Wall Street wait and see on AGP

America’s $3.7 trillion municipal bond market is keeping a wary on Puerto Rico’s fiscal course after this week’s election ushered in a new governor and ousted an incumbent who had earned credit on Wall Street for tough decisions.

The Popular Democratic Party’s Alejandro García Padilla (AGP) edged out New Progressive Party Gov. Luis Fortuño by a 47.8 percent to 47 percent margin in a vote that also saw the PDP capture control of the island House and Senate.

Fortuño, a statehood advocate and national Republican, had earned a reputation on the bond market as a pro-business reformer who took tough decisions, such as paring as many as 30,000 public workers, to address Puerto Rico’s chronic fiscal woes.

García Padilla, a freshman PDP senator and national Democrat, remains a largely unknown entity on Wall Street, where analysts are looking for signs on how he will steer the island economy and try to shore up its public finances.

One avenue of concern is whether García Padilla will stick with the Fortuño administration’s strategy of using public-private partnerships (P3) as an avenue to carry out highway and airport upgrades that the cash-strapped government cannot afford.

The P3 program for major tollroads and the Caribbean’s busiest airport earned high marks from analysts and U.S. institutional investors, who hold much of Puerto Rico’s $52 billion of high-yielding, tax-supported debt, and been touted as a model.

García Padilla has been critical of the huge airport deal, but hasn’t signaled that he will scrap the plan, which remains under final review by the Federal Aviation Administration and could be cleared before he takes office in January.

“We know little about the intended financial policies of the incoming governor, and this uncertainty is a credit negative for bonds,” debt analyst and Janney Capital Managing Director Alan Schankel said in a Reuters report.

The Wall Street Journal and other media outlets have been reporting about investor anxiety leading up to the election, pointing to the fact that Puerto Rico’s triple tax-exempt debt has been outside a recent price rally in U.S. municipal bonds.

“A return to borrow-and-spend philosophies would jeopardize Puerto Rico’s bond ratings and threaten market access,” Richard Larkin, senior vice president at Herbert J Sims & Co, said in a commentary.

García Padilla reiterated in a post-election interview that he would maintain his platform of job creation. He has pledged to create 50,000 new jobs during his first 18 months in office.

“We will take care of the debt through a reduction in spending and an increase in wealth,” García Padilla said. “Resources will go to create jobs, and that’s how the economy will grow.”

The governor-elect also plans tax breaks and incentives such as wage subsidies to encourage hiring by small businesses and entrepreneurs.

“You will be seeing a new budget and priorities. We will have to see what he does,” MacKay Shields Senior Managing Director John Loffredo said in a Reuters report.

Meanwhile, pressing issues including Puerto Rico’s public pension crises are keeping bond investors and analysts on edge amid signs that Fortuño’s efforts have helped Puerto Rico’s economy and finances turn the corner after a six-year recession.

“The market’s indicating that time is running out for Puerto Rico to remedy itself,” said Dan Heckman, senior vice president at U.S. Bank Wealth Management. “Puerto Rico has huge fiscal challenges. Frankly, it doesn’t matter who's elected; they will be faced with those challenges. They need to just not walk in the right direction. They need to start running in the right direction.”