As Puerto Rico takes steps to respond to its bond crisis, even the most successful businesses there are feeling the bite.
Puerto Rico announced Monday that it does not have the money to make good on $72 billion worth of bond payments. On Wednesday, to make up for its revenue shortfall, Puerto Rico raised its sales taxes to 11.5 percent from 7 percent. And in September, it will levy a new 4 percent tax on business-to-business sales.
For business owners such as Carlos Melendez, the co-founder and chief operating officer of Wovenware, an outsource software provider, a San Juan-based company that made the Inc. 5000 list of the fastest-growing private companies in 2014, it's an extremely difficult climate in which to operate a business.
"The tax increases create an environment where our company and all companies on the island will strategically invest less money, and try to stay operating the same as they did before," Melendez says.
On Wednesday, the island territory and protectorate of the U.S. also missed hundreds of millions of dollars in installment payments to its bond holders. It's a staggering amount, and one in which mutual funds, hedge funds, and other investors in the U.S. have a big interest in repayment.
Unlike other bonds issued by municipalities, Puerto Rico's debt is not taxable either at the local, state, or federal level, making it popular with investors. That, in turn, has made it easy for the island to raise money it can't pay back. (More than half of all open-ended muni funds own the island's bonds, according to Bloomberg.)
Puerto Rico Governor Alejandro Garcia Padilla has asked to restructure about a quarter of the payments, worth $25 billion, as well as asking for more time to repay the remainder. Since the spring, he's been rolling out austerity measures reminiscent of those in Greece, including $1.4 billion of cuts to the government and university systems.
Melendez points out that most companies in Puerto Rico have already created their budgets for 2015, so the additional tax money will necessarily have to come from funds they had previously earmarked for things like research and development, or strategic projects. And that's likely to hamper future growth.
At the same time, Puerto Rico has been in a recession since 2008, which has taught Wovenware executives, like those at other companies on the island, how to grow in a lean environment, Melendez says. That includes seeking bigger opportunities by expanding into regions like Latin America, Canada, Europe, and the U.S.
Such lessons should continue to serve Puerto Rican businesses well if conditions improve, which Melendez expects to happen.
"In the short term, [the debt crisis] will affect us," he says. "But Puerto Rico has a lot of solid companies and established businesses that have the potential to become global companies. This will redefine our economy, and in the long run make us stronger."