Commentaries

PMC Weekly Review - July 29, 2019

Protesters oust Puerto Rico’s governor amid political and economic hurricane

Two years ago this September, we wrote in our weekly review about the state of the Puerto Rican economy post Hurricane Maria. It seems apropos this week to provide some updated context amid an unfortunately worsening situation that recently has developed on the island. Puerto Ricans flooded the streets of San Juan this week to protest a government many of them see as dishonest and even scornful toward the island’s people. A corruption scandal combined with the release of profanity-filled, homophobic, and misogynistic messages from a group chat that included Governor Ricardo Rossello and his inner circle, targeting political adversaries, proved enough to bring simmering tensions to a boil. The botched response to Hurricane Maria, followed by austerity that has closed more than 100 schools and slashed budgets, created a volatile situation intensified by these recent scandals and highlighted the demand for change.

As we approach the two-year anniversary of Maria, the economic situation in Puerto Rico is becoming increasingly dire. Today, nearly 30,000 of the island’s citizens remain homeless, and its critical tourism industry has all but crumbled. Amid last week’s protests, Royal Caribbean Cruises diverted two of its ships from the island, accounting for about 8,000 passengers and an estimated $650,000 in lost spending. And although Congress has allocated more than $42 billion in aid to Puerto Rico, the funds have come in slowly, exacerbating an already appalling set of circumstances.

To illustrate what caused the current situation, tax breaks on the island dried up during the past couple of decades, and the Puerto Rican government initiated new bonds backed by a sales tax to support the island’s aging infrastructure. However, the island now owes more than $70 billion to bondholders, a result of mismanagement and a dwindling tax base. Additionally, as recently as 2017, the median household income in Puerto Rico was less than $20,000, with about 40% of residents living in poverty. By comparison, the median income in the mainland US was about $60,000 in 2017, and only about 12% of residents lived in poverty. Then the hurricane hit in 2017, which killed roughly 4,500 people and caused $95 billion in damage. To make matters worse, as of May 2019, the unemployment rate on the island is dismal—close to 9% compared with less than 4% in the mainland US. This has caused a spike in migration from the island to the mainland US. Amid this migration, the economic gap between the wealthy and the poor has widened: Many of the island’s middle class have fled, whereas the poor have been unable to leave, and the wealthy (who were shielded from many of these problems) have stayed. This clearly has only intensified the tensions on the island territory.

Amid this complex financial situation, protesters also are demanding a variety of policy changes to prevent corruption, diminish the influence of lobbyists, provide greater media transparency, and audit and reduce Puerto Rico’s massive debt load. However, late Wednesday night, Governor Rossello announced his resignation via a taped video published on Facebook. This clearly is a relief to Puerto Ricans, but unfortunately, it comes with its own problems. By law, the island’s secretary of state would succeed Rossello, but since that position is currently empty, Justice Secretary Wanda Vazquez is next in line. However, Vazquez is seen as loyal to Rossello, and there already have been calls for her to resign. Furthermore, it seems this transition has no impact thus far on the fiscal control board that has been accused of mismanaging the island’s debt for years. This confusing and uncertain passing of the torch provides little comfort to Puerto Ricans, and raises questions about what policy changes ultimately will result.

Although these recent developments come as no surprise amid a worsening situation, the frustration that is currently boiling over into the streets of San Juan is easily understandable. And it seems that despite these protests that may spur much-needed reforms, Puerto Rico’s economic woes have a limited path toward improvement, leaving the fate of the island unclear at best. We can only hope that Puerto Rico can rectify this truly awful political and economic situation.

Michael P. Manning, CFA

Investment Analyst

Works Cited
•Cerullo, Meghan. “Behind the mass protests in Puerto Rico, a tale of economic woe,” CBS News: Moneywatch, 19 July 2019, cbsnews.com/news/puerto-rico-governor-protests-behind-the-unrest-a-tale-of-economic-woe. Accessed 23 July 2019.
•Tormos-Aponte, Fernando. “Unrest in Puerto Rico is not just about the governor. Here are four things you need to know,” Washington Post, 23 July 2019, washingtonpost.com/politics/2019/07/23/unrest-puerto-rico-is-not-just-about-governor-here-     are-four-things-know. Accessed 23 July 2019.
•Yan, Holly. “Debt, hurricanes, texting: Puerto Rico’s troubles explained: Protests against governor erupt,” CNN, 19 July 2019, kesq.com/news/national-world/debt-hurricanes-texting-puerto-ricos-troubles-explained. Accessed 23 July 2019.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results. Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index. Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses. Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. © 2019 Envestnet. All rights reserved.