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.”
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 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.”
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.”
Full text in http://www.latamfm.com