Headlines - Retirement Wave - "Report on Panama as 2008 Draws to a Close"
|Bob Adams: Report on Panama as 2008 Draws to a Close
(Posted October 26, 2008) A note to some readers: I will frequently use the word "billion" below. I am well aware that it is used differently or not at all in some countries and languages (Spanish, for example). When I use it, I am referring to 1,000,000,000 or what many of you call a "thousand million" (mil millones in Spanish).
About that Freight Train...
On February 3rd of this year, I posted a commentary still here at the site [in the Members section] titled, "Looking Forward in Troubled Times". You can consider this to be an extension of that commentary. A few sentences from that commentary led to a greater membership response than anything else I have written. This is what I said.
If the recession deepens, as many expect, will Panama be a good place to live when it happens? I answer that question in my actions, not just words. I moved here, in part, four years ago because I was concerned that a global recession was on its way and that it could be pretty serious. I live here today and intend to continue to live here, in even larger part, for the same reason. Let me put it this way. If I am standing in the middle of the tracks, as I felt I was in the US, watching a huge freight train coming right at me, ever faster, ever closer, I may jump the in the wrong direction. I may not jump in time. I may feel some of the pain even if I clear the tracks. But I'm going to jump. I have no intention of staying in the center of the tracks. I believe I would have felt the same way had I been living in Canada, Europe or any "wealthy" nation. But neither was I going to jump into some kind of isolation, depriving myself of so much that makes life worth living. I'm not trying to hide. I don't think that is possible. I'm just trying to get out of the center of the tracks.
Well, folks, the train wreck is underway. It is a long train and we can expect to feel its impact for a long time to come, but more so in some parts of the world than others. By the time you have finished reading this, I trust you will understand what I mean by that, particularly in regards to Panama.
I am not going to get involved in a discussion of what or who was responsible for the current financial crisis. There are plenty of websites that will be delighted to share their thoughts on the topic in great detail. That is not my purpose or the purpose of this site. However, I will mention three very simple factors critical to understanding how so many nations got into this unfortunate mess.
1) Ignoring their own experience, intelligence, and simple common sense, many financial institutions handed out money foolishly and irresponsibly.
2) Ignoring their own experience, intelligence, and simple common sense, many consumers took it, just as foolishly and irresponsibly.
3) Ignoring their own experience, intelligence, and simple common sense, many governments did nothing to intervene, but facilitated this foolish and irresponsible behavior.
I suspect including that second item is going to lead to some angry emails, but, folks, we are all ultimately responsible for ourselves and we have to learn the very nasty lesson currently being taught to all of us.
As the old saying goes, "It rains on the just as well as the unjust." People in the US, UK, Spain, Ireland and many other nations who have paid off their mortgages many years ago, have excellent credit ratings, and very conservative financial habits in general find that their home values fall right along with their less conservative neighbors. People who "saw this coming" and bet on a collapse of the US dollar and a meteoric rise in gold, silver, and oil prices have watched the dollar make a major rebound, gold and silver fall back substantially, and the price of oil collapse. All that can change and will, or not, that is for future events to determine. However, in weeks or months, I cannot tell you how long, my comments today will be out-of-date and irrelevant, but that is the nature of life and thus of future analysis. Let us just say that there are a lot of unhappy investors out there, regardless of their investment philosophy.
I know "tropical cyclones" well. We call them hurricanes in the US and I lived through several during my lifetime. We called them typhoons in Asia and I lived through them too, once watching as the roof of my house in the Philippines went sailing off into the distance! When you are caught in a tropical cyclone, the first thing you do is look for shelter. But, as I discovered in the Philippines, not all shelters work. You just have to choose as best you can and hope you have done the right thing. But no matter how bad the storm, there are a few shelters that will survive and they will not always be the ones you expect to survive.
I know that many RW members are looking for "shelter" right now. Whether your shelter is found in Panama is something only you can decide. I cannot tell you. Panama works for me, but each of us has his or her own set of circumstances, expectations, and hopes. However, many of you have written to ask how the global financial crisis has affected Panama. Often, Americans write expecting to hear that real estate prices have fallen in Panama as much as they have in the US. Some are so sure that this is true that one gentleman actually began his message, "Now that real estate prices in Panama have collapsed...". I hate to disappoint people, but sometimes I have no choice.
Okay, so housing prices have been falling in the US since late 2006, the term "sub-prime" entered the global vocabulary over a year ago, and tens of millions of people discovered that "Bear Stearns" was not the nickname for an American football coach. Surely, if the Panamanian economy was tied to the US economy, we would really be suffering down here. Are we?
