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Maybe Puerto Rico needed trip to the bond junkyard

The news that S&P, Moody's and Fitch have downgraded several Puerto Rican bonds to junk status has caused the financial community, investors and general public to set their eyes on the island.

However, many of the articles and interviews that I've read fall short of providing a serious analysis of the situation—many are downright superficial. Every time I hear an expert assuring that the Puerto Rican economy depends on the tourism industry, I know is time to change the channel or stop reading. I'm not trying to put a spin on the current financial crisis. Instead, I'm providing my opinion as to why I believe that Puerto Rico will come out of this crisis with a much more competitive economy. Those agreeing with me will look at the risks and benefits of investing now in the country, but in a different way.

A Cartier store in San Juan, Puerto Rico.
Getty Images
A Cartier store in San Juan, Puerto Rico.

What brought us to this situation? Simply put, decades of a laid back approach to our economic policy. Despite the warning signs, we decided to kick the can down the road. Disregarding our country's output, politicians gave voters what they wanted, and that resulted in more government spending. We covered our budget deficits by issuing debt while at the same time relegating the much-needed economic changes. The result: We hit our "debt ceiling".

Puerto Rico is in a unique situation in that the island can't print money and can't declare bankruptcy. The tax revenue-spending shortfall can no longer be covered with debt, even if issuing billions more in debt is the latest development. And remember, the new bond issue is to repay maturing debt—only $100 million is "new money." With this new bond issue, Puerto Rico will hit its debt limit allowed under its constitution.

For the first time, a real balanced budget must be achieved.The obvious question is whether our politicians, even with few options left, will have the political will to cut expenses and balance the budget. Voters have made it easier on them. Based on current poll numbers by Puerto Rico's El Nuevo Dia, a super-majority strongly support cutting expenses and balancing the budget. Fundamental changes to government spending can finally be made while at the same time, politicians are able to avoid committing political suicide.

(Read more: Tips to deal with rising interest rates)

What about economic growth? Puerto Rico, although not a wealthy country, is not a "developing" one. Most of what is required to sustain a growing first rate economy already exists: highways, ports, a highly skilled work force and political stability among others. The island has stable local banks regulated by the FDIC and a high-tech communications infrastructure.

The risk of investing in a distressed economy that has none of the above is obviously much higher. Somehow, Puerto Rico is constantly classified and compared to a developing economy. This creates the unfounded perception that investing in Puerto Rico is a high-risk endeavor. Reality says otherwise.

Although the new debt issue of at least $2.5 billion of general obligation bonds will probably be compared by analysts to other emerging market debt, it has more to do with limitations from traditional municipal bond buyers on investing in speculative grade debt and the low risk profile of their investors. I have a hard time understanding how Puerto Rico can be at the same risk level as countries that are serial defaulters and have inefficient, unstable political systems.

(Read more: Rates rise aside, bonds still a good investment bet)

Yes, Puerto Rico has its problems. The island is over-leveraged, unemployment is at 15 percent, and the labor participation rate is in the low 40s. Per capita income is much lower than the U.S.average—though higher than many emerging markets—and our murder rate is among the highest of any U.S. jurisdiction.

However, just like New York City in the 1970s, Puerto Rico has the tools to change. The possibility of a balanced budget and fast-tracking fundamental economic reforms are exponentially higher than before. Combine that with a significant asset price correction that has occurred in the past few years, due to the recession and fiscal crisis, and we have a very unique and time sensitive opportunity for smart capital that is willing to spend some time doing its homework.

Judging by large investments, including hedge fund giant Paulson & Co.'s recent resort acquisitions, it appears that at least some smart capital has already reached the same conclusion.

—By Francisco De Armas, principal, Caribbean Investment and Acquisition Corp., and a member of the CNBC-YPO Chief Executive Network

CNBC and YPO (Young Presidents' Organization) have an exclusive editorial partnership. It consists of regional Chief Executive Networks in the Americas, EMEA and Asia-Pacific. These Chief Executive Networks are made up of a sample of YPO's unrivaled global network of 20,000 top executives from 120 countries who are on the front lines of the economy. The opinions of Chief Executive Network members are solely their own and do not reflect the opinions of YPO as a whole or CNBC.

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