VZCZCXYZ0032
PP RUEHWEB

DE RUEHZP #0827/01 3012049
ZNR UUUUU ZZH
P 272049Z OCT 08
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC PRIORITY 2612
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS PANAMA 000827 
 
SENSITIVE 
SIPDIS 
 
TREAURY - SARA SENICH 
COMMERCE - MATTHEW GAISFORD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PM EINV
SUBJECT: PANAMA,S BANKING SECTOR WEATHERS GLOBAL FINANCIAL 
CRISIS - SO FAR 
 
 ¶1. (SBU) Summary.  Panamanian bankers widely agree that 
Panama's financial sector, one of the largest in Latin 
America with 90 banks licensed and $63 billion in assets as 
of September 2008, has avoided the core cause of the global 
financial crisis - subprime mortgage instruments.  Liquidity 
remains healthy as Panama's economy continues to grow at an 
estimated 8-9 percent clip, FDI flows remain robust, and 
capital seeking a safe haven flees from countries such as 
Venezuela.  However, credit card debt overhang also has 
restricted consumer lending.  Most importantly, Panama is 
bracing for the derivative effects of the crisis that 
anecdotally already are occurring: reduced Canal traffic and 
maritime business, slower real estate sales, fewer tourists, 
a decline in Colon Free Zone (CFZ) trade, and a current 
virtual freeze in project lending. End summary. 
 
--------------------------------------------- ------- 
Avoiding the Subprime Trap and Irrational Exuberance 
--------------------------------------------- ------- 
 
¶2. (SBU) "U.S. debt instruments were too good to be true. 
With 9 percent for AAA debt, they should not have needed to 
sell it," opined Alexi Arjona, President of the Banking 
Association of Panama and General Manager at Banco Aliado, in 
explaining why Panamanian institutions did not purchase these 
instruments.   HSBC Economist Rogelio Alvarado, emphasized 
that Panama has no Federal Reserve and therefore no moral 
hazard inherent in the expectation of being bailed out.  "If 
you make a bad decision, you lose your bank."  Alvarado also 
noted the intimacy of Panama's banking community and its 
knowledge of its commercial and consumer customers.  As of 
June 2008, the caution of Panama's bankers was generating 
healthy returns: 3.1 percent return on assets and 19 percent 
return on equity, according to the GOP's Bank Superintendent. 
 Also, primary liquidity as of that date stood at 25 percent 
of deposits.  Panama's banking sector dominates the overall 
financial sector that also includes insurance and capital 
markets.  Of the 25,000 people employed in the financial 
sector, 16,000 work for banks. 
 
¶3. (SBU) Furthermore, banks overall did not relax prudential 
lending standards during the ongoing boom that appears to 
have peaked last year.  During what may have been the peak of 
the real estate frenzy 12 to 24 months ago, they did not lend 
to developers unless a hefty percentage of the building 
(usually 40-50 percent) was presold.  About 12 months ago, 
banks began to demand presales in the 50-60 percent range. 
Also, financial institutions uniformly require 20 percent 
down in order to finance mortgages.  As an added caution, 
buyers paying more than an informally set price per square 
meter must front the difference between the limit and the 
price paid in cash.  Finally, Panama's bankers keep and 
service their mortgages.  According to the Bank 
Superintendent, banks have sold their loans at a rate of 
roughly 1 to 1.5 percent between June 2006 and June 2008. 
Rather, managers use mortgage servicing as a tool to market 
other products and services to existing customers. 
 
----------------------- 
Problems on the Horizon 
----------------------- 
 
¶4. (SBU) The financial sector's Achilles heel appears to be 
credit card debt.  This type of debt averaged $6,685 per 
borrower in 2007.  Today, adds Arjona, credit card debt 
stands at 144 percent of borrower income.  Banks have 
tightened the reins, but the rate of accounts overdue has 
risen from 2.8 percent at the close of 2007 to 3.05 percent 
in June 2008. 
 
