moody’s also cited a staggering CNMI population decline that will be exacerbated by restrictive new federal immigration rules that will result in the loss of more foreign workers and less economic activity in the Commonwealth.

Total CNMI population peaked in 2004 at 70,500, of which 57 percent were foreign contract workers. The most recently published population figures from 2007 show a 16 percent decline in total population directly related to the loss of alien workers in the garment industry.

The credit rating agency also noted that the lack of budget and financial reporting has affected the CNMI’s status. “The Commonwealth did not adjust its budget to reflect falling revenues,” it said.

The CNMI passed its Fiscal Year 2009 budget of $143 million already five months into the fiscal year.

‘Large unfunded pension liability’

Since 2007 when the CNMI pension trust fund had an accrued unfunded liability of roughly $570 million and a funded ratio of less than 50 percent, liabilities have since grown after the CNMI stopped making employer contributions to the Retirement Fund.

The ongoing court battle between the Fund and the central government, Moody’s said, raises more areas for clarification.

“It is unclear whether CNMI qualifies as a municipality under Chapter 9 of the federal bankruptcy law as it applies to municipalities. However, even the exploration of bankruptcy rights is disturbing given the very weak economy and falling revenues. It is unknown, at this time, what role the federal government, if any, would take to stabilize the Commonwealth,” Moody’s stated.

The CNMI was last rated in December 2003 when the rating of Ba2 with a stable outlook was assigned to the Commonwealth’s general obligation bonds series 2003A.