Think Strategically: Puerto Rico’s Earth Cries Out

North of 1,500 earthquakes impact island

Everywhere we look around the planet, nature seems to be moving in ways never witnessed by most scientists.

We have begun to see how climate change is altering the natural cycle of life, from hotter and longer days to increased temperatures on most continents, especially in the arctic zones, where the artic caps are melting at a rapid pace. Other ecosystem failures are occurring in the world, for example, forest fires in California and, more recently, Australia that have destroyed both flora and fauna and thousands of homes.

In Puerto Rico, we have been enjoying an extended holiday season that began on Thanksgiving Day and ends Jan. 20 after Las Fiestas de la Calle San Sebastián. All celebrations came to an end for most families on Dec. 28 when two earthquakes, at 4.7- and 5.0-magnitude on the Richter scale, occurred in the area known as the Montalva Fault, some 6 km out in the sea from Guánica. The quakes have continued, and more than 1,500 aftershocks have been recorded within the same geographic area that includes Guánica, Yauco, Peñuelas, Guayanilla and Ponce as Puerto Rico’s Earth cries out.

Finally, as most Puerto Rican families were set to celebrate the Epiphany, or Three Kings Day, on Jan. 6, at 6:32 a.m., a 5.8-magnitude earthquake hit in the area known as Indios in Guánica. The impact created severe damages to homes, businesses as well as landslides. Then, on Jan. 7, a 6.4 earthquake struck the region at 4:24 a.m. local time. This time, the earthquake was felt across the entire island and left Puerto Rico without electric power for the second time in two years. Extensive damage to hundreds of homes was reported, causing more than 50 to collapse in Guánica, and downtown Guánica was basically destroyed with hundreds of businesses damaged. In addition, some schools have collapsed in Yauco, Guayanilla, Peñuelas and Ponce as well as severe damage to hundreds of other buildings. A second 6.0 earthquake followed at 7:15 a.m. local time, also causing extensive damage.

All told, more than 1,500 earthquakes have had an impact on and continue to hit the area.

Thousands of citizens are living in makeshift refugee camps, with tents, tarps, cars or other makeshift temporary shelters. Most fields have thousands of people sleeping in them, including sports venues, parking lots, shopping centers, farms and other locations in their communities outside their homes. These refugees are fleeing nature’s destructive power; they are afraid of losing their lives in their own homes, and there seems no end in sight for nature’s destructive power.

During Hurricane Maria, the government’s inactions allowed 4,645 Puerto Ricans to die, and this time, the island’s residents took matters into their own hands. The outpouring of support for our fellow neighbors includes thousands of private-sector companies sending help. Caravans of aid could be witnessed going south; however, why hasn’t the government evacuated the zone and set up a proper refugee camp at the National Guard’s Camp Santiago? This facility housed the Central American Games not that long ago, and it can be converted into a tent city quite quickly—and outside of the earthquakes’ current epicenter. If the government uses Camp Santiago, all support can be channeled to a single center where it can help all affected in the region. With its location near PR-52, and 45 minutes from the San Juan metropolitan area, this should be the place the government uses to support those in need.

Week in markets

Major indices near all-time highs as Iran takes 2nd stage

The stock market picked up in 2020, exactly where it left off in 2019, even rising with a strange mix of geopolitical issues and rosy economic reports. The way the market is behaving is signaling its likely chronicle for 2020. As the year takes shape, four vectors are likely to have an impact on investor behavior:

  • Vector 1: As an election year, 2020 will be affected by political risks and policy shifts.
  • Vector 2: The global, U.S. and Puerto Rico economic performance will be affected.
  • Vector 3: The U.S. presidential impeachment and election processes will take their toll.
  • Vector 4: How to sustain current market growth?

All major indices we follow closed at near-record highs as the geopolitical issues between the U.S and Iran took second stage. For now, it seems no further escalation is occurring. Even as Iran retaliated against the recent killing of its general by striking U.S. military bases in Iraq, but there were no reported casualties, and President Trump seemed to stand back from his initial position.

In the second week of trading of the year, the Dow Jones Industrial Average closed at 28,823.77, for a gain of 188.89 points, or 0.66 percent, and a year-to-date (YTD) return of 1.0 percent. In addition, the S&P 500 closed 3,265.35, for a gain of 30.50 points or 0.94 percent, and a YTD return of 1.1 percent. The Nasdaq closed at 9,178.86, for a gain of 158.09 or a 1.75 percent increase, and a YTD return of 2.1 percent. The Birling Capital Puerto Rico Stock Index closed at 1,733.66, a loss of 11.03 points, or -0.63 percent, and a YTD return of -0.9 percent. Meanwhile, the U.S. Treasury’s 10-year note closed with a 1.83 percent gain, or an increase of 1.67 percent. The U.S. Treasury’s 2-year note closed at 1.56 percent, or a gain of 1.96 percent, or YTD return of -0.1 percent.

Jobs growth and unemployment

The Bureau of Labor Statistics reported that total nonfarm payroll employment rose by 145,000 in December, and the unemployment rate remained unchanged at 3.5 percent, with significant job growth happening in retail trade and healthcare.

In December, the number of unemployed people was unchanged at 5.8 million. When compared year over year, it is noted that in December 2018, the unemployment rate was 3.9 percent, or 10 percent higher than December 2019, when it was 3.5 percent.

Final word: San Sebastián Street Party must be postponed

Amid all the suffering, anxiety, destruction, loss of life and crisis, a movement to postpone the San Sebastián Street Party has erupted in Puerto Rico. This effort has begun to attract several figures, including Gov. Vázquez, Archbishop González, several artists and a growing majority of other local people. San Juan Mayor Carmen Yulín Cruz has stated Las Fiestas de la Calle San Sebastián should go on as planned.

