Country Article / Postcards

Panama's Fiscal Future

Date: 01/18/2005

Dear International Living Reader,

One of the major concerns facing persons considering Panama as an offshore asset protection haven is the future stability of the government. The new government of President Martin Torrijos, sworn in last September, has high approval ratings from the public, but that may not hold for long.

That's because the national budget here was left far out of balance by the outgoing Moscoso administration, and the social security fund is all but empty. This means hard decisions on increasing taxes to fill the gap. In discussions here yesterday American observers assured me that it is virtually impossible that any taxes on what are now tax-free offshore financial activities would be imposed. Torrijos ran on a pro-business platform, but more than that, he very much wants to encourage badly needed foreign investment that has lagged behind both national needs and official expectations. The real estate boom here is a notable exception.

One bright spot has been the five-year record since the Panamanians took over full control of the Panama Canal from the U.S. They have not only increased the number of ships using the waterway, but last fiscal year, even after required maintenance costs, produced a $350 million surplus. While canal revenues are supposed to be used only for the canal, politicians here are now eyeing this windfall for general spending purposes. The canal is now operating at an unusually high 93% of its capacity.

In a meeting here with Derek Sambrook, head of Trust Services Ltd., and a member of the Sovereign Society Council of Experts, he pointed to the good standing Panama has achieved from the international ratings agency, Fitch Ratings, that gave a US$600 million bond issue a long-term foreign currency rating of BB+. Fitch said that "dollarization, a stable financial system and the government's considerable financial and land assets" support that rating. Some of the Fitch optimism is based on expectations for the new government which they see as willing to get the nation's fiscal house in order.

One major issue looming is Torrijos' promise to hold a national vote on whether to build a new, expanded canal that can handle the huge ships now barred by the original canal's size limitations. There is some fear here that the longer the vote is delayed, the less likely it is to win approval.

Another major issue is the estimated $5 billion to $10 billion cost and the means to finance that huge expenditure.

After a recent in-country assessment here, the International Monetary Fund has expressed approval of actions taken by the Torrijos government to control public spending, reform taxes and spur economic growth.

Panama faces many problems, but the optimism I have seen here is palpable and bodes well for the offshore sector and the nation's continued role as a leading tax and asset protection haven.

That the way that it looks from here in Panama.

Bob Bauman
For International Living