Report on Panama as 2008 Draws to a Close

Editor's Note: I am republishing this article with the express permission of the author, Bob Adams. It originally appeared on his Retirement Wave website, a wonderful resource for anyone interested in Panama. At this time, understandably, people across the globe are seeing the effects of the pervasive financial crisis and, understandably, those people interested in Panama are asking how this crisis might affect Panama. Bob's opinion is honest, informed and insightful.

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.

Second quarter growth in Panama's GDP (the economy) measured 10.1 percent, ensuring that Panama keeps its place as one of the fastest developing economies in the world. This is also an increase from the first quarter's 8.4%, thus indicating that growth was actually accelerating in Panama, not slowing, during the first half of 2008. The latest figures through the first eight months of the year indicate an overall 9.2% rate for the year so far.
The construction industry recorded a growth of 59.2% between January and July of 2008, compared with the same period last year.
Panamanian exports in the first eight months of the year rose 9.9 percent over the same period in 2007.
Foreign direct investment (FDI) in Panama in the first half of the year reached US$1.1 billion, reflecting an increase of 32.8% over the same period in 2007.
The country's financial authorities have downgraded the potential affects to the domestic economy posed by the calamitous fiscal situation in the United States. For example, only 0.3 percent (three-tenths of one percent) of the assets at the government's development funds could be affected by the events of the recent financial crisis in the United States.
The Colon Free Zone (the largest in the Western Hemisphere and second-largest in the world, following Hong Kong) registered an increase of 12.1% in business for the first nine months of the year, compared to the same period of 2007. The Zone's association attributed the growth to the above-average performance of Latin American economies.
The Panamanian port system handled 2.9 million shipping containers during the first eight months of the year, representing a 14.2 percent increase from the same period in 2007.
As of my preparation of this commentary, the Dow Jones Industrial average is down 37% so far this year while the S&P 500 has lost 40% and the Nasdaq 41%. In the U.K., the FTSE 100 is off 40%, the French CAC 40 is down 43%, and the German DAX 47%. In Japan, the Nikkei 225 has dropped 50%. The large emerging markets have suffered huge declines, with Russian stocks down 76%, Brazil off 50% and China down 65%. What about Panama's stock market? We are down 2% this year, 4.8% off our high.

In terms of Panama's attraction to foreigners:

The number of tourists who went to Panama in the first half of the year increased 23.9% over the same period in 2007 and tourist expenditures rose 21.5%. The biggest increase in arrivals has been from Europe (54%) and the U.S. (19.9%).
At least 12 global hotel chains will be arriving in Panama. Among the companies planning to establish hotels in the country include Hyatt, Westin, Super Clubs Breezes Resort, Hard Rock, Renaissance, Hilton, Marriott Residence Inn, Four Seasons, Nation Hotels, Le Meridien, W Hotels Worldwide and Candlewood.
KLM has increased its flights from Amsterdam from three a week to five. Iberian Airlines is increasing from three to four weekly flights in December. Both increases are due to 80-90% of current seats being sold and rising European demand.

There is more, but the point is simple. We are doing quite well, very well indeed.

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.