We at Birling Capital strongly feel the San Sebastián Party should be postponed; this is not the time for a party when we have thousands of fellow Puerto Ricans without homes, who are sleeping in tents or cars. This is the time to unite all our efforts to support our fellow neighbors in their time of need.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

Puerto Rico’s 12 Governors Have Lacked Transcendent Goals

Puerto Rico’s 2020 elections outlook

Since 1948, Puerto Rico has democratically elected 11 of its 12 governors, beginning with Luis Muñoz Marín and, most recently, Ricardo Rosselló Nevares. We have had industrialists, engineers, lawyers, career politicians and the son of a governor. What we never have had, until recently, was an unelected governor who rose to power after a governor resigned during “The Summer of Ricky.”

Of Puerto Rico’s governors, 10 have been men and only two have been women. By and large, a great variety of smart and transforming initiatives were delivered or attributed to our governors, as well as significant blunders and mistakes.

Every governor is remembered for one or two key issues that permit us to examine our past governors’ accomplishments.

Luis Muñoz Marín: His legacy is as the “Father of Modern Puerto Rico” and the “Architect of the Commonwealth.”

Roberto Sánchez Villella: His legacy included the most efficient public administration of all Puerto Rican-born governors, and he is blamed for the Popular Democratic Party’s (PDP) loss in the 1968 elections.

Luis A. Ferré: His legacy includes PR-52, the Christmas bonus, a 40-hour workweek and the Museo de Arte de Ponce.

Rafael Hernández Colón: The economic booms from Section 936 created gross domestic product (GDP) growth of 5 percent during the years 1987–1989, the highest since Operation Bootstrap. Construction began on the Teodoro Moscoso Bridge and the controversial Pabellón de Sevilla in Spain was built.

Carlos Romero Barceló: His legacy includes Minillas Tunnel, Roberto Clemente Coliseum and the creation of the Puerto Rico Federal Affairs Administration. He was frequently associated with the Cerro Maravilla shootings in 1978.

Pedro J. Rosselló González: His legacy includes the Puerto Rico healthcare plan, and starting the construction of the Convention Center, Coliseum of Puerto Rico and Superaqueduct. Rampant corruption also reminds us of some of his associates.

Sila M. Calderón: Her legacy includes being the only woman governor elected in Puerto Rico, who actively took action to eliminate corruption through a Blue Ribbon Committee that largely stalled the government’s work. She restored citizens’ confidence in government, revamped government finances and retained credit quality, spurred economic growth and job creation, and gave particular attention to the most disadvantaged sectors of the population. The controversial Special Communities Program provided $1.4 billion to poor communities and funded it with $1 billion from the now-defunct Government Development Bank.

Aníbal Acevedo Vilá: His legacy includes the adoption of the sales & use tax, the government’s shutdown and a shared government. He was also indicted and charged in a long-running public corruption probe, along with 12 other people; he was later acquitted.

Luis Fortuño: His legacy includes attempting to fix the government’s finances; Act 7 that eliminated 20,000 government employees; the 4 percent tax on pharmaceutical manufacturers; and the public-private partnerships law (P3) that converted the Luis Muñoz Marín Airport and PR-22 into world-class P3s.

Alejandro García Padilla: His legacy includes the Puerto Rico government debt crisis, declaring Puerto Rico could not pay its debts and would default on its bond payments, which forced U.S. Congress to enact the Puerto Rico Oversight, Management & Economic Stability Act.

Ricardo Rossello Nevares: His legacy includes spearheading Puerto Rico’s economic recovery after Hurricane Maria, which grew the GDP to 1.7 percent, a 136 percent increase, lowered unemployment to 9.0 percent, which was the lowest levels in 30 years, among other initiatives. He is also remembered by the controversial Telegram chat that forced him to resign.

Wanda Vázquez: While it is too early to tell, she provided much-needed stability to the government after Rosselló’s resignation. 

It is often said that great governors have been those who served in times of crisis, and to a high degree, the mystery of human nature comes into play. One of the relevant cohesive stories from these 12 Governors is the fact that not a single one of them was able to develop a plan for Puerto Rico broader than their term in office. That is why we need to develop supranational goals, objectives that would live beyond the governor’s four-year term.

Week in markets: U.S. stocks rally, uncertainty removed

The U.S. stock market rallied to new record highs after the three elephants in the room revealed their kimonos and erased some of the uncertainty that had been lingering. The top issues include:

Brexit: With the recent dramatic turn of events in the United Kingdom’s general elections, Boris Johnson received a strong public mandate to finalize the U.K.’s exit from the European Union.

U.S. Federal Reserve Bank policy: This past week, the Fed did not lower rates, as was mainly expected, and signaled a pause in monetary policy for 2020.

U.S. & China trade deal: The nations are said to have agreed on what is called a “phase one” trade agreement, which includes agricultural purchases and tariff reliefs; however, this deal has not been finalized.

While these issues will continue to dominate the news until they are resolved once and for all, there are significant risks that volatility will increase as 2020 ushers in the new decade.

The Dow Jones Industrial Average closed the week at 28,135.38, for a gain of 120.32 for the week, or 0.43 percent, and a year-to-date (YTD) return of 20.60 percent. In addition, the S&P 500 closed the week at 3,168.91, for a gain of 22.89, or 0.73 percent, and a YTD return of 26.40 percent. The Nasdaq closed the week at 8,734.88, for an increase of 78.35, or 0.91 percent, and a YTD return of 31.60 percent. The Birling Capital Puerto Rico Stock Index closed the week at 1,6664.67, or a gain of 54.96, or 2.71 percent over the previous week, and a YTD return of 20.34 percent. Meanwhile, the U.S. Treasury’s 10-year note lost this week, closing at 1.82 percent, or a loss of -1.09 percent and a YTD return of minus-0.90 percent. The U.S. Treasury’s 2-year note rose during the week to 1.60 percent, a loss of -0.62 percent for the week, and a YTD return of minus-0.87 percent.

The current market rally has lasted more than 10 years up to March 2019, and it is the longest bull market in history. A diversified view can help you navigate significant volatile periods, even recessions, bubbles and market crashes. Doing so will allow you to thrive in bear markets while growing your portfolio.

The final word: Supranational goals needed; what are they?

