Richard L. Carrión, presidente y principal oficial ejectuvo de Popular, Inc. se dirige a los presentes del "Investment Summit" en el Hotel Vanderbilt el jueves, 24 de abril de 2014.
"I firmly believe that we are at a critical turning point that presents, as other turning points I have mentioned, great opportunities."
Good morning. Let me join in with the Governor and Secretary Bacó in welcoming you to Puerto Rico. It is a pleasure to have you here. Today, Puerto Rico is on the cusp of a great transformation, and this juncture presents great opportunities for those who choose to be a part of it. Thank you for your time and you interest.
Let me start by talking a bit about who we are. Popular, Inc. is the holding company of Banco Popular, the largest financial institution in Puerto Rico. Banco Popular was founded in 1893. Many people believe that my grandfather was one of the founders. Well, my grandfather was born in 1891. You can do the math. Anyway, a group of people got together and, inspired by a very powerful idea, founded a bank to offer banking services to the poorest, to those that did not have access to banking services.
Since these humble beginnings, the history of Banco Popular and Puerto Rico has been closely intertwined. The Bank lived through dramatic events, such as a change in sovereignty just five years after it was founded, devastating hurricanes and the Great Depression. And we have also witnessed, or better said, we have been a part of, important transformations in Puerto Rico’s economy and society.
One such transformation was the change from an agriculture-based economy, sugar primarily, to an industrial-based economy in the late 1940’s and 1950’s, as the industrialization program launched by the government began to take hold.
Around that time, a U.S. Senate Committee investigated Puerto Rico and said its problems were “unsolvable”. Then appointed Governor Rexford Guy Tugwell titled his book about Puerto Rico “The Stricken Land.” Yet, the government put policies in place that resulted in dramatic changes and substantial improvements in the standard of living. One of these policies was the Industrial Incentives Act of 1947, which offered 10-year tax exemptions to companies that established manufacturing operations on the island. Most of the activity was in light, labor-intensive industries, such as clothing. Later on, there was a shift toward more capital-intensive industries. Puerto Rico became a showcase for developing countries all over the world.
The contribution of agriculture to the island’s GDP, which in 1950 was more than 18%, fell to 6% in 1960 and 3% in 1975. Meanwhile, manufacturing, which accounted for 17% of GDP in 1950, grew to 23% in 1965 and 29% in 1975.
In addition to the right policies, change was driven by a remarkable sense of optimism- the conviction that tomorrow was going to be better than today, and the day after that, better than the previous one. We had proved that we could, indeed, pull ourselves up by our bootstraps.
Other industries flourished during this period as well. Higher investment in manufacturing and infrastructure, coupled with a higher rate of growth in urban areas, fostered rapid growth in the construction industry. The tourism sector also experienced significant growth, aided in part by the travel ban on Cuba.
The 1950’s also saw a dramatic expansion of the island’s infrastructure, including new highways, an expansion of the electric power system, new aqueduct and sewer systems and new airports and port facilities. In the 15-year period between 1950 and 1965, the economy grew at an average annual rate of 7.3%.
The early 1970’s were difficult years. The U.S. trade deficit, the monetary crisis and a wave of inflation combined with a drastic rise in the price of oil as a result of the OPEC oil embargo. The global crisis created serious fiscal problems for the local government, including zero access to the capital markets. Difficult measures, such as new taxes, were implemented and effectively restored confidence in Puerto Rico bonds.
The mid-1970’s brought two favorable changes that once again transformed the economic structure of Puerto Rico. The first was a dramatic increase in the transfer of federal funds to the island, which boosted economic activity. The second change was brought about by the enactment of Section 936 of the Internal Revenue Code, which provided that earnings generated in Puerto Rico by U.S. corporations would be totally exempt from payment of federal taxes. Another important element of Section 936 was the exemption on “passive income” received by corporations as a result of financial investments in Puerto Rico. These funds, which had to remain on the island in order to enjoy the tax benefit, resulted in a lower cost of funds for banks than other sources. The increase in bank liquidity and the related savings were transferred to clients in the form of lower interest rates, which, in turn, fostered investment. In this period, manufacturing continued to thrive. But it was not the same sort of manufacturing of the 1950’s and 1960’s, which leveraged low oil prices and low-cost labor. The operations that were most attractive under Section 936 were high-added-value capital-intensive operations, primarily pharmaceutical and electronics.
