In conjunction with our newsletter, Offshore Pilot Quarterly, this quarterly regional roundup is provided to our clients and professional associates.  Issues of this newsletter, in full or in part, also appear in the British journal, Offshore Investment.com, under the heading, Latin Letter.

January, 2009.                                                                                                                                                                                               Volume 11

 Number 1

 

The World’s Emporium

I wonder how many readers expected 2008 to end the way it has for the world’s economies?  2009 begins shrouded in economic uncertainty and particularly for many parts of Latin America.

There are 7 countries on the isthmus of Central America which lies in the tropics and runs from the southern border of Mexico to the northern border of Colombia.  The countries (none of them large) are, from north to south, Belize, Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panama.  They cover an area of 180,000 square miles which is about twice the size of the United Kingdom.  English- speaking Belize, however, is the odd man out, never having fallen under Spanish colonial rule.  British pirates, traders, runaway slaves and others of mixed blood made up the original population and because Latin America, by definition, consists of countries whose inhabitants speak a Romance language, Belize will be excluded from the rest of my comments.

Despite the current international banking concerns, more fully covered in our Offshore Pilot Quarterly, Panama has been sheltered.  The country adopted the US dollar as its currency after independence and, therefore, has no central bank.  Panama must buy or obtain dollars by either producing or exporting real goods or services, so the money supply is market-driven.  The bankers have no fallback position and the distortions that government printing presses can create are absent.  Importantly, the banks are financed by local deposits and doubtless they are mindful of the fact that liquidity is vital without the crutch of a lender of last resort in the form of a central bank.   Article 114 of the country’s 1904 constitution states:   “There will be no forced fiat paper currency in the Republic.  Thus, any individual can reject any note that he may deem untrustworthy”. 

Panama’s aversion to paper currency stems from the fact that in the nineteenth century the country’s currency was based on gold and silver, with a mixture of coins in circulation.  The Silver Peso was the most popular although the US currency was also in circulation due mainly to the construction of a railway linking the Atlantic and Pacific oceans which was being built by an American company.  Although originally independent from Spain in 1821, Panama later became part of Colombia and in 1866 the Colombian government made several decrees that forced the Panamanians to accept government fiat notes.  But because the country’s open economy, one based on transport and trade, could not really benefit from this move the result was dissatisfaction and discord. 

It was Simón Bolívar who said that Panama could become “the emporium of the world” and the economy continues to this day to be driven by transport and trade although its complexion has changed; Panama now has banking expertise and is emerging as a regional logistics and services hub.  Projects presently under way include the development of an urban centre which will be the size of central London with an eventual value estimated at US$10 billion.  The present canal expansion is behind plans for a US$7 billion oil refinery and a consortium’s plans to make Balboa the largest port in Latin America.  The future, to say the least, looks positive.

 Munchausen Bankers

After years of successfully fighting inflation, prices in the region rose in the last 12 months up to June, 2008, by 13.5 per cent (over twice the 2006 figure).  More worryingly, with so much of the population being very poor, food prices in the same 12-month period increased by almost 21 per cent.  The International Monetary Fund, which may have to adjust its estimates, believes, at the time of writing, that in 2009 inflation will be highest in Honduras (8%) and lowest in El Salvador and Panama (around 4.5%). 

As the harsh financial winds travel across the isthmus, the countries there have always been vulnerable over consumer prices because they neither produce oil nor are they self-sufficient in food.  Fortunately, inflation is beginning to ebb as the other effects of recession begin to bite.  For the last decade the average GDP of the 6 countries has been $19.6 billion and although some diversification has occurred, the main export market, and the dominant trading partner, remains the US which is now faltering financially.  It is Panama’s exceptional good fortune to have a revenue-producing and internationally-used canal with an expansion plan that could contribute 1% to future annual GDP growth.                                                                   

The strange thing is, even although the credit crunch in the US has not infected Latin America’s banking system in a life-threatening way, it seems to have had a psychological effect because banks have become far more cautious with their lending.  They are suffering, if you will, from monetary Munchausen syndrome:  making up symptoms that don’t exist.  Perhaps memories remain from what happened just a few years after America’s 1929 stock market crash when 16 Latin American governments were swapped for either outright dictators or autocrats.  Even so, the reality is that Central America’s economies are better placed this time around to stave off global economic eruptions.  In addition to Panama and El Salvador, both Nicaragua and Costa Rica have sturdy banking systems with central bank reserves having doubled in both countries since 2004.

I welcome the fact that countries such as Panama have kept their banking policies stable and that the bankers have not strayed from fundamental banking principles.  This, however, will not avoid future economic woes driven by the fact that, as Norman Douglas, the British writer, put it:  “A man can believe a considerable deal of rubbish, and yet go about his daily work in a rational and cheerful manner”.  The financial manipulators of the present global mess counted on this; their successors can again, I regret to say.