¶5.  (SBU) Even with these measures, financiers already feel 
the softening of the real estate market, with a pending 
oversupply of luxury apartments estimated next year at six to 
eighteen months.  Banks are just saying "no" to new projects, 
reports Arjona.  Financial institutions continue to lend to 
developers of smaller middle and lower class housing projects 
- they are considered less risky.  While figures through 
August show overall robust growth, financiers and business 
representatives report that the global financial crisis is 
beginning to affect Panama's area of comparative advantage: 
trade.  Canal traffic by tonnage had slowed from 312.9  to 
309.6 PCUMS' (Panama Canal Universal Measurement System) 
between FY2007 and FY2008.  In the Colon Free Zone, where the 
2007 $16.1billion trade volume nearly equaled Panama's $17 
billion real GDP, business rose 31 percent.   Yet, CFZ 
merchants are expecting 2008 to end in slower growth, if not 
outright contraction.  Observers predict a similar scenario 
 
for Panama's ports.  Hoteliers are forecasting a leaner 
period for Panama's burgeoning tourist industry.  Perhaps 
most troubling, Arjona reports that "in the past few days," 
credit lines from overseas banks have either become 
unavailable or are so costly as to be unusable.   In an 
October 20 meeting with Ambassador Stephenson, 
representatives of U.S. power firm AES, confirmed that 
lending for large projects in Central America was "dead." 
 
------------------- 
Panama's Advantages 
------------------- 
 
¶6.  (SBU) Given the most alarming global trends in decades 
and Panama's dependence on global trade, why is there no 
collapse?  First, employment remains robust at 6.3 percent 
(down from 12 percent in 2004), not far from what is 
considered full employment according to the Minister of 
Finance.  Secondly, through July, FDI had been prodigious - 
$1.1 billion for the first half of 2008.  Much of that FDI 
involves movement of regional headquarters to Panama, as with 
Caterpillar, Procter & Gamble, and Hewlett-Packard.  Thus, 
the investment will continue to generate employment and 
demand for housing, capital goods, and consumables.   Most 
importantly - and strongly related to employment and FDI - 
huge infrastructure projects are underway.  The Panama Canal 
Authority has embarked on a marquee $5.25 billion expansion. 
Dredging and excavation activities began in Fall 2007 and the 
contract for the $3.35 third set of locks is set to be 
awarded by late spring or summer.   The dirt is flying on 
Panama Port's (Hutchinson International Port Holdings, Inc.) 
$240 expansion to its Pacific and Caribbean terminals. Major 
infrastructure projects continue to progress, such as the 
Panama-Colon highway ($215 million) and a coastal connector 
road, Cinta Costera ($189 million), in highly congested 
central Panama City -- where construction proceeds 24 hours a 
day.  Nonetheless, the pipeline of planned projects is likely 
to narrow as access to financing becomes more challenging. 
 
¶7.  (SBU) Panama also benefits from turmoil in the region. 
Eighty-three percent of new deposits are from abroad, reports 
Arjona.  HSBC's Alvarado estimates that over 100,000 
Venezuelans alone have accounts in Panama.   Several bankers 
report that Ecuadoran money also is fleeing to Panama at a 
brisk pace, and Panama traditionally has served as a safe 
haven for Colombian cash.  Add to that mix U.S. and Canadian 
retirees and Europeans capitalizing on the cheap (although 
recently strengthening) dollar.   Even some Panamanians, who 
traditionally viewed the U.S. as the safest harbor for 
investment, are beginning to bring their savings to 
Panamanian institutions, according to one member of the 
U.S.-Panama Business Council. 
 
¶8. (SBU) Comment: Panama's banks and commercial sector remain 
healthy and confident for now.  However, Panamanians are 
concerned about the possibility of long term availability of 
financing.  Although the all-important Canal expansion 
project recently received a green light from a consortium of 
multilateral and national export bank lenders (septel), key 
projects such as the proposed OXY-Qatar refinery and further 
expansion of Tocumen International Airport could be delayed. 
 In addition, a sharper than expected drop in construction - 
which accounted for much of Panama's 9.5 percent GDP growth 
for the first half of 2008 - remains a possibility, even 
though financial institutions appear to have tightened credit 
in a calibrated manner.   Indeed, while the GOP still 
predicts 2008 GDP growth to exceed 9 percent, INDESA (a 
highly regarded financial consulting firm in Panama) sees 
growth leveling off at 7.7 percent for the year. 
STEPHENSON