• Transform Puerto Rico with robust economic development and sustained 4 percent growth over the next two years;

• Align P.R. as knowledge-based economy of not less than 25 percent within a period of 10 years;

• Create 300,000 new jobs in the private sector in the next six years;

• Increase the labor-participation rate to 55 percent;

• Reduce the unemployment rate to 5 percent in six years;

• Reduce the government apparatus by transferring to the private sector any operation that the private sector can perform more efficiently; and

• Transform the educational system, from the primary to university levels, into one focused on entrepreneurship and the trades.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.


P.R. Courts Ask for Pay Raise Amid FOMB Cuts to Pensioners; Stocks Breaking Records, Investor Sentiment High

Judicial branch’s untimely 35 percent salary increase

The hawala system has existed since the eighth century between Arabic and Muslim traders along the Silk Road. Hawala is a method of transferring money without moving any money. Interpol’s definition of hawala is “money transfer without money movement.” Another explanation is “trust.” Hawala is an alternative remittance channel that exists outside of traditional banking systems. Transactions between hawala brokers or hawaladers are made without promissory notes because the system is heavily based on trust.

If the hawala system or the hawaladers are new to you, it is only because locally the hawala system is called the Central Government, Legislative Branch and the Judicial Branch. All are based on its citizens entrusting them with the power to lead the country in the best possible manner. The Judicial Branch is a system also based on trust, the trust that it will interpret and apply the rule of law in Puerto Rico. Here in Puerto Rico, the Big Hawalader of the Supreme Court is seeking to raise their base salaries 35 percent. Assuming the average superior court judge makes shy of $90,000 a year, the raise would signify an increase of $31,500 and the new average salary would be $121,500 a year. The most significant problem with this salary-increase request is that it comes amid the plan of adjustment of the Financial Oversight & Management Board (FOMB), where bondholders, retirees and most constituents are to receive significant haircuts on their bonds, pensions and obligations.

The country should be appalled with this request from the Judicial Branch because it does not reflect Puerto Rico’s reality and current dire financial condition. But remember, for the hawala system, trust is key. While most judges may be doing an ok job implementing justice, we know the system is flawed. Very little is accomplished on time; if you were to go to a courthouse on any Friday at 2 p.m., you would find it deserted. Nothing begins before 9 a.m., and most sessions are ended quite early. In addition, the courts’ infrastructure is in poor condition, and it has an outsize operation that has not adjusted to the realities of the demographic decreases. So, why not base the judges’ salaries on productivity, or percentages of the caseload that was resolved, or even by measuring the court docket decreases every month and evaluating how justice is being served expeditiously.

Measuring productivity is a concept the judicial branch would fight because they view their job as an art form, and artists take time. So, we must trust that justice will be served with prudence and compassion once the new salaries are implemented. However, before we conclude, let us review some of the data that compares the salaries of public servants in Puerto Rico with their peer group in the United States.

We compare the average salary of a judge with that of the per capita income in Puerto Rico; their pay is $70,657 or 365 percent higher than Puerto Rico’s per capita income. What is the basis of this salary increase? Why now? What metrics are being used to measure productivity? Does the Judicial Branch know Puerto Rico is in bankruptcy? All the right questions are not being answered. The fact is that our Hawala System based on trust is costing Puerto Rico a pretty penny.

Week in markets: U.S. stocks breaking records, investor sentiment high

The U.S. stock market continues to rally as it produced the fifth-straight week of substantial growth. The main drivers of the rally are:

•U.S. and China trade negotiations showing strong signs of continued progress.

•78 percent of corporations registering better-than-expected earnings growth has increased investor confidence.

•Global economic front is showing signs of normalization.

•U.S. Treasury yields have climbed to their highest level in months.

Although there are still several items to be finalized in trade negotiations, we are cautiously optimistic that in the near term, there will be a final deal that will provide the markets with the confidence it needs to maintain the current bull market.

The Dow Jones Industrial Average closed at 27,681.24 for a gain of 333.88 points, or 1.22 percent, and a year-to-date (YTD) return of 18.70 percent. In addition, the S&P 500 closed the week at 3,093.08, for a gain of 26.11, or 0.85 percent, and a YTD return of 23.40 percent. The Nasdaq closed the week at 8,475.31 for an increase of 88.91, or 1.06 percent, and a YTD return of 27.70 percent.

The Birling Capital PRSI closed the week at 1,661.96, or a gain of 63.75, or 3.99 percent over the previous week, and a YTD return of 20.14 percent. Meanwhile, the U.S. Treasury’s 10-year note rose during the week, closing at 1.94 percent, or an increase of 13.45 percent, with a YTD return of minus-0.80 percent. The U.S. Treasury’s 2-year note rose during the week to 1.68 percent, an increase of 8.39 percent for the week, and a YTD return of minus-0.88 percent.

Final word: Birling Capital’s 1st glance at 2020 outlook

For our vantage point, we would like to review the economic and market data dynamics that we are analyzing for the year ahead at Birling Capital:

•2020 global growth remains timid: With world a forecast of 2.7 percent for 2020, and 2.8 percent for 2021, we must wait until the ink is dry in the U.S. and China trade deal; we expect global growth to remain suppressed until the headline risks are eliminated, and supply chains return back to normal.

•Mixed monetary policy gamut: With most Central Banks adopting “swinging toward easing,” we must remain vigilant to the economic impact of the normalization of the U.S. and China trade war and its impact on the world economies.

•Growth in the European Union: The EU projected growth at 1.4 percent in 2020, which remains low as the EU has suffered the global trade disruption harder than other regions of the world.

•Brexit and the UK: The United Kingdom is set to expand 1.4 percent in 2020, assuming an orderly outcome to Brexit and a partial economic recovery for 2020.

•Asian growth in the spotlight: China is expected to grow at 6.1 percent for 2020, which is highly dependent on the outcome of the trade deal. Japan’s economy is set to decline to 0.7 percent in 2020, with fiscal measures expected to somewhat mitigate the growth volatility.

•Latin America and the Caribbean: We expect 2.5 percent growth in 2020. After the overall economy contracted by 35 percent in 2019.

