PANAMA: An Introduction to Banking & Finance

Panama is, and consistently has been, one of the fastest growing economies in Latin America.

Several factors, including its dollarised economy, stable political environment, advantageous geographic position, and easy access to capital markets and international sources of funding, have influenced this sustained growth.

Project Finance in Panama  

Even if the private sector is an important factor in generating such impressive growth, with few exceptions, most major infrastructure projects are sponsored either by the central government or by state-owned entities.

Panama has enjoyed an investment grade rating by all major rating agencies for over ten years; a rating obtained in part thanks to a limit set in Law 34 of 2008 and its subsequent modifications, which currently states that the annual budget deficit has an upper limit of 2% of the GDP for 2024.

Due to this hard limit, a novel financing structure was needed to finance key infrastructure projects in a way that (i) allowed the government to guarantee public contractors that projects were fully funded, and (ii) ensured that financial institutions would have certainty of payment when the debt became due and that the project costs would not be considered government debt when the infrastructure project commenced but, when the payments became due.

In order to achieve these goals, the state and state-owned companies, including Empresa de Transmision Eléctrica S.A. (the owner and operator of the national electric grid), Metro de Panama S.A. (the owner and operator of the Panama City metro lines), the Ministry of Public Works and others issued regulations for the issuance of the so called Certificados de No Objeción (CNOs) or Certificados de Pago Parcial (CPPs) which constitute an autonomous, unconditional and irrevocable obligation of the contracting entity.

Such regulations allow the contracting entity to issue promissory notes (the CNOs and the CPPs) in favour of the contractor on a monthly basis as the public works progress. Such promissory notes are payable at a future date, and the contracting entity recognises and pays for the financing cost at a predetermined interest rate from the date of issuance until the date the promissory note is paid.

Local and international financial institutions have expressed interest in acquiring the promissory notes, purchasing them at a discount and effectively carrying out factoring operations on government debt, granting immediate liquidity to contractors. Such factoring operations are documented in contracts entered into by the public contractor and the financing entities; the government is not a part of such arrangements.

The CNO and CPP regulations hove now been superseded by new regulations issued by the central government whereby a new public debt instrument called the Informe de Progreso de Trabajo (IPT) was created. It operates in a similar way to the CNO and CPP with some minor differences; the main one being that instead of several pre-determined payment dates, now only two such dates are allowed, the first usually being when the project reaches 50% completion and the second once the project reaches 100% completion.

Public private partnerships  

Even though the CNO, CPP and IPT financing arrangements have been highly successful in financing major infrastructure projects, in Panama, as a fast-growing country, even bigger projects are planned for the future. Such future projects, due to their magnitude and the budgetary constraints mentioned above, cannot be financed via CNOs, CPPs and IPTs.

In September 2019, Panama enacted Law 93 of 2019 regulating Public Private Partnerships (PPPs) starting a new era in the financing of public infrastructure projects.

The public bidding process for the first of these PPP projects, consisting of the refurbishment, maintenance and operation of 246 kms of the east side of the Pan-American road and the financing of such operation will be adjudicated in the near future to the winning bidder.

The bid documents of at least two other major infrastructure projects are currently being prepared under the PPP model, signalling the direction the government will be taking in the near future.

Banking  

With respect to the banking sector, the latest report of the Superintendence of Banks of Panama (SBP), the entity in charge of regulating and supervising the banking and fiduciary sector, shows that activity remains solid, with deposits exceeding USD 100 billion at the end of March this year, which is a sign of confidence.

These figures show that at the macroeconomic level, the sector has maintained the robust growth rate with which it closed 2022 in 2023. The assets of the Panamanian international banking centre registered an increase of 5% over 2022, totalling USD 140 billion, while the credit portfolio increased by 12% to USD 83 billion.

According to the SBP, the banking sector results are mainly due to the “growth of time deposits, with a concentration in natural persons, which have high renewal rates, and in turn, improve the funding and liquidity profiles of the entities”.

The most recent results of the financial sector follow several phenomena that tested its resilience, such as the pandemic and its consequent impact on economies, including interest rate hikes and, more recently, some bank collapses in the United States.

The pandemic also tested the institutional framework of the Panamanian financial system when the legislative body tried to reform the legal structure of the banking system to regulate the free market using the control of interest rates as an excuse. However, these initiatives did not prosper when the sector, supported by other pillars of the economy, succeeded in exposing the risks involved in modifying the model.

The rebound in banking and financial activity is in line with the rest of the local economy, which the World Bank estimated grew 7.8% in 2022, while it calculates a rebound of 5.7% in 2023 and 5.8% in 2024.

Key risk factors and prospects for the future

Despite this scenario of institutional and macroeconomic strength, several risk factors have been weighing on the Panamanian economic model for a number of years but remain unresolved. Decisions on some important issues can no longer be postponed. Such issues include the need to consolidate a fiscal strategy in the face of the growing public debt and a reform plan for the social security system, which some predict the pension component of which will go into deficit as early as 2024, just in time for an election year and a new President taking office.

On the more structural side of the economy, organisations such as the World Bank have warned that Panama needs to “deepen institutional reforms” to reduce inequality and gender gaps, build a more transparent and fiscally sustainable economy, and promote a more inclusive and environmentally sustainable economic recovery to adapt to and mitigate climate change.

In the financial sector, this inequality and lack of inclusion are reflected in the fact that, although Panama is recognised as one of the leading global banking centres, only 45% of adults in the country have a bank account, when the average in Latin America is 48%, according to a 2022 report by the Inter-American Development Bank (IDB).

On a positive note, Panama recently exited the FATF (Financial Action Task Force) Gray List, having successfully completed the 15 points that the organisation required. Panama’s exit from the list further strengthens the country’s position and is sure to have a positive effect on the country’s outlook in respect to the security of the financial system.

Panama will not stop growing, the need for major infrastructure projects will not disappear and the government will always need to find novel ways to finance such growth while respecting the legally mandated limits required to preserve its investment grade rating. Financial institutions and their legal advisors will always need to rise to the challenge and find creative ways to assist their clients to achieve these goals.

The rest of 2023 will find the country involved in a pre-election year, which will demand the definition of the candidates’ positions on these issues; however, the macroeconomic soundness and institutional framework of Panama’s financial model will allow it, as in other ventures, to depend on the resilience of the banking and financial sector as a pillar of the economy.