Meanwhile, Down in Panama...
Here are a few facts and figures drawn from responsible sources, both public and private, over the last month regarding the economy of Panama. This is my short list, having dropped a dozen items to keep the length within reason. In a sentence or two, they summarize a much longer report. Some are very different indicators than others, but they all are pieces of the big picture.
This has come as a surprise to nearly everyone, including me. I was ready to hear that business at the free trade zone, an important indicator of business conditions in the region as a whole, had fallen, not risen 12%. I did not expect tourist numbers to fall in general because I recognize the growth in Latin American visitors, but I did not expect American visitors to increase by nearly 20%. I would not have been surprised if the GDP growth rate had fallen at least to a 7-8% annual rate, but I did not expect it to remain above 9%. Although I had long expected an increase in European interest in Panama, KLM and Iberian made their separate decisions to increase flights to Panama at the time that fuel prices were near their recent highs. These days, airlines do not add expensive "long haul" flights to their schedules unless they are very, very confident that the demand is there.
One of the more amusing things to watch over the last year, if "amusing" is the right term, has been the long series of articles in every publication in Panama discussing the likely negative effects of the North's financial crisis on Panama. We have been warned over and over again, "It's coming! It's coming!" Those articles still appear once in awhile, but the sense of urgency is fading quickly.
So is Panama Finally "Paradise", Like the Ads Say?
Nonsense, of course not. Panama has plenty of challenges to deal with in coming years, as every human society. Despite a recent independent survey finding a dramatic drop in poverty, this is still a problem that needs to be continuously addressed in Panama. Inflation has reached high levels by Panamanian standards, touching 10% last month. Although that is not unusual in today's world, Nicaragua hit 24% for example, and although we are seeing a very dramatic fall in gasoline prices now, Panama enjoyed a couple decades of inflation at 2% or less so this has been quite shocking for them. The increase, particularly in food prices now that fuel prices are falling, has strained lower and middle class budgets.
Although the construction of infrastructure has been impressive in recent years, we clearly need a great deal more attention paid to the public educational system. The public health system has plenty of needs to be addressed, especially in the rural areas. Although the evidence available indicates that crime here is nowhere near as serious a problem as in Central America, Mexico, and many other nations, we are still concerned about any increase here. Panamanians are very much aware of the cartels in Colombia. We salute their government for the progress it has made in reducing the cartels' power, but we have to always keep an eye on those Colombian criminals who show up in Panama.
Panama has plenty of real problems that Panamanians need to work on, but they are generating the income to do it and a growing respect from others for the progress they have already made. They are moving forward as best as can be expected from a human society and a democracy. I believe that if you look at global history with any objectivity, you will find that every nation that we consider to be a "success" is a nation that took many decades of "two steps forward and one step back" to get where it is today. The critical factor is the direction taken. I would not trade Panama's direction for that found in any North American or European nation today.
Okay, so Why is Panama Doing so Well?
There are too many reasons to list here, but I will mention three of them.
1) Foreign Direct Investment (FDI) is exactly what it says it is. It is the total amount of money that foreigners invest in a nation. FDI is extremely important to a nation's development. It is "extra" money from outside that the nation could not create by itself.
China is one of the largest recipients of FDI in the world. A reasonable estimate of China's FDI this year is $90 billion. A reasonable estimate for Panama's FDI this year is $2.2 billion. In other words, China can expect to get 41 times more foreign investment than Panama. If you see a table of FDI around the world, China is always listed separately because its number is so huge. Panama is usually not listed separately because its number is so small. Typically, Panama will be included in "Other Latin America".
But China has to take care of 1.33 billion people while Panama needs only to deal with 3.3 million people. China has 400 times as many people. On a per capita basis, China's FDI works out to roughly $68 per person while Panama's FDI works out to roughly $667 per person, nearly ten times as much.
Think of it this way. Suppose you bought a ticket for the lottery and won a million dollars. You would be a millionaire! But if you shared that ticket with 400 people, you would only get $2500. Who do you think is better off?
We are a small nation and that is a great blessing. A billion dollars is a billion dollars anywhere in the world, but it has far more impact here than it does in China or most nations.
2) Panama has an extremely conservative banking system, certainly in comparison to those found in North America and Europe. As I have mentioned elsewhere at the site, if a Panamanian wants a home mortgage, they have to provide a minimum 20% down payment. A foreigner has to provide 30%. In addition, the borrower will go through a very intense financial background check. It can take two months, sometimes three, before a mortgage is approved.