•Middle East and Africa: With 1.3 percent growth to end 2019, we expect 3.5 percent growth in the region for 2020. For our year-end 2020 outlook, we plan to provide readers our yearly report, “5 Forecasts, 5 Themes & 5 Reactions for 2020,” in the last issue in December 2019.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

THINK STRATEGICALLY: Change…Change…Are You Ready?

Protesters turn up in droves to demand Gov. Ricardo Rosselló’s resignation, July 18, 2019. (CB)

Rally Behind new Governor and Allow Economy, Investments to Improve; Political Turmoil Cost Economy $1 Billion

We might think Puerto Rico has had a tough summer, and yes, in every measure, most every Puerto Rican can agree. It is not reasonable to have had three governors since Aug. 2, with now-former Secretary of Justice Wanda Vázquez sworn in as governor on Aug. 7 by presiding Supreme Court Chief Justice Maite Oronoz. The path is set for a radical change in the manner in which politics is conducted in Puerto Rico. Since 1948, all our governors have been elected by popular vote and, in the view of the New Progressive Party (NPP) majority in the legislature, for the post of governor, an elected official is favored rather than an appointed one. In Resident Commissioner Jenniffer González’s case, she received the most votes, 718,591, in the 2016 elections, compared to former Gov. Ricardo Rosselló, who got 660,510 votes. In other words, González received 58,087 more total votes.

In the days that followed the new governor’s ascension to the post, the NPP leadership rallied behind the resident commissioner to request she be named secretary of State, to then allow her to become governor. Gov. Vázquez stated she could designate González as secretary of State but intended to finish her term as governor on Jan. 2, 2021.

While this new political situation is being sorted out, depending on how Gov. Vázquez manages her latest post, we may find it refreshing to have a governor who does not respond to usual party pressures, does not care about getting re-elected, who would assume the hard decisions that have eluded most elected officials, and the stage is set for Gov. Vázquez to rise to the occasion and prove every skeptic wrong.

Week in markets: Volatility rising; China goes nuclear with its renminbi

The stock market’s volatility has risen sharply in the past three weeks as the U.S.-China trade war has taken a turn for the worse. As all global markets reacted negatively to China going nuclear with its renminbi (official currency of the People’s Republic of China) and weaponizing the trade war.

The U.S. Department of the Treasury took the step of labeling China a currency manipulator when that nation took concrete steps to devaluate its currency as a direct effect of the U.S.-China trade war. The renminbi fell to the lowest level in more than 12 years. According to U.S. Treasury Secretary Steven Mnuchin, the U.S. will now engage with the International Monetary Fund to eliminate any unfair advantage created by China’s currency manipulation actions.

The U.S. stock market finished lower for the third-consecutive week, with bond yields falling to their lowest level in three years. However, the outlook is still positive based on resilient economic expansion, modestly rising corporate profits and still-low interest rates.

The Dow Jones Industrial Average closed the week at 26,287.44, for a loss of 197.57, or minus-0.75 percent, and a year-to-date (YTD) return of 12.70 percent. In addition, the S&P 500 closed the week at 2,918.65, for a loss of 13.55, or minus-0.46 percent, and a YTD return of 16.40 percent. The Nasdaq closed the week at 7,959.14, for a loss of 44.93, or minus-0.56 percent, and a YTD return of 20.00 percent. Meanwhile, the U.S. Treasury’s 10-year note took a loss during the week, closing at 1.74 percent, or a drop of minus-5.43 percent, with a YTD return of minus-0.95 percent.

Final word: Improving P.R. investment climate

A reliable, stable and consistent investment climate fosters productive private investment from every sector, which is the engine for gross domestic product growth, jobs growth and eradicating poverty. An improved investment climate expands the depth and variety of corporations while creating new, enhanced services; it improves the goods available and ultimately reduces the cost of doing business. The summer of 2019 and its political turmoil have cost the private sector more than $1 billion in decreased economic activity and investments. This cost is a significant impact. An improved investment climate creates efficient financial markets, improves infrastructure investment and improves the lives of people who directly or indirectly work or benefit from the establishment of new entrepreneurial concerns. If you have any doubt, take a drive from Caguas to Humacao or from Cataño to Manatí, and you will note how every community has benefited from the growth of the pharmaceutical sector in each of these areas.

Firms that invest in Puerto Rico are here to make profits, and the capital activity they create allows the island to grow. Their investment decisions are impacted by their ideas, capabilities, strategies and assessment of the opportunities and incentives for particular taxes and locations.

Puerto Rico was once the king at attracting foreign investment. Since the late 1990s, the island has lost its way.

Seeking to improve government policies and behaviors that shape the investment climate matters not only for the fi rm but should also matter to every citizen. To improve Puerto Rico’s investment climate, it is key to consider all areas where the government has a strong influence, including:




•Regulatory burdens, red tape;

•Infrastructure and finance costs;

•Labor market regulation.


•Political risk;

•Policy predictability and credibility;

•Macroeconomic stability;

•Rights to property;

•Contract enforcement;


Barriers to competition

•Regulatory barriers to entry and exit;

•Competition law and policy;

•Functioning financial markets;


Our investment climate has been suffering in the same way our country has over the past few years. Improving the investment climate has to be the highest priority of the government of Puerto Rico. We must be open to increased entrepreneurship, innovation and exports while breaking into new markets.

We must work hard to recover our credibility, brilliance and strengths in attracting new activities to Puerto Rico that, in turn, create thousands of jobs and new investment.

The best way to eliminate inequality and poverty is by creating and distributing wealth all around Puerto Rico, and that is an aspiration we should all join to achieve.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

—Views expressed in this section do not represent the opinion of Caribbean Business.

Honoring the Office

Editor’s note: The following was first published in the July 18-24, 2019, issue of Caribbean Business.

Let’s put this in perspective. There was a time, it seems now to have been long ago, when a Puerto Rican Governor was given the Presidential Medal of Freedom, recognizing him, in the words of President Lyndon B. Johnson, as a “poet, politician, public servant, patriot, he has led his people on to new heights of dignity and purpose and, transformed a stricken land into a vital society.” Those are heavy words, and Luis Muñoz Marín deserved every single one of them. Whether you supported him or not, Muñoz made all of us proud, made all of us better. But that was then.

