Cablegate: Panama,S Banking Sector Weathers Global Financial

Published: Mon 27 Oct 2008 08:49 PM
DE RUEHZP #0827/01 3012049
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1. (SBU) Summary. Panamanian bankers widely agree that
Panama's financial sector, one of the largest in Latin
America with 90 banks licensed and $63 billion in assets as
of September 2008, has avoided the core cause of the global
financial crisis - subprime mortgage instruments. Liquidity
remains healthy as Panama's economy continues to grow at an
estimated 8-9 percent clip, FDI flows remain robust, and
capital seeking a safe haven flees from countries such as
Venezuela. However, credit card debt overhang also has
restricted consumer lending. Most importantly, Panama is
bracing for the derivative effects of the crisis that
anecdotally already are occurring: reduced Canal traffic and
maritime business, slower real estate sales, fewer tourists,
a decline in Colon Free Zone (CFZ) trade, and a current
virtual freeze in project lending. End summary.
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Avoiding the Subprime Trap and Irrational Exuberance
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2. (SBU) "U.S. debt instruments were too good to be true.
With 9 percent for AAA debt, they should not have needed to
sell it," opined Alexi Arjona, President of the Banking
Association of Panama and General Manager at Banco Aliado, in
explaining why Panamanian institutions did not purchase these
instruments. HSBC Economist Rogelio Alvarado, emphasized
that Panama has no Federal Reserve and therefore no moral
hazard inherent in the expectation of being bailed out. "If
you make a bad decision, you lose your bank." Alvarado also
noted the intimacy of Panama's banking community and its
knowledge of its commercial and consumer customers. As of
June 2008, the caution of Panama's bankers was generating
healthy returns: 3.1 percent return on assets and 19 percent
return on equity, according to the GOP's Bank Superintendent.
Also, primary liquidity as of that date stood at 25 percent
of deposits. Panama's banking sector dominates the overall
financial sector that also includes insurance and capital
markets. Of the 25,000 people employed in the financial
sector, 16,000 work for banks.
3. (SBU) Furthermore, banks overall did not relax prudential
lending standards during the ongoing boom that appears to
have peaked last year. During what may have been the peak of
the real estate frenzy 12 to 24 months ago, they did not lend
to developers unless a hefty percentage of the building
(usually 40-50 percent) was presold. About 12 months ago,
banks began to demand presales in the 50-60 percent range.
Also, financial institutions uniformly require 20 percent
down in order to finance mortgages. As an added caution,
buyers paying more than an informally set price per square
meter must front the difference between the limit and the
price paid in cash. Finally, Panama's bankers keep and
service their mortgages. According to the Bank
Superintendent, banks have sold their loans at a rate of
roughly 1 to 1.5 percent between June 2006 and June 2008.
Rather, managers use mortgage servicing as a tool to market
other products and services to existing customers.
Problems on the Horizon
4. (SBU) The financial sector's Achilles heel appears to be
credit card debt. This type of debt averaged $6,685 per
borrower in 2007. Today, adds Arjona, credit card debt
stands at 144 percent of borrower income. Banks have
tightened the reins, but the rate of accounts overdue has
risen from 2.8 percent at the close of 2007 to 3.05 percent
in June 2008.
5. (SBU) Even with these measures, financiers already feel
the softening of the real estate market, with a pending
oversupply of luxury apartments estimated next year at six to
eighteen months. Banks are just saying "no" to new projects,
reports Arjona. Financial institutions continue to lend to
developers of smaller middle and lower class housing projects
- they are considered less risky. While figures through
August show overall robust growth, financiers and business
representatives report that the global financial crisis is
beginning to affect Panama's area of comparative advantage:
trade. Canal traffic by tonnage had slowed from 312.9 to
309.6 PCUMS' (Panama Canal Universal Measurement System)
between FY2007 and FY2008. In the Colon Free Zone, where the
2007 $16.1billion trade volume nearly equaled Panama's $17
billion real GDP, business rose 31 percent. Yet, CFZ
merchants are expecting 2008 to end in slower growth, if not
outright contraction. Observers predict a similar scenario
for Panama's ports. Hoteliers are forecasting a leaner
period for Panama's burgeoning tourist industry. Perhaps
most troubling, Arjona reports that "in the past few days,"
credit lines from overseas banks have either become
unavailable or are so costly as to be unusable. In an
October 20 meeting with Ambassador Stephenson,
representatives of U.S. power firm AES, confirmed that
lending for large projects in Central America was "dead."
Panama's Advantages
6. (SBU) Given the most alarming global trends in decades
and Panama's dependence on global trade, why is there no
collapse? First, employment remains robust at 6.3 percent
(down from 12 percent in 2004), not far from what is
considered full employment according to the Minister of
Finance. Secondly, through July, FDI had been prodigious -
$1.1 billion for the first half of 2008. Much of that FDI
involves movement of regional headquarters to Panama, as with
Caterpillar, Procter & Gamble, and Hewlett-Packard. Thus,
the investment will continue to generate employment and
demand for housing, capital goods, and consumables. Most
importantly - and strongly related to employment and FDI -
huge infrastructure projects are underway. The Panama Canal
Authority has embarked on a marquee $5.25 billion expansion.
Dredging and excavation activities began in Fall 2007 and the
contract for the $3.35 third set of locks is set to be
awarded by late spring or summer. The dirt is flying on
Panama Port's (Hutchinson International Port Holdings, Inc.)
$240 expansion to its Pacific and Caribbean terminals. Major
infrastructure projects continue to progress, such as the
Panama-Colon highway ($215 million) and a coastal connector
road, Cinta Costera ($189 million), in highly congested
central Panama City -- where construction proceeds 24 hours a
day. Nonetheless, the pipeline of planned projects is likely
to narrow as access to financing becomes more challenging.
7. (SBU) Panama also benefits from turmoil in the region.
Eighty-three percent of new deposits are from abroad, reports
Arjona. HSBC's Alvarado estimates that over 100,000
Venezuelans alone have accounts in Panama. Several bankers
report that Ecuadoran money also is fleeing to Panama at a
brisk pace, and Panama traditionally has served as a safe
haven for Colombian cash. Add to that mix U.S. and Canadian
retirees and Europeans capitalizing on the cheap (although
recently strengthening) dollar. Even some Panamanians, who
traditionally viewed the U.S. as the safest harbor for
investment, are beginning to bring their savings to
Panamanian institutions, according to one member of the
U.S.-Panama Business Council.
8. (SBU) Comment: Panama's banks and commercial sector remain
healthy and confident for now. However, Panamanians are
concerned about the possibility of long term availability of
financing. Although the all-important Canal expansion
project recently received a green light from a consortium of
multilateral and national export bank lenders (septel), key
projects such as the proposed OXY-Qatar refinery and further
expansion of Tocumen International Airport could be delayed.
In addition, a sharper than expected drop in construction -
which accounted for much of Panama's 9.5 percent GDP growth
for the first half of 2008 - remains a possibility, even
though financial institutions appear to have tightened credit
in a calibrated manner. Indeed, while the GOP still
predicts 2008 GDP growth to exceed 9 percent, INDESA (a
highly regarded financial consulting firm in Panama) sees
growth leveling off at 7.7 percent for the year.
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