Monday, June 25, 2012

Most important providers of financial secrecy are in world's biggest and wealthiest countries

Campaigners say OECD action against banking secrecy has failed

06 October 2011

The campaigning body Tax Justice Network has published a report claiming that the OECD nations have failed to make any practical difference to international banking secrecy.

In its report, The 2011 Financial Secrecy Index, TJN ranks 73 international financial centres according to its estimates of their secrecy and the quantity of money that flows through them. It claims to deliver a "politically neutral" result.

The index uses fifteen factors to calculate the secrecy index of each jurisdiction. They include knowledge of beneficial ownership, corporate transparency regulation, regulatory efficiency, and international standards and cooperation.

According to TJN, its ranking reveals that "the world's most important providers of financial secrecy are not small, palm-fringed islands as many suppose, but some of the world's biggest and wealthiest countries". Indeed it puts countries such as the USA high on the secrecy list - not a view much promoted by the OECD's Global Tax Forum, the body responsible for the official campaign for international exchange of tax collection information.
Each of the 73 jurisdictions examined has its own report on the TJN website. Switzerland and the Cayman Islands are at the top of the list. This is mainly because of the large cash volumes they handle, although TJN also dismissed both jurisdictions' information exchange agreements as "ineffective".

Other leaders in the field are Luxembourg, Hong Kong, Delaware in the USA, Jersey and Bahrain. The UK, Japan and Germany are not far behind.


Tax Justice Network Financial Secrecy Index

2011 Results


Thursday, June 21, 2012

Compliance costs serve as barrier to the poor

A report by the World Bank explains how compliance and KYC costs at banks are passed on to consumers, thereby excluding many of the poor from access to banking services.

Measuring Financial Inclusion: The Global Findex Database

Asli Demirgüç-Kunt

World Bank - Development Research Group (DECRG)

Leora F. Klapper
World Bank

April 2012

World Bank Policy Research Working Paper No. 6025


This paper provides the first analysis of the Global Financial Inclusion (Global Findex) Database, a new set of indicators that measure how adults in 148 economies save, borrow, make payments, and manage risk. The data show that 50 percent of adults worldwide have an account at a formal financial institution, though account penetration varies widely across regions, income groups and individual characteristics. In addition, 22 percent of adults report having saved at a formal financial institution in the past 12 months, and 9 percent report having taken out a new loan from a bank, credit union or microfinance institution in the past year. Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy. Among the most commonly reported barriers are high cost, physical distance, and lack of proper documentation, though there are significant differences across regions and individual characteristics.

Tuesday, June 19, 2012

The honeymoon has ended...

Government fatigue is typical by the 3rd year of any administration in Panama. The euphoria after election day vanishes among the reality of a coalition politics, expectations of an impoverished population, and international economic circumstances beyond control of a small Isthmus.

Panama's Democracy Goes South

When supermarket magnate Ricardo Martinelli became president in 2009, free-marketeers celebrated, but the honeymoon was short-lived.

By Maria Anasatais O'Grady
Some 15,000 ships, carrying 5% of the world's sea-going cargo, already pass through the Panama Canal every year. But when a third set of locks capable of handling larger vessels is completed in 2014, analysts expect the annual canal cargo volume to double. This will ensure that in the 21st century, "the path between the seas," as historian David McCullough called it, will be an even more significant international trade route.
The economic importance of this legendary passage is but one reason that a stable and free Republic of Panama is a security interest for the Western Hemisphere. That, in turn, is a good reason to heed the warnings from a growing chorus of Panamanians that center-right President Ricardo Martinelli is moving the country toward authoritarianism.

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Columnist Mary Anastasia O'Grady on Panama president Ricardo Martinelli trying to pack the Supreme Court. Photo: Getty Images.
"He is constructing public works but tearing down institutions," says Aurelio Barria, a Panamanian businessman and the leader of Civic Crusade, a nonpartisan movement famous for its democratic advocacy during the dictatorship of Gen. Manuel Noriega. As if to prove Mr. Barria's point, on Thursday Mr. Martinelli went ahead with his plan to pack the Supreme Court by naming three new judges who will grow the bench to 12 from nine. Opposition parties pledged to fight the move.
James Madison wrote that "in framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." The trouble for Panama is that Mr. Martinelli is out of control.
When the supermarket magnate was sworn in as president on July 1, 2009, free-marketeers around the region celebrated. Until then, Hugo Chávez copycats seemed to be popping up everywhere. Mr. Martinelli's victory in Panama suggested that democratic capitalism could make a comeback. But the honeymoon was short-lived.

