Trading on Transparency

Capital Markets

The BVP is the flagship of Panama's capital markets, which have themselves arisen with the rigors of regulation from the nation's unenviable past.

Panama’s story, within the space of a few decades, is one of remarkable transition from financial opacity to favored destination for FDI and home to rigidly regulated capital markets. IMF data reveals that while for 2016 global growth printed at 3.1% and Latin America and the Caribbean shrank -0.7%, Panama, floated by investor confidence and economic diversity, outperformed both on GDP growth of 4.9%, ranking second in the Americas. In short, the hugely internationalized economy has added to its logistics backbone the meat of financial integrity, shedding its less-than-salubrious former reputation. This is evidenced in a 2016 FDI print of USD5.209.3 billion, exceeding the 2015 figure by 15.9%. Meanwhile, Panama’s financial market development was ranked 15th in the world by the World Economic Forum’s 2015-2016 Global Competitiveness Report. It also ranked 40th for financing through the local equity market.

Visibly Enhanced

Transparency is the byword for the Open Government policy, wherein the Ministry of Economy and Finance (MEF) monitors financial sector accountability. Dulcidio de la Guardia, Minister of Economy and Finance, explained to TBY that “Panama has complied with the recommendations of the International Financial Action Task Force (FATF), in 2015 getting off the gray list of this agency.” More recently, in October 2016 Panama became a signatory to the Convention on Administrative Assistance on Mutual Assistance in Tax Matters (MAC), depositing “the instruments of ratification on March 16 of 2017, making us one of the countries that implemented this instrument the fastest.”

Despite International Ripples and Local Bumps

Inevitably perhaps, there are hiccups to the best-laid plans, the wide-reaching Panama Papers leak standing out among them. Meanwhile, locally, capital markets blushed in February 2017 with the confidence-bruising indefinite suspension of bond issuer Cheque Efectivo by the stock exchange due to its revealed liquidity woes. Another major story epitomizes the ideal synergy between the capital markets, the real economy, and the government, or alternatively, the sheer potential for contagion. In 2016 Aeropuerto Internacional de Tocumen S.A. (AITSA) placed USD575 million of 20-year bonds with a 5.625% coupon maturing in 2036. The objective was to raise the funds necessary to complete the south terminal and related works of the airport, a wholly owned government entity whose chairman of the board is the Minister of Economy and Finance. In May 2016 Fitch rated the instrument ‘BBB’ and ‘AAA (pan)’ with ‘stable’ outlook. Fitch also affirmed at ‘BBB’ AITSA’s 2013 USD650 million senior secured debt due in 2023, revising the outlook to ‘stable’ from ‘negative’ in the wake of the successful placement of the USD575 million instrument: So far so normal. Yet two subsequent developments, by association, potentially rocked the credit quality of AITSA’s financial obligations. First was the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) linking of Consorcio Grupo Wisa and affiliates operating duty-free stores at the airport with irregularity and narcotics trafficking. The second development was a downgrading to ‘B+’ with ‘Negative’ outlook of Odebrecht Engenharia e Construcao, the holding company of the contractor building the south terminal, for potential contractor default.

ThE Bourse

But taking a broader perspective, let us focus on the sunnier side of the capital markets street, which the all-important investor community certainly seems to do. The Panama Stock Exchange, Bolsa de Valores de Panamá (BVP), was born at a time of political and economic adversity from forward-thinking members of the business community keen to harness the catalytic effect that capital markets would have on the broader economy, if astutely developed and transparently executed. The first bell clanged on June 26, 1990, a year in which trading volume printed at just USD3.3 million. Yet as the bourse celebrated its sweet-16, the figure came in at USD2.256 billion. And by 2011 the MCap of domestic listed entities had scaled USD10.7 billion. Underpinning this performance was the nation’s new climate of stable business enabled by the investor sentiment that can only emanate from political stability. That in turn reflected in comprehensive economic reform and a tax environment conducive to business so as to shore up shortfalls in capital market development, notably including the digitalization of trading, clearing, and liquidation. The BVP, regulated by the Superintendencia del Mercado de Valores de Panamá, argues that its more intimate scale enables greater flexibility in accommodating would-be listed firms. What’s more, in its move toward becoming a financial hub, it offers the low operating costs appealing to international listings. Roughly 20 fund management firms today operate in Panama, predominantly foreign-owned entities. The appeal, too, is that while regulations stipulate at least one resident director, service providers by law may be based anywhere in the world, so long as they are in a jurisdiction recognized by the Panamanian financial authorities.

Growth Strategy

Olga Cantillo, the Vice President and General Manager of the BVP, revealed that in 2016 the bourse accounted for just 20% of total investment volume, with the bulk stemming from foreign exchange trading. In fact, as a nation, “we have always been oriented to the banking sector and its savings culture [although today the BVP is] working on an education strategy for the long term with the objective of being foremost in mind not only for investment purposes, but also as an employment opportunity for the younger generation.” Parallel to local steps is a wider regional footprint to deepen the capital markets and gain global traction. “We are in the process of launching the market integration between the stock exchanges of El Salvador and Panama,” Cantillo adds, which “will allow the approved stock members of each country to trade in the other country’s exchange system without double registration of the securities listed in each country.”

Go Figure

2016 was a record breaker for the BVP, as issuances in the January-September period alone surpassed 60% of the total issuances of FY2015, with the bourse bullishly forecasting FY2017 total trades of USD7 billion. Official data for the full year indicates that BVP transactions soared 40% YoY to over USD7.3 billion compared to USD5.246 billion traded in 2015. Specifically, transactions on the primary market climbed 15.7% YoY to USD3.934 billion, with the Senior Secured Bonds of Tocumen International Airport, at USD625 million, delivering a full 20% of the total. Meanwhile, the secondary market appreciated 44%, from USD1.51248 billion in 2015 to USD2.18289 billion

The benchmark BVPSI Index was forecast by Trading Economics closing 2Q2017 at 413, and 1Q2018 at 401. By YE2016 the BVP had registered 38 new issues valued overall at USD3.021 billion, thereby exceeding the 29 registered in 2015 worth USD1.9184 billion. And for 1Q2017, of the total volume traded at the BVP 55% was generated in the primary market, with 29% in the secondary market and the remainder being repurchases. In the primary market the most traded instruments were corporate bonds, notes, and negotiable commercial securities of USD338.9 million, followed by bonds and Treasury Bills of USD228.8 million. Data also shows trading of USD20.1 million in the shares of mutual funds plus USD9.9 million in common stock and USD198 thousand in preferred shares. Meanwhile, in the secondary market, government securities ruled the roost on a trading volume of USD158.6 million, ahead of corporate debt comprising bonds, notes, and negotiable commercial securities on USD104.7 million, and lastly variable yield instruments of USD76.1 million. On March 14, Panama issued USD125 million in government debt on the local market, maturing in 2024 and with an average yield of 3.63%. Firm demand came from public-sector entities, prompted both by the instrument’s good return and favorable credit risk status.

Panama’s capital markets, now rigorously scrutinized, can expect further investor attention as the nation adjusts to its status as a regional finance hub.

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