After these past three weeks, there will be no similar accolades for Gov. Ricardo Rosselló Nevares. In the most critical moment in our modern history, when Puerto Rico needs to restore its credibility, when it must begin a long climb back to respectability, the person who represents all of us has taken his office to new lows of dishonor. In one scandal after another, the picture that emerges so far is that our country is being run by an inept and immature man.

What then is to be done? Re-electing him seems like a foregone conclusion. Ricardo Rosselló could have—and I believe quite effectively—finished out his short political career. His own party has turned against him; it appears he will not even be able to obtain the nomination. But he still has 17 months left in his term and all signs are that it will only get worse for him. (Note that in last week’s indictments neither Julia Keleher, nor Angie Ávila were charged with profiting from giving out the illegal contracts; that means someone ordered them to do so, and big questions remain unanswered.)

All things considered, it is best for Puerto Rico if the Governor is removed from office. That can only occur through resignation or impeachment. The impeachment route is protracted and will require a careful articulation of violations of law to be justified. The Puerto Rico House of Representatives would need two-thirds of its members to bring an indictment. In the current climate, that is achievable. But removing him from office as a result of the indictment would require three-fourths of the senators to find that his conduct in the chats constitutes a felony or a misdemeanor involving moral turpitude. He has insulted women, denigrated homosexuals and, so, on in the most undignified manner, but whether he did so in violation of any law will be highly debatable.

In the end, the only option might be his resignation.

Undoubtedly, the Puerto Rico Constitution is on “High Alert.” We have never seen a Governor resign during his tenure nor have we ever impeached one. We have a Constitution for a reason, and we must let the Constitution lead the way. Moving beyond the outrage and disdain, our institution of government must be preserved. Governors come and go, but the institution remains. That is our obligation now—to protect and preserve the Rule of Law.

—Roberto L. Prats Palerm is an attorney with RPP LAW PSC and a 2020 gubernatorial candidate for the primaries of the Popular Democratic Party.

—The views expressed in the Opinion section are the writers’ own and do not necessarily reflect those of Caribbean Business.

Puerto Rico’s Governance Crisis

Editor’s note: The following was first published in the July 18-24, 2019, issue of Caribbean Business.

Puerto Rico is on high alert. With the FBI’s recent arrests of government cabinet members and disclosure of their private “chats,” the past 10 days have evidenced the highest levels of corruption and theft, and the lowest levels of morals, decency and ethics by a governor in the island’s history. There is a growing call for Gov. Ricardo Rosselló to immediately resign his office. And he should.

The ingredients of this corruption scandal are troubling:

First, on June 25, Gov. Rosselló’s then-Chief of Staff, Treasury Secretary & CFO Raúl Maldonado publicly stated in a radio interview that the government of Puerto Rico “acts like the mob” (“mafia institucional”). Maldonado also stated that corruption, fraud, bribery, extortion and influence-peddling abound at the highest levels in the government of Puerto Rico. Within hours, Rosselló fired Maldonado. A couple of days later, Maldonado’s son, Raúl Jr., stated that the governor is part of this orchestrated corruption. In response, the Puerto Rico Police Department, violating all protocols and civil rights, disclosed that they would start an investigation of Maldonado Jr., who had a gun owner’s license and multiple registered firearms in his home. His home address was also published by the police. The American Civil Liberties Union (ACLU) and private attorneys jumped to Maldonado’s defense and the “investigation” was dropped.

Second, on July 10, the FBI issued warrants for the arrest of six people, including Gov. Rosselló’s former Education secretary and the former director of Puerto Rico’s Medicaid program. The charges stem from an inappropriate relationship to obtain contracts with the accounting and consulting firm BDO Puerto Rico, a member of BDO Global. It became clear that private lobbyists were placed inside government agencies to direct contracts their way. Trials have been scheduled for the summer of 2020.

Third, on July 13, more than 880 pages of a private chat among the governor and his closest advisers were published. The chat shows private conversations full of insults against many public officials, acts of corruption, misogyny, strategies to destroy reputations, homophobia, orders by the governor to manipulate public opinion and bribe journalists and, the worst, making fun of the those who died after Hurricane Maria, whose bodies were lying on the floor in the state morgue.

After reading the 889 pages of the “chat,” the statements from Raúl Maldonado and the federal indictments, it is evident the current administration of the government of Puerto Rico is acting like a bunch of thugs. Ricardo Rosselló and his cronies are unfit to govern. There are no adults in La Fortaleza. There is no honor. There is no integrity. It could not have come at a worse time, as Puerto Rico is in financial bankruptcy and recovering from the horrible effects of Hurricane Maria.

The governor must resign.

We must restore honor and credibility in Puerto Rico. During a 2018 commencement speech at my alma mater, Princeton University, I stated that the lesson is loud and clear: Lack of integrity always has dire consequences. Silence is not an option. We must all learn to denounce what needs to be denounced; fix what is broken; right what is wrong and not allow anyone, regardless of their agenda, to weaken democracy. We must all become vital voices to restore our democratic principles and institutions. I am ready to lead.

—Eduardo Bhatia is an attorney-at-law, former 15th president of the P.R. Senate and a former executive director of the Puerto Rico Federal Affairs Administration. He is the Senate’s minority leader and is running for governor in the 2020 primaries under the Popular Democratic Party.

—The views expressed in the Opinion section are the writers’ own and do not necessarily reflect those of Caribbean Business.

Puerto Rico: Radical Transparency for Economic Recovery

Editor’s note: The following was first published in the July 11-17, 2019, issue of Caribbean Business.

The past few weeks have been very difficult for Puerto Rico. Widespread allegations of corruption have been levied at the island’s Government. The allegations—under investigation by the FBI and other Federal and U.S. State agencies—come at a terrible time. They reinforce an unfortunate bipartisan perception in Washington that the island government has been unable to root out a corruption problem decades in the making.

