Panama has an international financial centre which, like the rest of the country’s service-oriented economy – its world famous canal; the biggest free trading zone in the western hemisphere (the Colon Free Zone); its giant container ports – has no counterpart in Latin America.
Another fundamental difference between Panama and most of Latin America is the considerable financial depth of its banking centre. So much so, that according to the Bank Superintendency, the banks’ supervisory body, the total assets of Panama’s onshore and offshore systems amounted to $45bn in December 2005, equivalent to about 300% of the country’s GDP, and 12% more than in December 2004.
Another distinctive aspect is that Panama’s banking centre has engaged in international operations, almost from the point of its inception.
For instance, banks traditionally “capture deposits from the US, Asia and Europe to invest in Latin America,” according to Delia Cárdenas, who has been Panama’s bank superintendent since 1998. Such investments amounted to $6.8bn in the year to November 2005, 29% more than in the previous year.
Bankrolling trade
In the international operations category, Bladex, a bank that obtains 80% of its deposits from outside the country but which is domiciled in Panama, provided a total of $135bn in loans to finance trade in Latin America between 1977, when the bank was founded, and the end of 2005. “This is more trade finance in the region than that done by any other bank in the past 30 years,” says Bladex CEO Jaime Rivera.
Another well-established international activity is that Panama has long been viewed as a haven for capital flight, with banks doing a considerable amount of wealth management for rich Latin Americans who are eager to preserve their wealth from hyper-inflation and/or political crises in their own countries.
This reputation stems from Panama having no exchange problems, as the country’s legal tender is the US dollar, and because Panama has historically had a negligible inflation rate.
It also has a benign tax system, as no international operations are taxed in Panama – “just like in Delaware”, says Ms Cárdenas.
Meanwhile, a new development is that Panama is fast becoming a central American banking centre, on top of being an international financial centre. This is occurring in two ways. First, Banistmo, Panama’s largest private bank, has become central America’s biggest banking group as a result of acquisitions (see below).
Second, going in the other direction, several central American banks, including leading banks from El Salvador (Cuscatlan, Banco Agrícola), as well as from Nicaragua, have recently been reorganising and establishing their holding companies in Panama. Panamanian bank regulators say a reason for this is the high accounting standards now associated with Panama (since1999, all publicly traded companies have to follow international accounting standards), and the fact that these accounts are expressed in dollars.
“The banks have more recognition for being based in Panama than in their own countries,” the regulators say.
Residential lending
More recently, in the domestic credit market, mortgage lending, a traditional segment, has been taking off and moving in a new direction. Raul Alemán, CEO of Banco General, which was the leading private Panamanian bank in local private sector mortgage lending in 2005 with a 22% market share, says: “The residential mortgage market has been a consistent market for years, growing at 7%-10% a year in the high, medium and low-income sectors.
“But what is new is that in the past few years there has been an explosion in the demand for second homes by foreigners, including Colombians, Spaniards, US and Canadian citizens, both in Panama City and in lush, western highland towns, such as Boquete.”
But just how surprising is this development? Real estate is cheaper in Panama than in neighbouring Costa Rica. And at least in the case of US retirees, Panama may feel like home; many Americans used to live in the former US-controlled Panama Canal Zone, before the canal and land surrounding it were transferred to Panamanian authority, in accordance with a 1977 treaty, in 1999.
Meanwhile, other new sectors in the economy that are booming are shopping tourism, convention tourism and communications, reflecting Panama’s geographical advantage between North and South America.
But the banking system’s considerable liquidity also helps to explain another unusual phenomenon.
In 2000, Panama’s banks were blacklisted by no less than three international governmental organisations: the Financial Stability Forum, the Financial Action Task Force (FATF), which included Panama on a list of 15 countries deemed “non-cooperative”, and the Organisation for Economic Co-operation and Development (OECD), which classified Panama as a tax haven that was “harmful” to international competition.
Out in the cold
These listings hurt Panama. Domestic banks had difficulties gaining access in financial markets and “some banks didn’t open in Panama because of the reports. The country was seen as a moral hazard,” says Ms Cárdenas.
