Why Puerto Rico Now?
By Adam Greenfader
In every crisis, there is an opportunity. Today, we are navigating the aftermath of the global COVID-19 pandemic, escalating geopolitical conflicts, and the increasing devastation caused by the ongoing climate crisis. Supply chain disruptions have highlighted the vulnerability of global markets, pushing nations to prioritize the domestic production of essential goods, including pharmaceuticals and medical supplies. As countries implement stricter trade policies, tariffs, and border controls, the world is shifting toward a new era of isolation and economic self-reliance.
At the same time, environmental challenges continue to remind us that no region can address these crises alone, and cooperation is more critical than ever. Wildfires in California, flooding in North Carolina, unprecedented heat waves in Europe, and intensifying hurricanes in the Caribbean are stark warnings of the urgent need for collective action. While some nations are retreating inward, the reality is that global challenges require global economic solutions.
In this complex landscape, Puerto Rico stands at a pivotal crossroads. With over 70 years of leadership in pharmaceutical and critical manufacturing, Puerto Rico is uniquely positioned to strengthen the United States’ supply chain resilience. Its strategic location, highly skilled workforce, and robust industrial infrastructure make it an indispensable asset in ensuring national economic security.
Puerto Rico holds a unique and challenging distinction, it is on the front lines of the climate crisis. As hurricanes grow stronger, coastlines erode, and temperatures rise, the island faces the urgent need for climate adaptation and resilience. Puerto Rico’s struggle is not just its own; it is a preview of what many coastal regions around the world are already starting to experience.
This dual role, as both a manufacturing powerhouse and a climate crisis leader, positions Puerto Rico as a vital case study for the future. By investing in sustainable industries, resilient infrastructure, and disaster preparedness, the island has the potential to serve as a model for how communities around the world can thrive in the face of global uncertainty.
But before that can be done, Puerto Rico will need to pull itself out from its current economic challenges. Economic reconstruction is not easy, and, in the case of Puerto Rico, it calls for abandoning old approaches and cultural biases that have persisted since 1898. Puerto Rico’s economic development is not simply putting things back as it was before; or by replacing previously inadequate infrastructure or existing systems, but by making profound restructuring of existing ones.
Those who do not learn from the past are doomed to repeat it.
Since the beginning, U.S. Congress has employed a two-pronged approach to the island’s economic growth: encourage Puerto Rico to borrow heavily to perform critical government functions and create lucrative tax incentives to motivate U.S. companies to move to the island. Triple tax-exempt bonds were first introduced in 1917. The bonds were used to finance the island’s economy. Companies were also provided lucrative tax incentives to industrialize Puerto Rico. For a long while, it worked extraordinarily well. By the 1960s, The New York Times called Puerto Rico “one of the most spectacular economic achievements of the post-war era.” Puerto Rico prospered for thirty years. It had one of the highest per capita incomes and became one of the world’s top pharmaceutical production hubs (it still is today).
Globalism and the end of the cold war however revealed cracks in Puerto Rico’s economic policy. U.S. companies, searching for even cheaper labor and raw materials, were going farther across the planet. Ease of credit and tax incentives ultimately deflected attention from the fact that Puerto Rico did not have fundamental economic revenues models in place. Real estate taxes, land use planning and zoning for instance, were ineffective to generate sufficient revenue to fund its own budget internally.
Lucrative tax incentives like Section 936, also could not hide structural economic deficits; high unemployment, a large informal economy, and people emigrating to the U.S. mainland to find better paying jobs. When the Section 936 incentive expired, Puerto Rico went into debt. Adding real injury to insult, two category five hurricanes and multiple deadly earthquakes slammed Puerto Rico, causing more than 100 billion dollars of damage and the loss of over 4,700 lives. Then in 2020, the Covid 19 pandemic brought massive quarantines and huge reductions in tourism and other industries.
Amidst these challenges, there are rays of hope. Puerto Rico formally exited bankruptcy on March 15, 2022, after completing the largest public debt restructuring in U.S. history. This milestone followed a federal judge’s approval of the debt adjustment plan on January 18, 2022, which set the stage for the territory to begin its financial recovery. The restructuring process, initiated in 2017 under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), will address approximately $70 billion in debt and $50 billion in pension obligations.
As the island is recovering, it has now regained access to capital markets. Its banks are extremely well capitalized according to the Tier 1 Capital Ratio which is used to determine a bank’s financial health and ability to absorb potential losses. When comparing Puerto Rican banks with the top-tier U.S. banks: Puerto Rican institutions are leading the way.
Popular, had a Tier 1 Capital Ratio of 16.08%. Revenues were $2,941 billion, up 5.71%, and net income was $612,800, up 13.50%.
FirstBank ranks first with an impressive Tier 1 Capital Ratio of 16.30%. Revenues were $938,201 million, up 0.93%, and net income was $298,724, down 1.35%.
Oriental, also outperforming some of the largest U.S. banks, secures the seventh position at 14.26%. Revenues were $709,621 million, up 3.93%, and net income was $198,170, up 8.96%.