The island is still reeling from the impact of Hurricane Maria almost two years past. Billions in federal recovery funding, crucial for meeting economic recovery goals, have yet to be released, in part because of concerns on how the funding will eventually be used. Puerto Rico still desperately needs funding for widespread repair of critical infrastructure affected by years of neglect and hurricane damage. But the federal government is unable to bear the full cost, and thus expects private capital to have a substantial role. These private investors are understandably reluctant to invest in an island mired in federal investigations without the backstop of the federal government. Puerto Rico is in an endless hold, where federal lack of trust in the local government prevents the disbursement of recovery resources that will unlock the private investment that the U.S. citizens in Puerto Rico desperately need.

The only solution is Radical Transparency for Puerto Rico. During recent congressional testimony, I addressed one transparency initiative in particular: the creation of an Office of a Federal Coordinator for Recovery for Puerto Rico to speed up disbursement of recovery funds. A growing bipartisan group of us—public officials, investors, developers, federal executives, lawmakers—have brought this option to the U.S. Congress, the U.S. Senate, HUD (the U.S. Department of Housing & Urban Development) and other federal agencies. The concept is simple: Anytime the government of Puerto Rico considers projects funded with federal recovery funds, the federal government has a senior representative at the table to fully understand how these funds are awarded. Nothing more, and nothing less.

The Federal Coordinator is not another bureaucratic step—it is a catalyst, with visibility deep into P.R.’s procurement process, determining whether federal funds are allocated appropriately and transparently to deserving stakeholders. If the government of Puerto Rico takes active steps to find and expose corruption, the federal coordinator would act as an advocate, reporting that information to the federal government, external stakeholders, business leaders, media and capital providers. Likewise, if the federal coordinator discovers that contract awards are less than fully transparent, the office would again report such activity to federal agencies, the Senate, Congress, the media and capital providers. It would be up to those stakeholders to apply corrective action. This federal coordinator would work closely with the Financial Oversight & Management Board (FOMB) and the federal agencies providing recovery funds for Puerto Rico. Implementing this “sunlight pressure”—a concept welcomed by private citizens and the vast majority of P.R. government employees—is a necessary solution for the island’s problems.

As Machiavelli and Churchill correctly said: “Never waste the opportunity afforded by a good crisis.” History has provided Gov. Rosselló the perfect opportunity to regain the trust of the federal government by unconditionally “opening the books” of the government’s procurement processes, applying sunlight pressure to historically opaque, shadow processes that have existed for decades. The governor can welcome, with open arms, full federal overwatch of all recovery funds for the island. Everyone knows this will not be easy, but it will be the right thing to do. In doing so, we can still create the bright economic future that all of Puerto Rico deserves.

—Noel Zamot is the president of Atabey Group, an advisory firm focused on ethical investment in emerging markets. He is a son of Puerto Rico, a former business executive, retired Air Force colonel and combat veteran. He previously served as the Revitalization Coordinator for the Financial Oversight & Management Board for Puerto Rico. He has twice testified before Congress on rebuilding the island’s power grid, and the need for widespread structural reform of the Government of Puerto Rico.

A Call to Revisit the Prepa RSA

Editor’s note: The following was first published in the July 11-17, 2019, issue of Caribbean Business.

We traveled to Puerto Rico in March with several of our congressional colleagues to hear from the public on how best to rebuild civil society and a functioning economy. The same theme came up again and again: As much as anything, Puerto Rico needs relief from its crushing debt burden.

For a hurricane-ravaged community whose needs the Trump administration has neglected, the bloodless term “debt relief” might not sound to outside observers like a top priority. In fact, it is key to any hope for Puerto Rico’s future, and the people there know it.

Under previous Puerto Rican governments, the Puerto Rico Electric Power Authority (Prepa) and other agencies on the island issued billions of dollars in bonds that they cannot now repay. Any hope for Puerto Rico’s recovery lies in reducing that debt burden in a way that does not cause more people to permanently leave the island for lack of essential services or an excessive cost of living.

The public rightly demands a debt solution that does not put all the burden on working people. For that reason, we strongly oppose the recently announced agreement to restructure Prepa’s debts, and we urge the parties involved to go back to the negotiating table.

As Democrats on the U.S. House Natural Resources Committee documented in a 2015 report ( called “Profit at Any Cost,” much of Puerto Rico’s debt is owed not to disinterested lenders who just want their money back but to investment firms that spent millions of dollars on risky, high-yield bonds with a well-advertised risk of default. Those firms, which claim to want no more than justice, are hoping politics or the courts will bail them out on a bad bet. The May 3 Prepa deal represents exactly this kind of bad politics, and if it goes into effect, the result will be disastrous.

The agreement, which must be confirmed by a federal judge before taking effect, has many parties, none of whom are giving the public’s needs enough consideration. The deal, formally known as the Restructuring Support Agreement (RSA), includes Prepa; the Puerto Rico Fiscal Agency & Financial Advisory Authority; the Financial Oversight & Management Board for Puerto Rico; the Ad Hoc Group of Prepa Bondholders; and Assured Guaranty Corp., one of the bond-insurance companies that enabled Puerto Rico’s former leaders to issue excessive debt in the first place.

One way or another, these actors have to find a way to restructure $8 billion of Prepa’s legacy debt. This RSA is not the way to do this, and we recently wrote ( to the leaders of the Puerto Rican House and Senate urging them to oppose the deal.

The problems with the RSA are almost too numerous to lay out here. The agreement makes it impossible to meet the affordable energy goals laid out in the Puerto Rico Energy Public Policy Act of 2019, which recently became law. By all accounts, it will result in higher electricity rates for average Puerto Ricans, which will make businesses less able to expand or hire new employees, among other problems.

Despite an analysis by a Nobel Prize-winning economist for the National Bureau of Economic Research suggesting Puerto Rican debt needs to be reduced by about 80 percent, the RSA reduces the Prepa debt principle by only 22.5 percent—a drop in the bucket if the goal is to make Puerto Rican society able to flourish rather than to maximize third-party returns on bad investments.

