economy special

Panama praised, warned
at investors' forum
by Eric Jackson, from other media

Earlier this year Fitch, Moody's and Standard & Poor's all raised their ratings of Panamanian government bonds to investment grade, which is the first time that has happened. It has been cited as a great triumph by this Panamanian government, which built upon other measures by previous governments. Cutting many Panamanians out of the possibility of a Seguro Social pension, eliminating public housing assistance for single adult males who are left homeless by fires or otherwise, reductions in the availability of medicines in the public pharmacies, income tax reductions for the rich accompanied by a 40 percent sales and services tax increase and the ending of many tax exemptions that add up to a large net tax increase --- these are the things that bond raters and the foreign corporate investors whose interests they reflect tend to like and are the main factors behind the upgraded bond ratings.

The effective elimination of labor unions and environmental regulations would also meet the bond raters' approval. High public debts and serious political turmoil are things they don't tend to like.

Yes, they have actuarial tables, mathematical predictive models and other technical props, but what the ratings agencies say is highly ideological and their track record of giving advice that's good for Latin American countries or even very useful for predicting crises in major industrial powers is not particularly impressive. Until nearly the very end, they gave high ratings to some of the most fraudulent mortgage-backed commercial paper issued by major US financial institutions, and were it not for some government bailouts their predictions would have been even more severely disastrous.

The game is ideology, and now there are conservative and libertarian think tanks starting to look askance at the Martinelli administration's policies on a number of accounts, but mainly due to a large debt that's being run up for the Panama Canal expansion and other major public works projects and because, after all, this government has raised taxes. The people to whom the bond raters talk may have lost the exemptions that kept them from paying any taxes at all. A substantial section of Panama's wealthy elite has for one reason or another turned against Martinelli.

On August 19 Panama's stock and bond exchange, the Bolsa de Valores, celebrated its 20th anniversary with its XI Investors Forum, with the honored guest Standard & Poor's risk analyst Roberto Sifón-Arévalo. The verdict he gave about the Panamanian economy was mixed. He liked Panama's rapid growth, due to the canal expansion outpacing most of the rest of Latin America. He liked the trend of multinational corporations moving their regional offices here.

Given the audience, of course Sifón-Arévalo recommended that Panama pay more attention to developing its securities market. It's something that doesn't happen because of the rampant fraud and closely held family businesses that characterize this country's economic life, such that it's unwise to be a minority shareholder in anything, let alone to expect any of the sort of transparency required of companies that trade on the world's major exchanges.

But the S&P analyst recognized that Panama's growth rate is largely based on public spending, and said that he hoped for direct foreign private investment to replace government projects as the main economic engine. He opined that Panama relies too much on foreign funding for its government spending and noted efforts to change this factor. He called for further legislation of what people in his social circles call "free market reforms" --- privatization, deregulation, reduction of the public sector, elimination of labor unions, low wages, high profits and so on.

Sifón-Arévalo cited "mixed messages" from the government, expressing particular concerns about the weak rule of law, rigged public contracting procedures and the failure of this country's economic institutions to provide support for smaller businesses. He especially warned that the sorts of confrontations over Law 30 that were seen in Changuinola are serious impediments to foreign investment and advised such conflicts should be minimized rather than aggravated.