The erosion of Panamanian pluralism under Mr. Martinelli seems to have originated in the 71-seat unicameral national assembly. In the last election, his party, Democratic Change (CD), won a mere 13 seats. But since then Mr. Martinelli has been able to persuade 23 other deputies to either defect to the CD or to vote with him in a coalition, thus providing the simple majority he needs for passing laws and confirming judges even as former supporters have become adversaries.
It is not entirely clear how Mr. Martinelli won over all those politicians. But it is worth bearing in mind that the Panamanian constitution was written during the military dictatorship and as such centralizes a lot of power in the executive. Thus Mr. Martinelli has enormous discretion in steering funds to selected congressional districts, and he seems to have used it.
Like Mr. Chávez in Venezuela, who also has a majority in a unicameral national assembly, Mr. Martinelli's legislative advantage has allowed him to govern unchecked, despite loud protests from the independent press. And like Mr. Chávez, Mr. Martinelli has understood the power of the public purse.
President Ricardo Martinelli

His critics charge that he is corrupt. But that's hard to know. What is troubling is that close Martinelli cronies have too often been named to posts that ought to be manned by politically independent professionals. One example is the comptroller general. She is a long-time Martinelli associate and the former internal auditor of one of his own companies, leaving the public wondering whether there is anyone really watching the till. He also seems to prefer no-bid contracts for the many public works that he is launching. This has heightened suspicions about the misuse of public funds.
Meanwhile he is reaching for more. Since 1997 privatization revenues have been cordoned off in a special fund with the stipulation that only the interest from the principle could be spent. But this government is creating a new vehicle for future privatization proceeds, and it will have no such constraints. Mr. Martinelli has announced that he will be the one to name its entire board of directors.

Now the president is hinting that he would like another term. Consecutive re-election is not permitted under the constitution, and changing that would require Supreme Court cooperation. He has already named four of the high court's judges. (One of those, who is now president of the court, handled press censorship for the Noriega dictatorship.) A fifth is a reliable ally. Throw in the three new seats that he advocated for and filled, and two-thirds of the court is his.

Even if, as critics contend, Mr. Martinelli is a power-hungry caudillo, some might be tempted to tolerate him because he is not left-wing. Importantly he is not threatening property rights. But that ought to be little comfort. Once the institutional checks and balances that defend society against dangerous demagogues are destroyed, the door is open to candidates across the political spectrum. Just ask the Venezuelans.

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Tuesday, June 12, 2012

Offshore choices for Latin American investors

Small world
8 Jul 2011
The scramble for yield and return has sent investors scouring the globe in the post-credit crisis environment. Although still unprepared to invest too far from the beaten track, improved liquidity in markets like Latam has meant there is real opportunity for investors to reduce their risk profile through allocations to emerging markets. 

Latam investor base
The message appears to be that there is little let up in the demand for Ucits structures among investors who crave onshore structures, particularly in the absolute return format, but clearly that isn’t for everyone. In Brazil the opposite can be said. The market is currently awash with financial products and investors aren’t desperate for the security offered by Ucits, particularly in an absolute return fund.
“Things are going well in the real economy. When you analyse the risk assets, like the Bovespa, then there are certainly some problems but it’s because investors are wary of putting their money to work at the moment,” says Otavio de Magalhães Coutinho Vieira, director of investments Safdie Private Bank based in Sao Paolo. “This is because there are so many IPOs and financial products coming to the market. It’s a type of digestion the market is going through, and I believe that it will pass through a period of ups and downs and there won’t be too much definition for the markets.”
The ‘multimercados’ make up the majority of the market, regulated onshore products, whereas traditional hedge funds are set up as offshore vehicles attracting a different  client base. There’s no real rush by local institutional investors to invest in Ucits-wrapped funds, even hedge funds. “There is no rush. The majority of the investors here, the big endowments and the pension funds, prefer to go down the managed account route,” says Vieira. “And the ones that are launching these structures are the big banks so it depends more on the size and the objectives of the manager.
“Independent managers need to have some control over their client base so naturally prefer pension and endowments, which are longer term investors than the retail investors. In general these retail investors want to have a very liquid strategy and these independent guys are more dedicated to mid-caps and even small-caps, and they want a long term-oriented client base.”
A survey completed by KPMG released in early June indicated that the appetite for Ucits was still strong but that the wholesale shift to Ucits [Undertakings for Collective Investment in Transferable Securities] products hadn’t quite happened as many expected. In a lot of cases hedge fund managers opted to keep an offshore vehicle while at the same time create an onshore product that appeals to a certain investor base, largely reflecting the mixed attitude of investors.
Pension funds and endowments in places like Brazil have yet to come round to Ucits, and may not, although some of the institutional in Peru and Chile are more avid investors in Ucits products. “Here in Latam we didn’t have those problems that a lot of places had in 2008. So if a Latin American investor wants to have an absolute return type of product they’ll go toward a Cayman vehicle [offshore]. It is a different game [in Latin America],” says Vieira.
“For other investors Luxembourg protection matters but for Latam investors you see more plain vanilla type of products with a certain alpha attached. Hedge fund managers are receiving demand for their capacity and their skill at alpha generation and the growth is coming from big institutional investors, so Luxembourg [Ucits] is not an issue for them.”
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Monday, June 04, 2012