While the economy grew at a healthy average annual rate 3.5% in the second half of the 1970’s, partly as a result of the activity generated by Section 936, other factors negatively impacted the local economy in the early 1980’s. The hike in oil prices in 1979, the poor performance of the U.S. economy, rapid inflation and high interest rates led to a period of economic stagnation in the island. However, in the second half of the 1980’s, a reduction in interest rates, a drop in inflation and an economic recovery in the U.S., together with a stabilization in oil prices, benefited the local economy, which once again began to expand, growing at an average rate of 3.7% between 1985 and 1990.
The 1990’s, despite the impact of the recession caused by the Persian Gulf War, were characterized by healthy growth. A reduction of the public sector’s participation in the economy, driven in part by the privatization of several entities, together with an environment of economic expansion, led to substantial increases in government income. This, in turn, allowed the government to incentivize particular activities and to invest in infrastructure, further promoting economic growth.
The performance of the economy in the early 2000’s remained positive, but the seeds of the recent crisis were being sown. Public debt began increasing at a considerable rate, in great part to finance operating fiscal imbalances. Construction activity, both public and private, rose dramatically, and real estate prices soared. Assets in commercial banks reached their peak in 2005.
In the mid-2000s, several factors coalesced and led to the beginning of the recession that we are still battling today. In 2006, the government’s failure to present a budget resulted in a government shutdown that shattered consumer confidence and effectively brought the economy to a halt. In addition, accounting-related problems began to plague several local financial institutions. The local situation was later aggravated by the global financial crisis in 2008 and 2009. In 2010, after five years of negligible or negative growth, the FDIC took over three local financial institutions. The continuing increase in the public debt and heightened concerns over the health of the Puerto Rico economy came to a head in August of last year, when Puerto Rico GO yields reached nearly 10%.
So where are we today? Economic and fiscal conditions remain delicate. Problems created in decades cannot not be solved in months. But, the government has taken a series of difficult, and necessary, measures, to address the current situation, such as reforming the pension system, presenting a balanced budget and executing the recent GO issue. I firmly believe that we are at a critical turning point that presents, as other turning points I have mentioned, great opportunities.
Puerto Rico was transformed in the 1950’s with the shift from an agrarian to an industrial economy. We were transformed yet again in the late 1970’s, when new tax incentives promoted a higher-value-added type of manufacturing. Today we stand at the threshold of yet another economic transformation – from an industrial to a knowledge-based economy. This is a global phenomenon, so we have to ask ourselves: does Puerto Rico have what it takes to compete in this new economy?
I am convinced it does.
Most of these conditions are not unique to us. There are other jurisdictions that have a modern infrastructure, or political stability or tax incentives. In the case of Puerto Rico, the combination of all of these conditions present remarkable opportunities for ventures in the services fields.
Who can benefit from investing in Puerto Rico? Basically any business that exports services outside of Puerto Rico. This includes areas such as financial management, research and development, consulting, architecture, advertising, engineering, project management, health and laboratory services. Given my natural bias towards financial services, I also see great opportunities in activities such as mortgage servicing, loan processing, mutual funds, processing - basically any back office functions that support the financial industry.
An example of the sort of operation that can be very successful in Puerto Rico is EVERTEC, a processing company born out of Banco Popular’s internal technology group. We spun it off in 2004, and sold a majority stake to Apollo Global Management in 2010 in a transaction that valued the venture at approximately $900 million. In 2013, EVERTEC went public. During the year, Popular sold a portion of our shares and generated additional gains of $413 million, and we still hold a 15% stake in the company, which has a market cap of $2 billion. Apollo sold its shares during 2013, realizing a 400% profit on their investment in three years. EVERTEC stands ready to continue growing and generating healthy profits. Though it does not operate under Act 20, it does benefit from other tax incentives that result in a 4% tax rate.
I can go on and on about the virtues of Puerto Rico as a place to do business, but actions speak louder than words. Yesterday, during our quarterly earnings release, we announced the restructuring of our operations in the U.S. An integral part of that effort involves the transfer to Puerto Rico of many activities that are currently handled in the U.S. In practical terms, it means that we will transfer 200 positions from the U.S. to Puerto Rico in the areas of operations, legal, finance, marketing and the call center. There are no tax incentives at play here. We are doing it because we firmly believe that we can perform these functions locally effectively and at a lower cost than in the U.S.
As I said in the beginning, the history of Puerto Rico and Banco Popular are closely intertwined. My optimism about Puerto Rico’s prospects does not stem from blind faith. It comes from our experience, as we have witnessed Puerto Rico transform itself time and time again. We invite you to be a part of this transformation. We want to partner with you. We look forward to helping you take advantage of the opportunities Puerto Rico has to offer and to working together to ensure that Puerto Rico’s economy is once again renowned for its dynamism and vitality.