Friday, August 02, 2013

Panama: Developing a financial centre

Panama: Developing a financial centre
Latin America | 26 Jun 2013

Lending in Panama continues to grow at a healthy pace, while important regulatory changes are being carried out to ensure the stability of banks. At the same time, authorities are boosting transparency of the system, increasing their cooperation with the international community and strengthening Panama’s position as a regional financial centre.

Domestic credit within the national banking system grew by 14.2% in 2012, reaching more than $33bn, according to data from the Superintendent of Banks (Superintendencia de Bancos Panamá). The increase was largely on the back of private sector loans, which accounted for 94.2% of credit as of the end of last year. Overall asset levels were up by 10%, hitting $72.94bn.

Panama’s international financial centre – established in 1970 and home to nearly 100 offshore banks – also saw growth in 2012, with assets rising by 10% to reach $89.78bn. While the country still has relatively strong banking secrecy laws, it has started to disclose more financial information through bi-lateral agreements such as the US-Panamanian Tax Information Exchange Agreement (TIEA), which went into effect in April 2011, and the more recent TIEA with Canada signed in March 2013. Panama was removed from the OECD “grey list” in 2011 after signing its 12th TIEA in just under two years.

More generally, the country is taking steps to strengthen the regulatory and oversight frameworks for its financial system, in line with recommendations from the IMF. These include the establishment of a liquidity facility to act as a lender of last resort, as there is no central bank, as well as the ongoing development of capital adequacy and regulatory reporting standards for holding companies in the financial sector and the finalisation and implementation of regulations on operational and interest rate risks.

In its latest Article IV staff report, published in March 2013, the IMF also pointed out that, with high levels of trade and foreign financing, Panama remains vulnerable to external shocks. In particular, sudden fluctuations in capital flows to Latin America or a slowdown in Colombia and/or Venezuela, major trading partners and important sources of foreign deposits, could have an adverse effect on private sector credit growth, although the recent establishment of a sovereign wealth fund will reduce these risks.

Despite these concerns, Panama remains a top regional financial centre, with total assets equivalent to about 215% of GDP. Domestic lending to the private sector amounts to about 90% of GDP, and loans have exceeded deposits since mid-2010. Indicative of its importance, Panama was recently included for the first time in the March 2013 edition of the Global Financial Centres Index, which is published every six months by London-based think tank Z/Yen.

The country’s overall rank of 67 out of 75 of the world’s leading financial centres is indicative of its small size, yet it is not far behind its regional competitors Mexico City (55), Buenos Aires (53), Rio de Janeiro (48) and Sao Paolo (44). With a population of 3.57m, Panama is tiny in comparison to these giants, but its rapidly expanding dollarised economy, political stability and strong network of banks have allowed it to punch well above its weight in the regional and global contexts.

Since Panama first established itself as a centre for finance in 1970, the banking sector has undergone a number of important changes, particularly in the past few years. Improving asset quality, increased cooperation with the international community, and strong growth in domestic deposits amidst prominent economic expansion have all contributed to the development of the banking and larger financial systems. However, the strengthening of one of Latin America’s five-largest financial centres remains a work in progress.

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