Sunday, November 29, 2020

THINK STRATEGICALLY: A Fable of Two Islands

By on May 18, 2020

(Screen capture of USGS.gov)

Puerto Rico: Public Sector vs. Private Sector

We were led to believe that Puerto Ricans were united by our sense of purpose, by our rich culture, by our traditions, by our respect for others. After all, we are one country, we share the same soil, we all have dreams and face the same problems and challenges.

We used to think that the private sector’s strength was also the strength of the public sector, so it was every Puerto Rican’s responsibility to work in unison to make Puerto Rico better. 

Since 2013, when the Puerto Rico Government chose the easier route and decided not to honor the Constitution by preferring to default on $69 billion in bonded debt, that was the day we became two islands, inhabited by a segregated people, from the public and private sectors, respectively. 

These differences have grown more profound and starker after the initial lockdown order issued by Gov. Wanda Váquez. It was initially a good idea; now, it has become the worst possible nightmare for the private sector. Let’s look at the lives of each island:

The Island of the Public Sector: 

  • 201,900 government employees are quarantined at home; only essential agencies are working.
  • All receive their payroll payments on the 15 and 30th of every month.
  • 70% have not worked a single hour since the lockdown orders. 
  • Each accumulates vacation and sick-leave days
  • Receive free or highly subsidized medical insurance 
  • Most agencies are closed, so they cannot provide their mandated services to the public.
  • In the Island of the Public Sector, gatherings and activities even on Sunday, although not legal, are hosted by them.
  • Essential services such as unemployment benefits, the government’s health plan, nutritional assistance programs such as the school meal service are either not being provided or closed. 
  • The government has not been capable of executing the needs of its citizens.

The government does not recognize that all these luxuries that it provides to its employees are paid for by the revenue it collects from taxes and other government-imposed payments from the private sector. 

The Island of the Private Sector: 

  • The private sector hires 80% of Puerto Rico’s workforce, with more than 650,000 workers and a payroll that exceeds $30.2 billion a year. 
  • The private sector works hand in hand with communities, non-profit entities that collectively comprise $40 billion, or 83%, of the income in the economy.
  • Currently, private sector employees have filed 240,996 new unemployment claims, meaning 37% of the private sector labor force, which according to the Labor Department, totals 654,224.
  • Most economists point out that the number of unemployed is more than 359,000, or 55% of the private sector labor force.
  • Private sector workers not only lost their jobs, they will soon lose their health insurance and any other benefit.
  • Businesses that have been allowed to open have then been raided by agencies, including the spokesperson of #nostocaatodos.
  • Thousands of businesses face insolvency after over two months closed without any income; bankruptcies will quadruple.
  • Puerto Rico hospitals have lost $202 million in 60 days, with losses mounting, 30 hospitals could dramatically reduce operations, and there is a systemic risk in Puerto Rico healthcare that will, in turn, create a full-fledged humanitarian crisis.
  • The only components that have been allowed to operate marginally are supermarkets, drug stores, and restaurants limited to take-out service. 
  • Sales of bags of cement fell 60% in April.
  • Auto sales fell 96% in April.
  • Banks are sure to take an enormous hit due to increased loan delinquencies, including commercial, mortgage, auto, personal and credit cards. 

As you can see from this list, the Island of the Private Sector is facing insolvency, bankruptcies, losses, high unemployment and the potential loss of life if our hospitals begin to close. 

Meanwhile, the Island of the Public Sector remains undeterred by the crisis and continues to operate as usual as the Island of the Private Sector weakens. The Government of Puerto Rico will not be able to realize the tax income that it usually receives from the private sector and may ultimately face the unthinkable for any governor or politician, having to lay off thousands of public workers.

The private sector indeed represents the backbone that sustains the Puerto Rico economy. 

So if the government does isn’t capable of recognizing the critical importance of the private sector, it will realize soon enough the critical mistake it has made in not allowing the economy to reopen, albeit with significant safeguards,

No one should forget that the private sector is not just big corporations, it is also the cashier, bagger, butcher, nurse, cook, car salesperson, mechanic, construction worker, waiter, teacher, engineer, dentist, doctor and the business owner, too.

