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 Economist ponders part of Seguro’s problem

by Eric Jackson


The Social Security Fund has been something of a hot-button political issue of late, with international lenders warning that its retirement fund will go broke in a few years if hard decisions about limiting benefits or increasing payroll deductions aren’t made and the combination of a weak economy, widespread non-payment of business and employee contributions, and increased demand for public health care services causing an acute cash flow problem. It hit the front pages again as the production work on this issue of The Panama News was getting underway, when the fund’s board of directors rejected a budget proposal by Seguro director Juan Jované that would have cut subsidies for several health care facilities and increased payroll withholding rates.

Earlier economist José Abbo, who works at Platinum Consulting, spoke to the Panamanian Business Executives Association (APEDE) about one of the less discussed aspects of the fund’s money woes. “The grave and dramatic situation in which we find the Social Security Fund,” he maintained, stems in large part from law on the funds investment that he says were drafted with “tunnel vision.”

“A rational investor looks for the best return, while keeping risk in mind,” Abbo explained. A couple of techniques for maintaining this balance are diversifying the investment portfolio to limit the risk, and demanding a “risk premium” of higher return on riskier investments.

The risk premiums for various investment in private enterprises and government bonds are not secret. The estimation of these is what the whole bond rating industry is all about. The generally accepted benchmarks are established in London and New York, based on the rates that the wealthiest and most stable of the world’s borrowers --- for example, the US federal government --- can command.

At market rates, Panama’s “risk premium” is about two or three percent, Abbo said, pointing out that the American government pays about five percent interest on certain bonds with the same terms as Panamanian government bonds for which Panama must pay seven percent interest. Thus any ordinary investor would demand a correspondingly higher rate when putting his, her or its money on Panama.

“The Social Security Fund doesn’t have the right to make these kinds of rational investments,” Abbo argued. The laws here provide that the fund has to invest in things that help Panama, and narrowly restrict what these things can be and what bargaining power the fund can exercise. Referring to a chart of investments that the fund can legally make and the returns that they garner, as compared to US rates, he demonstrated that rates of return on Seguro investments are set without regard to risk. An an example, he noted that the fund was buying 20-year Panamanian bonds at eight percent interest, while in the United States they were paying 11 percent to borrow money under the same conditions. Taking the risk premium into account, Abbo said that the Social Security Fund should be demanding about 14 percent rather than the eight percent it gets on 20-year government bonds.

All told, Abbo estimated that the fund receives millions of dollars per year less in bond income than it should because of restrictive laws. However, he noted that this is a relatively small matter when compared to the restrictions on its approximately $1 billion in cash deposits, which by law must be deposited in the National Bank of Panama (BNP). The BNP is paying 1.09 percent interest on these deposits, but Abbo notes that the benchmark that the most creditworthy banks in London pay on such deposits is 1.25 percent and he argues that because the BNP isn’t as solid as the London institution the concept of risk premium means that Panama’s main state bank should be paying more than that.

Abbo said that much of Seguro’s problem could be alleviated if it were allowed to either invest its cash in institutions other than the BNP, or else put it in the BNP with the understanding that the bankd would in turn make earmarked investments in more profitable venues.

As his was the initial presentation at an APEDE forum featuring presidential candidate José Miguel Alemán, a number of Arnulfista activists were in the room and several of them gave Abbo some heated arguments about his proposition. For example, it was urged that as the BNP has the backing of the Panamanian government, it’s a more secure institution in which to invest than is Citibank. Abbo dismissed that claim, arguing that the US Federal Reserve system is a much more powerful and stable backer than the government of Panama. There were also objections of a nationalistic sort proffered, based on the premise that the present laws insist that Seguro’s investments help Panama and that the changes that Abbo wants would have this country’s retirement funds assisting the development of other countries instead. Abbo, however, wasn’t necessarily advocating the transfer of the Social Security Fund’s investments to Citibank or Wall Street, but rather that the fund should charge the sorts of risk premiums on Panamanian investments that Citibank and Wall Street institutions do.



Also in this section:
Business & Economy Briefs
Alemán's economic platform
The problem with investing the Social Security Fund
Panama-Taiwan Free trade pact signed
Arguments over shopping center permits


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