Banker expects Panama to be relatively unscathed by economic crisis

Reasons, other than pure denial, for optimism

Why Panama may dodge the world economic crisis bullet
by Eric Jackson

On December 3 banker Moisés Cohen, president of the relatively new Capital Bank, addressed the Tuesday Talks forum at Exedra Books, talking a bit about his bank but mainly about the Panamanian economy in general and its banking system in particular in the face of a worldwide financial crisis. A lot of people who usually don't show up at these talks showed up for the event, a number of them from the American Chamber of Commerce.

Panama's biggest trading partner, the United States, is in deep economic trouble and the biggest US trading partner, China, is having trouble selling its products as a result. These factors have decreased the tonnage of cargo passing through the Panama Canal. Many American retirees thinking about moving to Panama have had difficulty selling their homes in the soft US market and are thus reassessing their plans. The overheated Panama City upscale real estate market has more or less collapsed.

We have heard the incoherent, dogmatic denials from the government and the Panama Canal Authority. We still hear hoarse echoes of the "now's the time to buy" pitch from the loudest and least credible real estate shills. But giving a proper discount to all those winds coming off of the figurative rhetorical garbage dump, is there still any reason to be upbeat about the Panamanian economy?

Cohen thinks there is, with certain caveats.

"Every seven to 10 years, there's a crisis in the world," he noted, pointing to the dot-com bubble, the US savings and loan crisis, and Mexican and Asian crises. As a worldwide phenomenon he conceded that the current one is fairly serious and predicted that recovery will take two to three years.

However, he pointed out an advantage that this region has over North America and Europe: "In Latin America, the banks were not exposed to these toxic mortgage investments. We have had a very conservative banking policy in Latin America." For this and other reasons, he concluded, "the Panamanian banking system is very stable."

Not invulnerable, but not out on a fragile limb either, Cohen explained. Part of his argument was ideological, and part was empirical.

In the United States, an extensive government regulation scheme, undermined on the public policy side for ideological reasons and abused by greedy and unsustainable practices in the private sector, proved insufficient to fend off the financial crisis. Panama has no similar regulatory scheme and Cohen argued that there shouldn't be one. Government regulation means politicians insisting that banks make loans that bankers don't want to make, he claimed. Panama's closely-held, conservative business culture, he thinks, serves as a sufficient firewall against the bad loan and dubious security fads that brought down the US financial system.

Still, because we are primarily an international service economy, our customers' woes will affect us --- maybe not as much as if we were selling goods rather than services for our living --- but Cohen is slightly less optimistic than government economists about the prospects for 2009. We had economic growth of nearly 11 percent in 2007, the Gross Domestic Product growth is expected to be in high single digits this year, and Martín's bean counters and prognosticators are saying that it will be six percent next year. Cohen thinks that four percent is a more realistic projection for 2009 GDP growth, but points out that this is still an expansion and would be pretty good considering the global circumstances.

So what's vulnerable? High end construction, for one, according to Cohen. His own bank is not and won't be invested in that sector but a lot of other Panamanian banks are and he expects them to take their lumps but not to collapse. Foreigners seeking mortgages to buy houses will likely not be able to get such financing, and when they can it will be for shorter terms, at higher interest rates and under more onerous conditions. Construction projects aimed at foreign customers will be put off, but Cohen said that the Spaniards and Panamanians who are behind serious projects of this sort along Avenida Balboa have the resources to wait a few years for more propitious times to build. The big problem, he said, may be in condos now under construction upon which foreigners, particularly Americans, made deposits. Will they have the money to pay the rest of the price? There are fortunes riding on that question.

Downscale, there's still a strong demand for middle class housing in Panama and our employment rates are higher than they have been in years, so he expects that part of the housing construction sector and the banking sector that finances it to continue without much of a problem. The canal expansion and other large public works projects should also keep a lot of construction companies and workers busy for the next few years.

(In the course of his comments on the canal project, Cohen estimated the construction price at $7 billion, significantly higher than the government's and Panama Canal Authority's $5.3 billion price tag. When one considers the ACP's great fanfare about getting a group of international lenders to extend a line of credit that will allow it to meet just the $5.3 billion cost, there may be another story in itself about this point.)

The Colon Free Zone, essentially Asia's warehousing and wholesaling center for northern South America, Central America and much of the Caribbean, is "probably going to be lower, but they're not going to have a crisis." The biggest vulnerability here, Cohen opined, are the likely effects of lower world oil prices and political uncertainty on the Free Zone's biggest customer, Venezuela. Hard times in the USA are also going to mean a diminution of remittances that Central Americans working in the United States send back to their families, and that lost income will reduce the region's imports from the Free Zone.

Cohen also expects that Panamanian agricultural exports to the United States and Europe will be affected by economic troubles in those places.

On the up side, he notes that Proctor & Gamble's move of its Latin American headquarters from Venezuela to here, the location of Caterpillar's regional offices in Panama, petroleum infrastructure investments in Chiriqui and Bocas, a number of hydroelectric dams and the development of the former Howard Air Force Base for civilian economic uses are likely to boost the Panamanian economy. He also pointed out expansions to our road system, ports and the CEMEX cement plant as local business stimulants.

So if Cohen advises that it's not a time to hit the panic button in Panama, does that mean that he's also optimistic about how things will turn out in the United States? Not particularly. The Americans' problems are "not just toxic investments," he pointed out, but also "industries that can't compete." However, we are in an era when Latin America has some economic trends of its own, and countries other than the United States have industries that can and do compete and use the Panama Canal to ship some of their products. Cohen expects that Panama's service sector will get by as changes elsewhere sort themselves out.