A Financial Juggernaut

Panama City is a trade and finance hub of formidable stature fueled by an expanded canal and favorable investor climate. The numbers alone are impressive; overall financial sector assets constitute […]

Panama City is a trade and finance hub of formidable stature fueled by an expanded canal and favorable investor climate. The numbers alone are impressive; overall financial sector assets constitute 238% of GDP. The sector lubricates the dynamic service economy, which itself accounts for around 70% of GDP. Domestic credit to the private sector as a percentage of GDP printed at 83% in 2016.

A Brief Account

The leading force is the banking universe, which sits on roughly 90% of total system assets, with just over 15% being in the offshore sphere. It dwarfs the capital markets and insurance sectors. Meanwhile, the pool may be large, but the fish are plentiful, and 55 banks, two being state-owned institutions, vie for business. Just 20 are Panamanian, and foreign banks are largely Latin American in origin, of which four of the top 15 are Colombian. They accounted for roughly 17% of onshore banking assets as of 2017. By World Bank data, 5-bank asset concentration was at 56.51% in 2015. The banks’ non-performing loans to total gross loans in 2016 were at 2.52%, while in the same year the banks’ capital-to-assets ratio was 11.45%.

Hardly a Taxing Environment

The resumption of democracy post-Noriega has seen a full recovery of the nation’s financial and wider commercial prestige as the proverbial Switzerland of Latin America. Panama’s financial universe is characterized, too, by the absence of restrictions on fund transfers, much loved by international businesses and individuals alike. Its tax haven status is no secret, and sector data indicates that over 30,000 foreign conglomerates and tax haven organizations operate in the country. A staggering 400,000 corporations and foundations are domiciled today, benefitting from the corporate anonymity the system avails.

Restructuring and Reform

Back in 1998, already the exemplar of Latin America, Panama’s banking system, supervised today by the Superintendent of Banks, saw further restructuring to international standards. This now includes conformity to Basel guidelines on performance and security. Today of course, the dust continues to settle on a more recent national blight, namely the Panama Papers. Those documents had landed the nation on the EU’s tax-haven blacklist. Swift pledges to enact tax reform and tighter fiscal regulation saw a promotion of sorts to the Grey List, but the fallout was tangible as local banks, Multibank, Global Bank Corporation, and Banco Latinoamericano de Comercio Exterior were downgraded by S&P, feeling the sting of tough penalties as the watchdog showed its teeth. Fines have also been levied elsewhere for insufficient anti-money-laundering efforts. In January of this year, the Ministry of Economy and Finance forwarded key reform legislation to elevate financial transparency. The package covered so-called Crimes against the National Treasury encompassing tax evasion both in Panama and elsewhere in dealings pertaining to the nation. Sanctions of two-five years were proposed, with fines up to 10 times above the defrauded amount. Meanwhile, the government has also been casting a wider net in light of prevailing global economic rebalancing. In a recent strategic move, Panama discontinued links with Taiwan to curry favor with China and secure its financial sector participation.

The Capital Markets

In stark contrast to banking, the local equity market remains illiquid and slender, where 2017 data indicates the value of stocks traded as a percentage of GDP at 0.5%. As of 2017, the MCap of listed companies was USD15 billion, having equated to 24.58% of GDP the year before. As of May 21, 2018, Panama’s benchmark BVPSI had closed flat DoD at 479.49, respectively marking an annual and YtD appreciation of 13.69% and 8.25%.

Revealing Numbers

Broker-dealers account for 1.8% of financial system assets by World Bank numbers, and among the 91 licensed brokerage firms, 26 are banks holding brokerage licenses, or else subsidiaries of banks, and the remainder independent institutions. Notably, just 33% of brokerage houses’ total capital base was Panamanian as of last year, underlining the sheer internationality of Panama’s financial industry. Tellingly, too, only around 6% of brokerage transactions are actually executed within Panama. Olga Cantillo, the Executive Vice President and General Manager of the Panama Stock Exchange (BVP), explained a number of recent developments in a TBY interview. Accordingly, last year saw “28 new corporate securities issued for a total amount of USD3.2 billion, with a trading volume of USD5.3 billion, of which 55.4% was on our primary, 13.5% on our secondary, and the remaining on our repurchase market.“ She also mentioned integration of BVP with the El Salvador exchange, and at the technical level, a systems upgrade to NASDAQ’s market technology that she described as “an important investment for us, and key to our strategy of becoming a regional capital markets hub.“

The Ministry of Finance could potentially issue debt securities in the Chinese securities market to capitalize on lower prevailing borrowing costs that could amount to a saving of up to half a percentage point on what it would have to pay for an equivalent maturity dollar-denominated bond. The issue of these “panda“ bonds, potentially of up to USD500 million, to predominantly be aimed at Chinese investors, could have a maturity shy of 10 years. They are earmarked for 2H2018 given suitable financing conditions.


The reality is that the vital commercial infrastructure of Panama City is prone to natural disasters including floods, landslides, and seismic activity, among others. Data indicates that urban areas accommodating trade and financial services contribute 43% of GDP plus north of 80% of total exports. This is a wake-up call that government and World Bank in tandem have been working to address since 2010.

The insurance industry watchdog is the Panama Insurance Authority, but the sector also has two representatives in the shape of the Panama Insurance Association (PIA) and the Association of Insurance Brokers (AIB). Insurers account for just 2% of financial system assets according to 2017 data. Last year total premiums in Panama’s insurance sector amounted to USD1.471 billion, up 5% YoY. Yet sector data indicates that for the same period, the loss ratio for fires and floods had soared almost fourfold, with USD119 million paid out. In January 2018 the top-three insurers by premium subscriptions were Assa Compañí­a de Seguros, Compañí­a Internacional de Seguros, and Mapfre Panamá, respectively generating USD32 million, USD19 million, and USD16 million. Available data shows that in the January to October 2017 period premiums rose 4% YoY, fueled by a 9% climb in health insurance and 14% appreciation in collective life insurance. And while auto insurance premiums rose 4% those of other vehicles shed 18%.

As elsewhere in the financial universe, the insurance sector has seen certain reforms, and last year new regulations pertaining to the licensing of reinsurers emerged. Duly, the regulator sought to ensure that its counterparts abroad in countries of origin were working in accordance with international standards. The move by the Insurance and Reinsurance Superintendency of Panama followed on the heels of intervention into reinsurer Istmo Compañí­a de Reaseguros, and after Seguros Confianza was taken over in September.
In short, remedial steps from the government to shore up inadequate corporate governance have been swift and deep. As such, the financial industry remains capable of sustainably greasing the wheels of burgeoning commerce.

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