CHARLOTTE AMALIE, US Virgin Islands, Thursday August 2, 2012 – While the Caribbean Community (CARICOM) has mounted a strong lobby in the United States against what it perceives as unfair competition from rum production companies set up in the US Virgin Islands (USVI), those producers are being credited with keeping the USVI’s economy afloat.
Thanks to the USVI’s support of the Cruzan and Captain Morgan distilleries, the partnerships with parent companies Beam and Diageo respectively have “translated into the growth and strength” in the Matching Fund revenues, according to Governor John de Jongh, Jr.
“The success of our rum initiative has been critical to offsetting this series of financial blows,” the governor told credit rating agencies during recent conference calls on Monday to outline the measures taken by the his government in anticipation of a US$120 million bond offering to be secured by rum production revenues.
The governor shared the territory’s current and long-term financial picture, recounted efforts to bring down the costs of government and balance revenues with expenditures, and discussed the strength of rum proceeds from two of the world’s largest spirit manufacturers, which are collected by the federal government and wired directly to the bond trustee.
The revenue stream from the rum distilleries “is strong, it is growing and it is secure,” de Jongh told representatives of Fitch, Moody’s, and Standard and Poor’s.
“No one wants to borrow for working capital purposes, but the simple fact is that in the absence of revenue growth and the need to provide government services we cannot reduce costs quickly enough,” de Jongh said. For that reason, it is important to take action as soon as possible—preferably by the end of August—on the US$120 million bond offering authorized by the 29th Legislature. “The funds from the bond offering are critical to our payment of income tax refunds and obligations due to WAPA.”
The $120 million would provide the working capital to weather the worst financial downturn in the modern history of the Virgin Islands, the governor explained. In 2010, at the nadir of the recession, the Virgin Islands grappled with a 28 percent reduction in tax and fee revenues. An economic rebound was quickly hobbled by the closure of the territory’s largest private business, the HOVENSA oil refinery, further aggravating the government’s fiscal woes.
The cumulative decline in revenues from 2008 to 2013 was US$200 million—losses due to major decreases in personal income taxes, gross receipts taxes, and a whopping 71 percent drop in corporate income taxes.
The bond will be backed by matching funds obtained from the federal program that allows the Virgin Islands government to benefit from rum excise taxes.
To each rating agency, de Jongh described bold actions he has taken to compensate for lost revenues. The Virgin Islands government aggressively cut spending, rolled back public salaries, dismissed some 500 employees and encouraged another 500 to take early retirements—a 13 percent reduction in the government’s workforce representing a 19 percent reduction in personnel costs. The administration also raised some taxes, and aggressively pursued outstanding property and gross receipts taxes owed by delinquent taxpayers.
“We have made reductions that a few years ago would have seemed impossible to accomplish,” de Jongh told the rating agencies.
The borrowing will give the government time to prudently adjust to the HOVENSA closure in a manner that can be absorbed by the territory’s community and economy.