PANAMA,S BANKING SECTOR WEATHERS GLOBAL FINANCIAL

UNCLAS PANAMA 000827 SENSITIVE SIPDIS TREAURY - SARA SENICH COMMERCE - MATTHEW GAISFORD E.O. 12958: N/A TAGS: ECON EFIN PM EINV SUBJECT: PANAMA,S BANKING SECTOR WEATHERS GLOBAL FINANCIAL CRISIS - SO FAR ¶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. -------------- -------------- Avoiding the Subprime Trap and Irrational Exuberance -------------- -------------- ¶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 �00A;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. STEPHENSON