Nevertheless, Gustavo Villa, director of economic studies at the Bank Superintendency, says: “What is remarkable is that unlike most of the other large banking centres in Latin America, in Panama, despite the blacklists in 2000 and the fallout from Argentina’s financial crisis shortly after in 2002, the banking sector never stopped growing. This showed the system is very liquid.
“There was also no withdrawal of deposits and no bank needed government assistance. Even during the Noriega debacle in the late 1980s,” he adds, referring to when the US introduced economic sanctions against Panama and launched a military invasion to oust General Manuel Noriega, the dictator with past links to the CIA, “there was less capital flight from Panama than from Argentina in 2002 during its financial crisis.”
Nevertheless many Panamanian bankers think the 2000 listings were unfair. This is because Panama had a new banking law that was approved in 1998, which addressed most of the international organisations’ concerns. But the implementation of the law was delayed because of presidential elections and a transition to a new government in 1999.
“The listings were a very disagreeable surprise. We didn’t deserve it. History has proved we are a serious banking centre,” say Ms Cárdenas.
An overhaul of the system was overdue, though. A key change in the 1998 law, for example, was the replacement of the National Banking Commission, composed of bankers, with today’s financially autonomous Bank Superintendency, where neither the board nor the superintendent can be practicing bankers or directors or shareholders (of more than 5%) of any bank that is subject to Panamanian supervision.
Simultaneously, countering criticisms of the banking system’s anti-money laundering efforts, Panama established what are now widely recognised to be the most modern ‘know your customer’ procedures in Latin America, as well as a special Financial Intelligence Unit in the attorney general’s office.
Panama began a four-year programme in 2002, as part of a commitment to the OECD, to improve the transparency of its tax system. There has also been a significant increase in the country’s exchange of information with other regulators following the signing of 21 Memorandum of Understandings (MOUs), including exchanges with all the other Central American countries, the Caymans, Bahamas and, last year, with Colombia.
Restored credibility
These measures and others, Ms Cárdenas says, “have restored the credibility of the banking centre for being well regulated”. Since 2000 there have been significant improvements in assessments done by the Financial Stability Forum, the OECD and the International Monetary Fund (IMF).
For instance, in mid-2005 the IMF completed a review evaluating how banks are meeting the first international Basel Committee accord on banking supervision. Panama was found to be compliant with all but two of the 25 Basel principles – a much higher score than in the rest of Latin America. Panama also did better than the average in the region in the IMF’s latest 2005 FATF review, despite the recent increase and substantial revision of FATF standards.
CONFLICTS OF INTEREST AT BANCO NACIONAL DE PANAMÁ
Though Panama’s onshore banks are profitable, well capitalised and have a low non-performing loan ratio, not every financial institution is so praiseworthy, according to an IMF report published in January, which includes a section on Panama’s public banks.
According to the IMF, the state-owned Banco Nacional de Panamá (BNP), which has the biggest branch network of any public or private bank in the country, is unusual in many ways. For instance, though BNP carries out commercial bank operations, it also has some central bank functions, such as bringing dollars into the country. Additionally, though it obtains most of its funding from Panamanian public entities and ministries, it also acts like a development bank and is the government’s main lender.
The IMF report describes BNP as “a well capitalised, profitable bank”. However, the report adds: “Its [BNP’s] profitability comes in part from not paying market interest rates to public entities... and from low provisions to cover non-performing loans.”
Furthermore, though a new organic law for the institution came into effect this year – which explicitly forbids BNP from lending to its CEO, board members, or their respective wives and children (a new CEO and board are being appointed this year) – the transparency of the institution is still not guaranteed.
This is because, “the new law does not provide clear guidelines to deal with potential conflicts of interest between the government as shareholder, and the government as customer, of BNP,” the IMF report says.
That all was not well at BNP became evident in 2004. That year the public bank had to set aside a whopping $91.3m in reserves for non-performing loans. Banistmo’s Jack of All Trades