There is undoubtedly a misperception about what is meant when some refer to the private sector “los grandes intereses,” or big interests. Our concern is to create jobs, wealth, capital, business, factories, places to eat and car dealerships. Our most significant interest is that Puerto Rico thrive so that we may be able to revamp our economy, reopen our businesses and create the new way of life that will follow this pandemic. 

Every pandemic has lasting impressions on the surviving population. Such was the case with the first cholera pandemic (1817–1824), the devastation of  which highlighted the importance of clean water proper sanitation, paved roads, aqueducts, sewers, bathrooms and the consequences of wealth inequality among the countries. 

We do not realize how much the world will change forever. If Puerto Rico is to learn anything from this crisis it’s that no sector is more important than the other. We all need each other to survive if not thrive.

Gov. Vázquez, the time to safely reopen the economy is now.

Week in markets: Wall Street losses mount amid economy in worse shape than anticipated

The U.S. stock markets lost almost all of last week’s gains as U.S. Retail Sales fell 16.45%—much more than the 12% estimated. U.S. Business Sales fell 5.23%, to $1.38 trillion, and U.S. Production Price index fell 1.27%. There is also the expectation that there will be, at best, two more months of job losses. Also, there is mounting tension between the United States and China as the U.S. moved to block all semiconductor shipments to Huawei, citing national security. 

During a recent webinar, Federal Reserve Chairman Jerome Powell warned that a complete economic recovery for the United States could take as long as the end of 2021 or until there is a vaccine against the novel coronavirus. 

“For the economy to fully recover, people will have to be fully confident. And that may have to await the arrival of a vaccine,” Powell said.

The Dow Jones Industrial Average closed the week May 15 at 23,685.42, for a loss of 645.62 points, or 2.65%, and a year-to-date (YTD) return of minus-17%. The S&P 500 closed at 2,863.70, dropping 66.1 points, or 2.26%, for a YTD return of minus-11.4%. The Nasdaq closed at 9,014.56, losing 106.76 points, or 1.17%, for a YTD return of 0.5%. The Birling Puerto Rico Stock Index closed at 1,273.67, a loss of 65.83 points, or 4.91%, and a YTD return of minus-37.5%. 

Meanwhile, the U.S. Treasury’s 10-year note closed at 0.64%, a change of minus-7.25%, and YTD return of minus-1.3%. The U.S. Treasury’s 2-year note closed flat at 0.16%, for a YTD return of minus-1.9 percent. 

The Final Word: House Passes Stimulus No. 4, the Heroes Act 

On Friday the House of Representatives passed its fourth stimulus amid the pandemic. Known as the Heroes Act by its acronym for Health and Economic Recovery Omnibus Emergency Solutions, it consists of a $3 trillion proposal. The bill is a significant development as it marks the commencement of formal negotiations with the White House and the Republican-controlled Senate. 

As passed, the Heroes Act will cost more than the other three and a half stimulus bills enacted.

Highlights of the bill:

  1. Increased funds for state and local governments, with conditions.
  2. Additional changes to the Paycheck Protection Program, making it more flexible and generous; however, at this time we do not see additional funding for the program
  3. Increased funds for hospitals and front-line medical professionals, as hospitals are losing $50 billion a month in the United States and $101 million in Puerto Rico.
  4. Increased funding for COVID-19 testing: as more states reopen, testing becomes a critical tool.
  5. New tax incentives for U.S. corporations that bring manufacturing jobs back. While the focus is on China, the incentives are for any operation around the world. The bring-back-manufacturing strategy is Puerto Rico’s chance to become included in any related policy.

From our point of view, we believe that there is substantial support to pass the Stimulus 4 bill, and it should be successfully negotiated by the House, Senate and the White House by the end of the month or early June.

As this may be the last stimulus bill passed before the November elections, a lot of political capital is riding on its success.

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

You must be logged in to post a comment Login