San Juan, capital of the US territory of Puerto Rico, boasts a beautifully preserved colonial zone, while tropical forests and pristine beaches ring the rest of the country. But for the past few years, the Caribbean country has been navigating uncertain waters.
It is hard to overstate the economic devastation and social misery that Puerto Rico is currently experiencing. The island – whose residents are US citizens but can not vote in US elections unless they move to the mainland – is currently restructuring its $73bn in public debt, the biggest such restructuring in municipal bond history.
In May, Puerto Rico announced that it would close 179 schools, forcing nearly 30,000 students into classrooms elsewhere – some for the second time, as 150 schools were shuttered on the island between 2010 and 2015. Over the past decade, nearly 450,000 people have left to seek employment in mainland US, chiefly in nearby Florida.
Ricardo ‘Ricky’ Rosselló, the 38-year-old governor, has the unenviable task of attempting to reach a deal with bondholders. Ironically, Mr Rosselló is the son of Pedro Rosselló, who served as governor from 1993 to 2001 and increased public debt by more than $10bn during his term.
Among the creditors are hedge funds and so called ‘vulture’ funds, such as BlueMountain Capital Management, which own a significant chunk of Puerto Rico’s debt and have been relentless in their demands for repayment. The funds’ lobbying organisations, such as the Center for Individual Freedom and Main Street Bondholders, have been extremely successful in pressuring the US Congress.
Though Puerto Rico’s economic meltdown is often portrayed as solely caused by spendthrift local politics, as a de facto colonial possession of the US, the role of its northern neighbour has sometimes been unproductive, stifling trade and foreign investment.
In 1996, the US Congress restricted a provision that allowed companies in Puerto Rico to avoid income tax, an enticement that disappeared by 2006 and the lack of which played a key role in sending the country into recession. (US investors still pay no tax on their US income if they spend at least 183 nights on the island during the course of a year).
Favouring the mainland
The 1920 Jones Act (also known as the Merchant Marine Act) mandates that ships traveling between US ports have to be US-made, US-staffed and fly the US flag. Though originally envisioned with the end of strengthening US shipping, the Jones Act has added another layer of bureaucracy on the island and more or less forces local merchants to buy from US distributors. It shows few signs of being revised any time soon.
“The Jones Act is on a very solid political foundation in Washington, as it has been for a very long time,” says Charlie Papavizas, an attorney specialising in maritime law at Washington, DC law firm Winston & Strawn.
Nevertheless, Puerto Rico’s ‘never say die’ spirit has kept the door open for new foreign investment. Last year, New York hedge fund manager John Paulson said that he would be investing upwards of $1bn on luxury hotels and resorts.
Over the past few years, two solar power plants have been built there, including one $160m project by Oriana Energy LLC, a subsidiary of Miami’s Sonnedix Group, in partnership with Puerto Rico’s Yarotek. The plant is the largest of its kind in the Caribbean and will employ some 300 islanders.