As a result of that and more, Panamanians and foreigners alike used to complain to me constantly that Panama's banks were "too strict". I do not hear that now. As I have also said elsewhere at this site, if North American and European banks had been half as conservative as Panamanian banks, there would have been few, if any, "sub-prime" loans up north and today's financial crisis would be far less severe than it is. They were not, and their depositors and taxpayers (many of them RW members) are suffering for lack of that discretion. Panama is benefitting from it.
3) Another thing I have written elsewhere, Panama is becoming the "Switzerland" of Latin America. Through August of this year, foreigners have put more than $12 billion (more than $3600 per capita) into Panama's banking system, 65% of that from other Latin American nations and the Caribbean. Venezuelans alone have deposited one and a half billion dollars. Can you guess who is right behind them? It is Ecuador whose citizens have deposited nearly $1.4 billion. Why? Ecuador's private banking system and central bank are in danger of being taken over by the government. Fearing the loss of their money, out it goes.
Panama may have its problems, but if you take a careful look at other Latin American nations, you will soon realize how well off we are. From Mexico to Argentina, other nations are facing all sorts of social, political, and economic problems, some of them very scary. Panama is an island of security and stability in the region and, as mentioned above, its banking system is solid and very, very attractive to others.
For decades, Latin Americans moved their money out of their nations to a safe location when they faced conflict at home. There is nothing new to that. But before, that money flowed into American banks, especially in Miami. Today, it flows into Panamanian banks.
I cannot predict the future, but current trends suggest that there are plenty of Latin American nations that face and will continue to face economic and political shocks in coming months and years. While that gets sorted out, our banks, our real estate sector, and our retail business sector are more than happy to help them protect and spend their money.
Just a Minute! Isn't This Supposed to be a Real Estate Commentary?
A real estate market anywhere does not exist in a vacuum. You must always consider the total context. Given the large number of emails I have received asking about the "context", this commentary has dealt with that subject in greater detail. I have done my best to provide you with a statistical overview.
Unfortunately, we have very few statistics for real estate specifically. I cannot tell you how many homes of a certain value were sold in August of this year compared to August of last year, as just one of many examples. When you start talking about the real estate market in Panama, you enter the area of conjecture (conjetura in Spanish). Conjecture is based only partially on statistical data and only if you take the trouble to collect it which many people do not. It is also dependent on anecdotal information (individual stories people tell) and guesswork.
Please keep in mind that my reflections below are conjecture. The statistics are above. What follows is based on anecdotal information and guesswork.
Pick up any newspaper. Visit any news website. It is impossible to ignore that much of the world is in the midst of a true financial crisis, the worst since the depression of the 1930s. It is not a question of anecdotes; there is a tidal wave of statistics indicating how serious this situation is. It is perfectly reasonable to expect people from outside Panama to assume that Panama is experiencing the same disaster. We are not.
Is there anything mystical or magical about this? No. Is Panama immune from any effects of this crisis? No. Will Panama eventually feel the impact? Probably, but we will be starting from a stronger position and a higher level of economic activity than nearly all other nations. Whatever happens, one thing is very clear at the moment. If you follow the Spanish-language financial news at Capital Finaciero, La Prensa and its Martes Financiero, Panama Americÿ and its Calle 50, Mike Magallon's economic analyses at Vamaga and a host of other sources (and you have to, if you want to do a decent analysis), you will find piles of statistics and analyses that demonstrate that Panama has yet to be hit by this crisis and, in some respects, is actually benefitting.
Who among us would have thought a year or two ago that keeping your money in a Certificate of Deposit or a money market account earning 2 or 3% interest would be far, far more lucrative than investing in stocks, so-called "First World" real estate, gold, oil, or a bet against the US dollar? Very, very few. Who among us would have predicted a year or two ago that, if there was a global financial crisis, a nation like Iceland would be devastated while a nation like Panama would not. Very, very few. Beware the predictions of others. Listen to them, but always do your own analysis.
I do my best within my many limitations to share my reflections, observations, and statistics on Panama. I suspect some of you think I am an incurable optimist when it comes to Panama. I am not. When the facts change, my analysis will change, regardless of my emotional outlook. For the moment, I am much more concerned for my many friends and members in the north than I am for my friends and members here in Panama.
Now, if you have read my commentaries in the past, you know exactly what I am going to do. And, once again, I will ask you to read the following along with me, even if you have done it many times before. They are the only words I can safely present as "fact".
No one knows the future. Free markets go up and free markets go down. The future is not a simple extrapolation of the present. Anything can happen. Everyone has an opinion and those words above are just opinions.
Copyright 2008 by Bob Adams for Retirement Wave.
Copyright 2008: The DreamScape Group