Treating Puerto Rico as no more than a source of investor revenue will lead to a downward spiral and destroy what is left of Puerto Rico’s economic foundation. Unfortunately, that is what the RSA does. It ensures the first-priority use of every dollar that comes into Prepa from ratepayers goes toward paying off debt, not in building a more sustainable energy system or repairing the severe hurricane damage to the island’s infrastructure.

Like any other community, Puerto Rico cannot rebuild a modern power grid, provide good schools or offer attractive terms for potential investors without enough money to operate. Unfortunately, much of the money that should be spent on those programs is now earmarked for debt repayment. If that dynamic does not change, it is not too strong to say that Puerto Rico as a functional society will cease to exist.

People are already leaving Puerto Rico in record numbers. If we allow the island to become nothing more than a shell from which wealthy investors can squeeze money, it ceases to be an attractive business destination or a livable community.

The judge overseeing the case is expected to rule in July. Anyone who cares about avoiding an economic collapse for millions of American citizens should very carefully watch the next few weeks—and make their voices heard on the need to prevent the Prepa RSA from going into effect.

—Rep. Raúl M. Grijalva (D-Ariz.) chairs the House Committee on Natural Resources. Rep. Nydia Velázquez (D-N.Y.) chairs the House Committee on Small Business.

THINK STRATEGICALLY: The Thin Veneer of Civilization

Stock Market Roaring Back to new Highs; Earnings Increase; U.S.-China Trade Tensions Appeasing; More Stable Monetary Policy

Thin veneer of civilization: It turns out the ‘Fake News’ was true

The “thin veneer theory” is a term coined by Dutch primatologist Frans de Waal to place a label on the Hobbesian view of human morality. The idea of the veneer theory was advocated by biologists such as George C. Williams and, more recently, used by Former CIA Director General Michael Hayden. We have viewed in dismay how a mature democracy like the United States has morphed during the 827 days of President Donald Trump’s tenure toward a behavior similar to an oppressive egalitarian state identical to Venezuela, Cuba or Nicaragua. In our view, the thin veneer of civilization that protects us as U.S. Americans is fractured and fragile. It is that veneer that protects us from radical groups such as neo-Nazis, white supremacists, bigots and other discriminatory instances from showing up and being heard.

One of the most daunting images in our recent memory was the day of hate, rage, violence and death that occurred in Charlottesville, Va., during a “Unite the Right Rally.” This occurrence happened on Aug. 11 & 12, 2017, and led to the death of Heather D. Heyer.

In President Trump’s initial remarks on Charlottesville, he did not denounce the marchers explicitly; instead, he condemned “hatred, bigotry and violence on many sides.” He stated there were “very fine people on both sides,” much to the country’s dismay. In our view, this was only the beginning of a troublesome set of actions that have singled out the President as a racist and bigot. I have often thought that if you have a single doubt about whether a person is racist, the balance leans toward that person being racist. As it turns out, the so-called “Fake News” by President Trump was indeed true, as it turned out that Russia was attempting to tip the balance of U.S. elections toward Trump. The Trump campaign was actively sharing polling data results with Russia. Even though the President and his team have attempted to spin the story as a vindication, in my view, the President of the United States betrayed the country. What will Congress do about it?

Week in markets: Roaring back to new highs

After the Easter holiday, the U.S. stock market came back with a bang as both the S&P and Nasdaq reached new highs and, with it, put last year’s market decline into memory. The Dow Jones Industrial Average (DJIA) closed the week at 26,543.33, a loss of 16.21, or minus-0.06 percent and a year-to-date (YTD) return of 13.80 percent; and the S&P 500 closed at 2,939.88, a gain of 34.85, or 1.20 percent, and a YTD performance of 17.30 percent. The Nasdaq closed at 8,146.40, an increase of 148.34, or 1.85 percent, and a YTD return of 22.80 percent. Meanwhile, the U.S. Treasury’s 10-year note fell to 2.50 percent with a YTD return of minus-0.18 percent. The main drivers of growth are Corporate America providing increased earnings, U.S.-China trade tensions appeasing and a more stable monetary policy. North of 50 percent of U.S. public corporations have reported their first quarter (1Q) 2019 results, and most are on track with gains over 4Q 2018.

As we have stated in our recent columns, we predict that the market will continue to reach new highs based on the following:

•Strong 2019 market fundamentals. Increased earnings, fueled by economic growth.

•Corporate America delivering growth. Corporate profits are on the path for gains.

•U.S. economic growth. The U.S. economy grew at a 3.2 percent pace.

U.S. economy increases growth to 3.2 percent GDP

The United States economy defied skeptics and delivered a 3.2 percent gross domestic product (GDP) increase during 1Q 2019, which easily beat economic predictions that pointed to 2.3 percent growth, which was 45 percent better than the 2.2 percent rate recorded during 4Q 2018. The recent financial data destroys the recession fears and places the U.S. to reach its longest-ever expansion.

Final word: Birling ‘Stock to Watch’ at end of 2019

Birling Capital’s “Stock to Watch” includes an array of companies from Biotech, Banks and Technology, and you will note below how our portfolio of stocks have performed since Oct. 19, 2019, with an 8.06 percent return on the average.

We want to concentrate on two local bank stocks that have been perennial favorites in the portfolios of many Puerto Rico investors, Popular Inc. (BPOP) and Firstbank Corp. (FBP). Below are their 1Q 2019 results.

Popular Inc. (BPOP). Price as of April 26, 2019: $57.08

•1Q 2019 Results: Popular reported 1Q 2019 net income to common stockholders of $167.0 million, an increase of 58.3 percent when compared to the $106.4 million earned in 4Q 2018.

•Gross loans increased to $26.6 billion.

•Total deposits increased by $1.2 billion to $40.9 billion.

•Net interest income fell $5.3 million, or 1.1 percent, from the prior quarter, caused by lower fair-value accretion income on the acquired Wells Fargo auto loan portfolio.

•Regulatory Tier One capital ratios stood at 16.39 percent and is considered a “well-capitalized” institution.

First Bancorp (FBP). Price as of April 26, 2019: $11.28

•1Q 2019 Results: First Bancorp reported 1Q 2019 net income of $42.6 million, compared to the $100.4 million recorded in 4Q 2018.

