In a summer filled with continuous coverage of the unfolding Greek tragedy, the US faces an increasingly complicated situation with Puerto Rico, one of its oldest commonwealths.
Puerto Rico Gov. Alejandro García Padilla announced in June 2015 that the Caribbean island cannot pay back about $72 billion in debt owed to creditors. Last week a unit of the Puerto Rican government missed a debt-service deadline, indicating the commonwealth is running out of cash.
Although the news seems sudden, Puerto Rico’s economic problems predate the current crisis and have been slowly building since 2005.
How Did We Get Here?
When you think of Puerto Rico, pictures of sunny beaches and lots of tourists may come to mind. While tourism remains very important to the local economy, the commonwealth has carved out an increasing share of growth from pharmaceutical manufacturing over the past 30 years.
Business incentives through the form of tax breaks began in the 1970s and encouraged US companies to set up shop in Puerto Rico. Many did, until the incentives expired in 2006. The end of the tax break meant that many companies closed up shop and looked for better deals elsewhere, sending Puerto Rico into a recession that continues today. The global financial crisis of the late 2000s only added to the hardships faced by island residents.
How Do Puerto Rico’s Businesses Stack Up with US Counterparts?
To get an idea of how the current commercial environment has evolved in Puerto Rico over the past five years, Dun and Bradstreet compared US and Puerto Rican companies in industries located within the US and the commonwealth.
Using D&B’s three proprietary leading indicators of financial risks — Total Loss Predictor, the Delinquency rating, and the Viability rating — comparable indexes of active and open businesses between the two geographies were constructed. The rating scores were normalized and bound between 0% and 100%, with 100 being the best achievable rating and 0 being the worst rating.
The results (see charts below) reveal ongoing challenges and opportunities among Puerto Rican businesses. At first glance, overall financial risks among all active and open businesses in Puerto Rico are currently higher as an aggregate, when compared to the US. This means US businesses looking to make deals with Puerto Rican counterparts should exercise caution as the likelihood of payment default or bankruptcy is higher among businesses in Puerto Rico than in the US.
All of the 11 industry verticals tracked, which include the auto as well as real estate industries, show higher financial risks in Puerto Rico than in the US. The manufacturing vertical, which has been an integral industry to the island’s economy over the prior 40 years, declined 1.7% from 2010 — more than any other segment.
However, there has been gradual improvement among Puerto Rican businesses since 2010. The insurance sector has made drastic improvements over the prior five years — rising 16.7%. It’s currently sitting above the 50% dividing line.
As Puerto Rico searches for concessions from creditors and possible relief through new legislation from Washington, businesses will likely remain under distress. As this complicated financial and long-standing tax issue between Washington and San Juan unfolds, further improvements could follow.
|Index of Puerto Rican Businesses|
|Source: Dun & Bradstreet data|
|vs. Index of US Businesses|
|Source: Dun & Bradstreet data|
Adam Morehouse is a Macro Analytic Consultant on D&B’s Global Data, Insight & Analytics team. He covers parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight Products. He also contributes to D&B’s monthly economic tracker, adding both commentary and analysis. Adam holds a BBA in finance from James Madison University in Harrisonburg, Virginia, and an MBA in financial management from Pace University in New York City.