Like its economy, Panama’s capital markets are highly internationalised. With a dollarised economy and free mobility of capital flows, Panama attracts brokers and financial institutions from other regions that choose the country to carry out their international financial operations, in other words the majority of their business. Another feature of the Panamanian capital markets is the important role played by the public sector, whose volume of issuance can make the market vacillate between good and bad years, as happened from 2012 to 2013. As is common in many other small or less developed economies, Panamanian investors have a conservative profile and prefer fixed-income instruments, while companies rely more on bonds and loans than equity to raise funds and can often obtain the necessary financing from local banks.
Regulation & Players
The entity responsible for regulating and supervising capital markets is the Superintendency of the Securities Market ( Superintendencia del Mercado de Valores, SMV), created in 2011 to replace the National Securities Commission. The SMV is an autonomous entity with administrative and financial independence. It regulates and supervises issuers, investment societies, intermediates and other participants in the capital markets.
According to the SMV, there are 1362 natural persons (such as brokers, analysts, fund managers and others) authorised to operate in the capital markets in Panama, 45 investment advisors, 23 asset management institutions (including pension fund managers), three price providers, nine risk-rating entities and two self-regulated organisations, the Panama Stock Exchange (Bolsa de Valores de Panamá, BVP) and the Central Latinoamericana de Valores (Latin Clear). Latin Clear is a central securities depository and handles custody, clearing, settlement and electronic administration of securities.
There are 87 brokerage houses operating in the country, nine of which are banks with a broker’s licence, 17 are subsidiaries of banks established in Panama and 61 are independent institutions, according to the SMV.
There are 145 registered issuers. The financial sector dominates the list with 74 issuers (51%), followed by industry (16%), conglomerates (10%), commerce (8%), housing (7%) and services (6%). The remaining 3% is divided among sectors that have only one issuer each.
The proportion of international transactions has always been much higher than local ones. Factors such as fiscal incentives and good quality of communication contribute to attracting brokers and financial institutions from other parts of the world, especially Latin America. They can be established in Panama but do not operate in the local market, dealing only with external operations and foreign clients. Venezuelan brokers, for example, have been coming to Panama due to political instability and restrictions on operations with dollars in their country. Even though they do not operate in the local market, their presence is considered beneficial since it adds to the total expertise.
In the local market, the volume of private issuances was $3.7bn in 2013, 17% higher than the $3bn of 2012.
The number of issuances was 44, five above the 39 of 2012, with 70% of the issuances made through bonds, 15% by negotiable commercial securities, 11% by equities and 3% by other instruments.
With $650m issued in bonds, Tocumen International Airport alone was responsible for 18% of the private issuances. Other relevant issuances were AES Changuinola with $470m, and Arrow Capital, Credicorp Bank and Multibank with $150m each.
The volume traded on the BVP was $5.02bn in 2013. The instruments with the highest volume of transactions were bonds, which reached $2.43bn (48%), followed by Treasury bonds (12%) and negotiable commercial securities (11%). When considering consolidated private and government securities, the private sector was responsible for 74% and the public for 26% of the BVP’s operations in 2013. This represented a 24% drop in the total volume compared to the previous year. Analysing the performance of consolidated instruments, from 2012 to 2013 shares decreased 18%, going from $484m to $399m; corporate debt went from $2.5bn to $3.3bn, an increase of 31%; and government securities fell 63% to $1.3bn.
The stock with highest trading volume in 2013 was Fondo General de Inversiones, a fund share, with a total of $60.6m. Fund shares as a whole had a higher trading volume than all other types of stocks combined, at $226.7m as compared to $153.4m. The second-most-traded stock was Prival Multi-Strategy Income and Fund with a volume of $58.8m, although excluding fund shares, it was BG Financial Group, with $32.2m. The largest issue in the same period was from government of Panama, with a total of $581.8m in Treasury bonds and $295m in Treasury notes.
Index & Market Cap
The stock market index is the BVPSI, which is composed of 20 stocks. In 2013 LTXHB Latinex replaced Miba Corp in the index. The market capitalisation of the companies included in the BVPSI totalled $13.44bn at the end of 2013, which is 7% above the value exactly 12 months earlier ($12.54bn, or the equivalent of 34.2% of GDP).
The companies with the highest market capitalisations were BG Financial Group (BGFG) with $4.9bn and Empresa General de Inversiones (EGIN) with $3.6bn. Combined they represent 63.4% of the total market cap. EGIN owns 61% of BGFG’s shares, which is the parent company of Banco General, the second-largest bank in Panama, and Empresa General de Seguros, the seventh-largest insurance company in the country. From December 2012 to December 2013, the BVPSI rose by 5.4%, going from 408.73 to 430.79.
In 2013 the traded volume of the stocks making up the index was $120m, an increase of 7% when compared to 2012 ($113m). However, when considering the number of stocks traded, there was a 42% drop (5.2m in 2012 versus 3.0m in 2013).