Panama Punching above its weight

Punching above its weight

3 Oct 2011
Panama continues to appeal to international investors despite its relative insignificance in size. The Central American tax haven of just three million people has not attracted brokers and service providers to develop into a financial hub, but its attractive tax environment has helped it attract more than $10bn in foreign direct investment (FDI) since 2006, a quarter of which arrived in 2010.
“Investors use our jurisdiction for reduced taxes for the income from investment vehicles,” explains Ernesto Chong Coronado, CEO of PMC International Management Corp.  “Panama is not like a modern financial centre where you see everybody coming here to be a brokerage house or broker-dealer.”
With limited direct investment opportunities, funds play an important role in getting investors access to the Panama growth story – indeed, Panama continues to be one of Latam’s fastest growing economies. The World Bank projects that Panama’s GDP, which grew 4.5% in 2010, will grow at 7.8% in 2011 and 6.8% in 2012.
“The growth outlook for Panama´s economy is very promising,” says Ricardo Zarak, senior vice president at Prival Securities. “Construction, tourism, logistics and financial services are the sectors that offer the best investment opportunities and potential.”
BBVA Research says the Panamanian economy rallied by 7.5% year-on-year in 2010, regaining momentum after growth slowed during 2009. “Panama thereby consolidated its position as one of the fastest growing economies in Latam. Quarterly GDP growth accelerated over the year, supported by the strong growth of domestic demand, driven by increased spending on the public sector investments programme and Panama Canal expansion works,” the firm said.
Indeed, Panama’s significant government spending on a pipeline of high profile projects is one of the main factors drawing in international investors (and also fuelling a hefty account deficit). “A lot of developments are beginning in Panama,” says Jorge Vallarino vice president of treasury and institutional relationships at MMG Bank. “When you look at the canal expanding, for example, there are a lot of opportunities to develop services tied to that in particular.”
Considerable amounts of capital are going into certain sectors including tourism-related real estate, with a lot of construction around the hospitality sector planned for the future. “I think the real gems here are going to be the projects that have been developed in beach areas,” says Vallarino.
However, political risk still exists, with the government changing every five years and new rules evolving, often as a result of constantly changing agendas, which can make development somewhat unpredictable. A more pressing concern, however, is the potential inflationary pressures associated with global commodities.
“The main economic weakness of Panama is the high dependency on imports, especially on fuels, and an unspecialised labour force, which has caused wage inflation in the country,” says Zarak. “Panama´s dependency on fuel imports could damage growth – a spike on the price of oil due to circumstances from the Middle East will have a negative effect on consumer´s disposable income.”
“Inflation is set to be close to 5.3% on average, driven by strong business activity and high international commodity prices,” said BBVA Research. “The main risk threatening the economy’s performance would be intensification of the political crisis in the Middle East and the subsequent effects of this on oil prices and world trade flows.
“We forecast inflation of close to 5.3% on average during 2011, moderating in 2012 towards a rate of 4.4%, consistent with the adjustment expected in international commodity prices and the strengthening dollar, due to a more restrictive monetary policy in the US,” the firm added. “However, amid strong momentum in terms of economic activity and in the absence of monetary policy instruments to temper spending, inflation will remain a challenge for economic policymakers, reducing the economy’s competitiveness and highlighting outstanding problems facing productivity.”
Financial markets
Panama’s equities and debt markets are relatively underdeveloped. “Sophistication in the market is derived through the international investors, but not the local investors,” explains Coronado.
The market is fixed-income orientated (although there is a significant number of equities funds relative to the market’s small size), with many investors prioritising regular returns over long-term capital gains. The equities universe is small, with the stock exchange dominated by a handful of companies that power much of the economy and employ most of the workforce.
The biggest challenge for the local equity markets is that most of these companies’ shares are controlled by insiders, according to Vallarino.  “Even in the face of a high valuation, no one wants to give up control - that is one of the biggest challenges that we are trying to get people here in the Panamanian space to understand,” he says.
MMG Bank
MMG Bank currently runs two funds, a fixed income fund and a land fund, overall running around $55m in mutual funds.  The bank is a market maker in government debt, issuing the majority of the deals coming to the market.  This primary focus ties very well into the investment banking unit, which is bringing companies to the market by, for example, structuring debt deals.  Investment banking was at the core of the business at its inception, with everything else born from that centre, according to vice president of treasury and institutional relationships Jorge Vallarino.Sustaining liquidity is a also challenge for fund managers. According to Vallarino, it is important to be trading with the right bank to get access to the right deals. “We are structuring most of the new deals that are coming to the market, and we are going to give our customers a better entry point than any other firm,” he says.  “It is a big challenge, getting the deals and then trying to trade in the secondary market – it is far easier to sell than buy here, which presents another challenge for fund managers.”

