August, 2004.

Volume 6

Number 3

Changing Times …

Historians have frequently written about Latin America in a way which has defined its peoples as either beneficiaries or victims of uncontrollable events emanating from Europe and the United States, both of which have, at varying stages, brought democracy, suppression and enlightenment.  Such views have little relevance today in a region where the geopolitics in this century have seen fundamental changes take place.  Witness the recent international business relations being fostered by Argentina and Brazil, for example.  Both countries have become more international, less insular, and are looking to China, India, Russia and South Africa as a way of diversifying their economies.  These developments might concern Washington where, for almost two centuries, Latin America has been seen as falling under its exclusive sphere of influence. 

One of the countries closely linked historically with the United States is the Republic of Panama and which is another example of how things have changed.  Panama has started free trade negotiations with the United States (it already has trade agreements with El Salvador and Taiwan) and American foreign direct investment in Panama presently stands at about US$25 billion.  In recognising the trade deficit with the US (over US$1 billion annually) it should be noted that this is outweighed by capital receipts.  

In the April issue of this newsletter, Panama’s presidential elections (held in May) were mentioned and it was predicted that they would pass without incident, which proved to be the case.  The 41-year old social democrat, Martin Torrijos, carried the vote (47%).  Voter turnout was about 80% and outside observers declared the elections as having been free and fair.  Mr. Torrijos was educated in the United States and his father was General Omar Torrijos who ruled the country from 1968 until 1981 when he died in a plane crash.  It was General Torrijos who, by negotiating with the US president, Jimmy Carter, enabled the country to take control of its canal at the end of 1999.  Many sceptics at the time said that the canal, without American supervision, would suffer.  But since then, vessel transit time has been reduced by 24.4% (7.4 hours), container net tonnage has increased by 74% and accidents have decreased by 57%.  This, indeed, is a real achievement, but one of his son’s many challenges will be to address issues such as long-term productivity and sustainable growth, two common themes in Latin America. 

… and New Horizons

The role of the state in Latin America needs to be redefined so that business can be promoted without reinforcing the bureaucracies and the many vested interests that have choked much of the continent’s potential economic promise.  Panama’s president-elect appears to appreciate the limitations of the state’s role and his administration can also benefit from both a stable democratic system and a revitalised economy.  The country’s political stability contrasts sharply with some other Latin American countries where, in the past 5 years, there have been as many elected leaders who have not completed their term in office, namely, Paraguay (1999), Ecuador and Peru (2000), Argentina (2001) and Bolivia (2003).  As for the economy, the International Monetary Fund in a recent report notes that following two years of weak growth, the economy grew by 4%, in real terms, last year.  The IMF says that the fundamentals of the banking system remain solid (Panama is on target to being fully compliant with the Basel Core Principles) with banks’ profitability increasing sharply and the ratio of non-performing loans dropping to less than 3% as at the end of September, 2003.  Back in 1970, Panama introduced a banking law which became the foundation stone upon which a modern offshore financial services centre has been built.  In 1999 the old law was replaced with a new one that is comprehensive and covers the supervision of trust companies also.  (As a former offshore banking regulator of banks and trust companies, I can particularly appreciate the stringent monitoring and vetting procedures that have been put in place.) 

Another recent report on Panama, this time prepared by the State Department of the United States, acknowledges the progress made in strengthening the country’s money laundering controls (and echoed by the Financial Action Task Force) through the enactment of laws, executive orders and regulatory agreements.  The country has already assisted several countries with improving their money laundering programmes (such as Costa Rica, Nicaragua and Guatemala) and legislation in Panama now extends the list of money laundering offences to include criminal fraud, arms trafficking, kidnapping, extortion, embezzlement, corruption of public officials and terrorism.

Panama, unlike many regional offshore centres, does not rely on a twin-track economy of financial services and tourism.  In fact, the government has only scratched the surface of tourism (although the cruise ship industry is becoming significant) in a country which, besides many other attractions, has the largest rainforest in the western hemisphere outside the Amazon Basin.  The Panama canal, with up to 38 big ships passing through it every day, contributes 10% of GDP and it is reckoned that around one-third of the country’s GDP is derived from canal-related revenues.  Even so, more jobs and tax revenues come from international banking, manufacturing and shipping.  The Colon Free Trade Zone (second largest in the world) has seen business increase by over 6% in the first three months of this year, compared with the corresponding period in 2003.  There are more than 2000 businesses established in the CFZ and it has been estimated that it contributes over 7% to Panama’s GDP.  

Presently, there is debate about Panama’s canal being widened to meet demand from larger ships and this issue will be high on the agenda of the incoming president.  The fate of the proposal is uncertain, but one thing is certainly not in doubt:  Panama may not widen its canal but it will continue to broaden its horizons.