Real estate prices are "mixed". Unlike a couple years ago when prices were generally rising, some local markets are rising, some are falling back, and many are relatively unchanged. Gone are the days when you could easily delude yourself into thinking you could buy anything, anywhere, and make big money reselling in a year or two. That was always an illusion, but it happened often enough to be a factor in many people's thinking.
Prices tend to be weakest in areas that primarily attract English-speaking people from North America and the UK. This may be particularly felt in areas like Boquete, Volcan, and Bocas del Toro in the far west of Panama. Prices tend to be strongest in areas that primarily attract Spanish-speaking people from elsewhere in Latin America. They tend to buy in the Panama City area.
The number of Canadians and Europeans buying properties has greatly increased in the last couple years as a result of the US dollar's collapse against their currencies. The US dollar has risen sharply against these currencies in recent months and that may reduce Canadian and European demand until exchange rates shift again.
Some English-speakers who live here have found it harder to sell their properties than they expected. In almost all such cases brought to my attention, when I ask them if they have taken out a classified ad in La Prensa or one of the other local newspapers, they say, "No." They do not think that many Panamanians could afford their homes. Well, there are Panamanians who could, but that is not my primary point. Just as I would do if I arrived in Toronto or London looking for a home, people from Spanish-speaking countries looking for a home pick up a local paper to check the classified ads. By ignoring the Spanish-language press, many English-speakers are also ignoring not only the Panamanian market, but the great majority of the Latin American market as well. In Panama, that is a mistake.
Quite a few Latin American nations (Mexico, Venezuela, Bolivia, Ecuador, Argentina and others) are facing serious political and socio-economic problems that could get much worse. The influx of money and people from these nations will likely continue as long as this is the case and could accelerate if things get worse in their home nations. Unfortunately for them, that is a real possibility and thus a major factor in our real estate market as well as our banking system.
New real estate developments have opened across Panama in recent years, thus older developments are finding that competition affects sales. For example, there was a day when Altos del Maria sat in lonely splendor in the mountains near the village of Sorá. Today, Bavaria is just down the road. Where that has happened, prices may flatten or be depressed in the older development.
Not just developments, but new areas have opened to expatriate interest in recent years. A prime example is the Azuero peninsula (that "hump" that sticks out into the Pacific Ocean in central Panama). In past years, most expatriates wanted to be within two hours driving distance from Panama City. Now, more and more are willing to go three, four, or five hours in search of a more rural atmosphere, good surfing, beaches, and so forth. This has had its impact on some of the older developed areas as well.
Some Americans are unable to close on their new purchases in Panama because they cannot sell their old homes in the US. No question about it, this is a problem that we rarely had two or three years ago. For sellers who focus their efforts on the American retiree market, this is making their lives more difficult.
Local banks have limited their mortgage exposure to no more than $1500 per square meter. Sometimes they may go a little higher, but not much and only if the borrower is in excellent financial shape. So if you are buying a fancy condo on the bay in Panama City that costs $3000 per square meter and you need a mortgage to buy it, you have to come up with half or nearly half the purchase price yourself, then qualify for the mortgage for the remainder. This has been the case for quite awhile now and is not a result of the global financial crisis. This is just another example of our very conservative banking system and it also has had a dampening effect on high-end sales.
Although banks in Panama are very liquid, they are tightening their requirements for real estate developers. They have plenty of foreign clients for their money who are very solid, but cannot get loans from their own banks. Panama's banks are in an excellent position to be demanding and they are taking advantage of that. They are even tightening their requirements for projects they have already agreed to finance. We can expect weaker developers to lose their project financing or never start their projects at all. Even some stronger developers are pulling back and reconsidering. If this continues, this will reduce supply, so demand will have to fall equally or prices will rise.
Unnoticed by many expatriates here, quite a few major global corporations have moved their regional offices to Panama City, some bringing hundreds of professionals with them (800 in one case alone, I am told), nearly all of whom will need housing. They are predominantly Latin Americans and Spanish-speaking, so they are not noticeable as "expatriates" to English-speakers, but that is exactly what they are and they have money. They bring their families with them. This not only reduces the percentage of expatriates who come from North America and Europe, it also reduces the percentage who are retirees, further underlining what I have said frequently - this real estate market is not just about Americans and retirees.
Expatriates expecting to make 20% a year in property appreciation in Panama are fewer than ever, but those remaining are likely to be very disappointed. Expatriates expecting real estate values to crash 40% in Panama any time soon are also likely to be very disappointed. Both groups have existed for years and both exist now. Both are very vocal, but they generally offer opinions based on "what should happen" rather than analysis on "what is happening".
Always keep in mind that the Panama real estate market, like any other, is highly segmented. At any given point in time, some segments will be hurting while other segments will be doing just fine. Focusing on only one or two segments guarantees a distorted analysis.

The above list is a "mixed bag" of different factors, some positive and some negative for real estate values in Panama. Taken together and seen within the greater context of Panama's economic growth, the result demonstrates more positives than negatives and greater stability than is found in the majority of nations today. But different people are in different circumstances. Whether the result is positive or negative for you is something only you can determine.

In Summation

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.