Puerto Rican bank’s ability to outperform U.S. banking powerhouses in Tier 1 Capital Ratios signals resilience and significant growth potential, making them attractive to domestic and international investors, inspiring confidence and solidifying their role as pivotal components of the island’s economic stability and growth.
Notwithstanding overall stability in Puerto Rico’s banking sector, commercial lending remains significantly below pre-pandemic levels. Banks continue to prioritize real estate lending and liquidity management, limiting financing options for businesses. Policymakers and financial institutions must work together to create incentives encouraging business lending, particularly for SMEs. Commercial lending remains stagnant despite economic recovery efforts. Compared to 2014 levels, commercial lending has declined by 34.7%, suggesting that banks remain risk-averse in lending to businesses.
With Puerto Rico’s economy at a pivotal moment, revitalizing commercial credit availability will be critical to driving long-term economic growth. According to Birling Capital Advisors’ Francisco Rodriguez-Castro, “Expanding banking competition will increase capital availability, enhance credit offerings, and support the island’s economic transformation.”
While the traditional banking has waned, Puerto Rico’s alternative capital ecosystem is filling the vacuum and is experiencing significant growth with International Banking Entities (IBE) and International Financial Entities (IFE). The IFE Act (Act 273) was created to modernize Puerto Rico’s financial sector and attract a wider range of financial services companies beyond traditional banking. The primary goal of this legislation is to attract U.S. and foreign investors to Puerto Rico by authorizing entities to engage in specific banking and financial activities, primarily with non-residents.
While IBEs were primarily focused on offshore banking, IFEs allow investment banking, asset management, fintech, and other financial innovations. As a result, many IBEs are transitioning to IFE status to take advantage of broader services and more attractive tax incentives. As of 2020, Puerto Rico’s financial services sector included 27 International Banking Entities (IBEs) managing $59.3 billion in assets. The International Financial Entities Act provides significant tax incentives to encourage the establishment and operation of these entities in Puerto Rico. Benefits include a fixed 4% income tax rate on net income, full property and municipal license tax exemptions, and favorable tax treatment for shareholders on distributions.
Puerto Rico’s insurance market is notably diverse, encompassing 47 domestic insurers, 33 international insurers, and 271 foreign insurers. International insurers in Puerto Rico are companies established under the International Insurance Center, offering services primarily to clients outside the island. These insurers benefit from Puerto Rico’s favorable tax incentives and regulatory environment. Notable international insurers include AIG Insurance Company-Puerto Rico, MAPFRE Life Insurance Company, Chubb Insurance Company of Puerto Rico and Pan American Life Insurance Company of Puerto Rico.
The island hosts over 1,247 private companies within its startup ecosystem, spanning various sectors. This includes 96 new fintech startups in Puerto Rico, including notable companies like Zenus Bank, EVERTEC, FV Bank, Ready Player DAO, and Olé Life. Of these, 27 startups have secured funding, with 8 reaching Series A or beyond. This expansion highlights Puerto Rico’s emergence as a burgeoning hub for fintech innovation and entrepreneurship.
Fueling the growth of both traditional and alternative financial sectors, Puerto Rico has been granted the largest allocation of federal relief funds in U.S. history. Dubbed “Operation Bootstrap 2.0,” the island has already received over $35 billion to rebuild homes, develop critical infrastructure, implement renewable energy solutions, and fund other essential projects. This unprecedented federal investment is a crucial opportunity for Puerto Rico to rise from the ashes and emerge more resilient and self-sustaining.
In addition to relief funds, the Puerto Rican government and the U.S. Internal Revenue Service have introduced a series of tax incentives to attract businesses and individuals to Puerto Rico. Among these, Act 60 (previously Acts 20 and 22) offers significant tax advantages, including an exemption from almost all U.S. federal income taxes for United States citizens! These incentives have resulted in a massive influx of high-net-worth individuals and pioneering entrepreneurs. With thousands of new residents bringing innovative ideas, global connections, and significant capital, Puerto Rico is experiencing a rapid transformation. As the island navigates this unprecedented growth, the challenge is ensuring these investments result in long-term benefits for all island residents, not just individual beneficiaries.
Financial support from the United States Government, however, is not limitless. The urgency to implement new strategies has never been greater. Rebuilding Puerto Rico for the long term requires a forward-thinking approach that moves beyond temporary relief and toward lasting economic independence. In my latest book, “Why Puerto Rico Now,” I explore Puerto Rico’s historical economic landscape to uncover valuable lessons from the past. More importantly, I present forward-thinking strategies and innovative solutions for the future. By examining key industries, emerging technologies, and transformative opportunities, “Why Puerto Rico Now” is an out-of-the-box blueprint for economic self-sufficiency, innovation, and adaptability.
Whether you’re an entrepreneur, investor, policymaker, community leader, or just someone who wants to come back home, Puerto Rico invites you to play a pivotal role in the island’s future. This is your chance to not just witness change, but to actively shape Puerto Rico’s future. The window of opportunity is wide open, and the time to act is now.
Adam Greenfader
Chairman
AG&T
AG&T is a premier real estate development and advisory firm headquartered in Miami, Florida. Under his leadership, AG&T has specialized in creating exceptional hospitality, residential, and resort developments throughout the Caribbean and Central America.