•Gross loans rose to $138.7 million. The state of Florida region saw an increase of $50.3 million while Puerto Rico grew $74.1 million and the Virgin Islands experienced growth of $4.3 million.

*Total deposits increased $76.1 million to $9.01 billion.

*Net interest income increased to $140.2 million.

*The Regulatory Tier One capital ratio stood at 20.85 percent and is considered a “well-capitalized” institution.

As the recovery of Puerto Rico continues, we should expect both banks to play a significant part in all developments.

–Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

THINK STRATEGICALLY: The Behavioral Perspective

Until P.R. Gov’t is Able to Seek Investment-Grade Rating, Investors Exploring New Strategies, Diversifying Exposure Beyond One Asset

The behavioral perspective: New P.R. investment trends

The behavioral perspective is often explained in theoretical terms in which learning and behavior are described and explained as stimulus-response relationships.

Thus, the behavioral perspective of the Puerto Rican investor has significantly changed because the Government of Puerto Rico lost its investment- grade rating. With this downfall, it had an impact on any and all securities that have large amounts of exposure to the Government of Puerto Rico, which creates billions in losses to most investors that relied solely on these instruments. For years, this was the standard way to invest, and it was very profitable for those investors that could realize 6 percent returns from tax-free bonds or Puerto Rico mutual funds. Until the government can seek an investment-grade rating, investors have been exploring new strategies for their assets.

Below are some of the strategies being implemented:

•Money managers with diverse strategies. This strategy was often used by large institutional clients and, some years ago, became quite feasible for retail investors to select five or six money managers with a diverse array of strategies to professionally manage their portfolios. Some include BlackRock, Vanguard, State Street, Fidelity and Pimco.

•Exchange-traded funds (ETFs). These funds have become popular because they allow investors to quickly own a diversified set of securities, such as stocks, at a meager cost. They also allow investors to get exposure to areas of the market, such as countries, industries and asset classes.

•U.S. municipal bonds, funds. There are hundreds of issuers in the U.S. with solid credit quality, which are rated “AA” and higher, with prospective growth; there are also mutual funds that include in their strategies a 100 percent U.S. focus or an 80 percent U.S. focus, as well as many other mutual funds with a diverse set of investment strategies.

•U.S. Treasuries. The United States, with a “AAA” rating, has always been a safe-harbor investment that produced decent returns with minimal risk. Currently, the 10-year note closed Friday at 2.50 percent.

•Alternative P.R. investments. With private equity, loan funds and other new opportunity funds, there is much to consider when forced to change strategies, and this is one of those instances. When investors are accustomed to tax efficiency, favorable inheritance laws, high yields and names you knew and trusted; when changing all you know, you need trusted expert advice.

Week in markets: DJIA, S&P 500, Nasdaq show double-digit growth

There was significant activity in the markets globally as most stocks and indices finished the week on a very high note. The Dow Jones Industrial Average (DJIA) closed the week at 26,424.99, a rise of 496.36, or 1.91 percent, and a year-to-date (YTD) return of 13.30 percent; and the S&P 500 closed at 2,892.74, a gain of 18.34, or 0.64 percent, and a YTD performance of 15.40 percent. The Nasdaq closed at 7,928.69, an increase of 199.37, or 2.58 percent, and a YTD return of 19.60 percent. Meanwhile, the U.S. Treasury’s 10-year note increased to 2.50 percent, or a rise in yield of 4.17 percent.

Emerging markets growing faster than expected

We must look at the pace of growth for international stocks. Most emerging markets have outperformed all others. We note that most cyclical sectors have outpaced the defensive sectors, which is a clear sign that there is trust in current economic conditions. The principal thrust for the global rally was positive news coming from China. One of the items we review is the China Purchasing Managers’ Index and, for the month of March, it showed a return to expansion after more than six months of contraction. This is a clear signal that the tax cuts and other policies in China’s domestic market are producing modest growth.

U.S. adds 196,000 jobs in March

The U.S. Bureau of Labor Statistics reported that total nonfarm payroll employment increased by 196,000 in March, with the unemployment rate unchanged at 3.8 percent. Jobs growth occurred in healthcare, and professional and technical services. With hiring strongly rebounding in March, the fears of a dramatic slowdown of the labor market have subsided.

Final word-diversify, diversify: The discipline of protecting life’s work

As we have discussed many times, diversification is the discipline of protecting your life’s work. In our view, there are at least three critical benefits of diversification, and they include:

•Minimizing risk of loss. If some of your investments perform poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.

•Preserving capital. Similar to our lives at various stages, investing must be tied to our lifespan in the same way. For young people, this is about accumulation and, for older folks near retirement age, they must have goals toward preserving their capital to last through retirement and diversification, which is the key to help protect their savings.

•Generating returns. Investments often do not always perform as expected, and when you apply the benefits of diversification, you are expanding your sources of income. Just like you do not have just bread and water in your fridge, your investments must be a vast array designed to balance your risks in times of market turmoil.

The key with all portfolios is always to diversify them in a way that the investor does not have any more than 10 percent exposure to one strategy or asset class.

Probably the best way to present diversification is with a story. In 2006, we visited the patriarch of an ultra-high-net-worth family, and we had a great visit that I will never forget.

During that visit, the client was explaining that he was so well-diversified that he did not need to worry. We asked him how so? He explained that in addition to his general construction, he had a block and paver factory, an industrial hardware company, a quarry, a sand and gravel operation and a scaffolding renting operation.

We told him that what you are describing is not diversification. You are vertically integrated into the construction sector. If a construction crisis emerges, your entire business will suffer. He was startled and asked us how we could help. We developed an action plan that involved performing an enterprise valuation on all his business. After many discussions, we implemented the plan, which called for selling some of the assets and keeping the real estate for development and rental income. In two years, we were able to increase his holdings in the millions of dollars while maintaining some assets that were part of his original operations. When the construction crisis arrived, our clients had zero debt, income had grown by 35 percent, and the exposure to construction was only the development company, which is in the business of developing real estate for rental income.

This is the power of sound advice using diversification.

–Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.