Panama's strength
LatAm FMspoke with Prival Securities senior vice president Ricardo Zarak to discuss opportunities and growth in the Panamanian fund space

LatAm FM (LFM): When was Prival’s fund business formed?
Ricardo A. Zarak A. (RZ):Prival Securities is a 100% subsidiary of Prival Bank, and is an asset management firm that received its licence in 2010.  The executives of Prival Bank and Prival Securities have more than 10 years of fund management experience; and under their previous fund administration managed more than $300m in assets, mainly in the Latin American fixed income space. Prival Securities acquired the operations of Mundial Asset Management late last year, who had a family of funds. The Mundial Global Diversified Fund (MGDF) is a blended fund, currently being modified by Prival so it can be a purely fixed income fund, concentrated in investing in Latam. From 30 June, the MGDF, renamed the Prival Bond Fund after amendments, had $33m AUM and distributes dividends monthly to investors.  Year to date dividends are around 5% annualised. The breakdown of our clients is 90% Panamanian, and 10% international.
LFM: To what extent are you looking to attract more international investors?
RZ:We are always looking for ways to diversify our client base.  However, we are extremely careful
in how we allocate assets, since managing the capacity of the fund is always a challenge.  We have a deep evaluation process of the opportunities that come from the open market, and from private deals.  We want to maintain a dividend yield that is 150 basis points above the average deposit offering at local banks, so there are only a few assets that we can allocate each month.  We are growing between $3-5m a month, and we are seeing that level of growth until the year end. 
LFM: How developed are Panama’s fixed income and equities markets?
RZ:The market consists mainly of government bills and notes, as well as corporate bonds, commercial paper and preferred shares.  Most of the fixed income securities are bought by local institutional and private clients who hold the investments until maturity; therefore, sometimes finding a secondary market can take a few trading sessions.  Recently, the government has launched, through local broker dealers, a market maker programme to give liquidity to government bills and notes.Panama´s equity market looks positive overall.  As of 15 July, the equity market was up 14.18%.  The most important component of the stock market is in financial firms, which have sound liquidity, and must enjoy the benefits from a growing economy. 
LFM: How positive is investor sentiment towards Panama at the moment?
RZ:Investor sentiment towards Panama is very strong.  Another encouraging sign is that Panama received around $2.3bn in foreign direct investments (FDI) in 2010, which represent around 8-9% of GDP.  Furthermore, Panama has received more than $10bn in FDI since 2006. Because Panama has a limited market in terms of the quantity and size of the issuers, finding enough deals to meet inflows is always the main challenge; for this limitation, fund managers must look to other markets, or at private deal opportunities.
Meanwhile, the legal environment for funds poses few challenges; it is relatively sophisticated and efficient, making the fund space relative easy to navigate for external players. The management of assets is very well regulated, but the administrative services are not regulated for those funds. What is required, though, says Coronado, is a more competitive edge from the market’s administrators.
“We need to be more aggressive, more sophisticated, to compete with, for example, Colombia and Brazil,” he says. “This aggression should not manifest in the form of risk, but, rather, in a way that we can be more sophisticated and stay in control of our jurisdiction, and to stay in touch with international investors.”
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