Of the stocks composing the index, BGFG had the highest volume of trades in 2013 with a total of $32.2m. In second place came EGIN with 28.4m, followed by Rey Holdings (11.3m) and QBE Del Istmo (11.2m). The stock with the best performance in 2013 was QBE del Istmo, the value of which rose by 789%, far ahead of second-placed MHC Holding with 101%. The worst performer was Grupo Melo, whose shares fell by 97%. LTXH Latinex, which had the best performance in 2012, saw its share price drop 80% in 2013. That fall, however, was due to the split of its shares in August 2013, when each LTXH share was turned into five (four LTXH and one LTXHB, with voting rights). The same happened to its price, which went from $9.75 to $1.95.
Two firms, ProFuturo and Progreso, dominate pension funds in the country. After buying the 21% share held by Assa, the insurance company, Banco General became ProFuturo’s only shareholder. Meanwhile, Progreso has Banco Panameño de la Vivienda as the only shareholder. The country’s pension funds are under the supervision of the SMV but also of the Superintendency of Banks of Panama and the Savings and Retirement Account System for Public Servants ( Sistema de Ahorro y Capitalización de Pensiones de los Servidores Públicos, SIACAP). Although acknowledging the value of the regulatory regime and recognising the technical capacity of the supervisory bodies, Roberto Alfaro, executive vice-president of ProFuturo, believes that the fragmentation of regulatory duties is a weakness of the system, adding there should be a unified body with a division dedicated solely to pensions and manned by people who know this specific market well.
The two companies manage private pension funds and severance funds. In 2013 ProFuturo managed $201m in private pension funds (48%) and $217m in severance funds (52%) for an overall total of $418m. In addition to pension and severance funds, Progreso also manages part of the resources of the public pension fund, SIACAP. The company administers a total of $605m, with this breaking down into 22% private pension funds ($136m), 30% severance funds ($179m) and 48% public pension funds ($290m).
According to data from the SMV, the number of affiliates in one private pension fund system or the other stood at 61,422 in January 2014. Progreso had 29,306 affiliates (48% of the total) and ProFuturo 32,116 (52%). From 2012 to 2013 Progreso had higher growth in the number of affiliates (6.8%), against 0.6% for ProFuturo. But taking the past five years (since 2009), Progreso registered a smaller growth in the number of affiliates (41%) compared to ProFuturo (48%), which has been the leader since 2009. Regarding the volume of investments of private pension funds, Progreso had $132.6m (a market share of 40%) in February 2014 and ProFuturo $200.9m, 60% of the $333.5m total. From 2009 to the present, ProFuturo increased its funds by 129%, while Progreso’s investments increased by 78%, annual averages of 23% and 16%, respectively. Private pension funds in the country are still very small when compared to the public fund, SIACAP. In December 2013 SIACAP had a total of $642m in funds, almost twice as much as Progreso and ProFuturo combined. This difference may be explained by the fact that public employees are required to make contributions to SIACAP, whereas contributions to the private funds are voluntary.
Investors & Issuers
The size of the Panamanian economy is an obvious obstacle to the development of the capital markets and to becoming a regional financial centre, but it is not the only one. One of the features of the capital markets is the conservative profile of investors and issuers. Panamanian investors lack the culture of risk and reward as Jose Abbo, financial advisor and member of the board of directors of the Panamanian Sovereign Wealth Fund (Fondo de Ahorro de Panama, FAP), told OBG. It is not only a matter of increasing the level of savings, but also of knowing and understanding the potential and taking chances on financial instruments other than fixed income and saving deposits. In other words, financial education is still needed. It is thus a cultural/institutional issue.
One of the ways to address this would be to change the way existing savings are managed. ProFuturo’s Alfaro points to the need to open public funds to the private system. He was speaking not necessarily of a privatisation of the social security system but a system in which contributors could choose the company and the way their savings are invested. This could benefit contributors, strengthen existing companies and attract new ones. FAP’s Abbo believes a good opportunity in this regard was lost in 2012, when the government backed away from a decision to sell part of its stake in Cable & Wireless Communications Panama to the public. It could have been a step forward since people would not be so reluctant to buy shares of a well-known company.
Bank Funding & Debt
With a developed banking sector, companies can get the necessary funding from banks, so they are not willing to go public and comply with the disclosure of information and other regulations that come with being listed. In this sense, according to Roberto Brenes, the executive vice-president and general manager of the BVP, companies still do not realise the advantages of capital markets as a complementary source of funding. “Why not issue a bond, a source of funding in which you set the conditions, contrary to what happens with banks?” he told OBG.
Another challenge is that companies in Panama have debt as their main source of funding and they are not willing to dilute equity and lose control, especially in good times. Thus, when they need to raise money in capital markets, they do it by issuing bonds, not equity. Brenes also points out that there are not many capital-intensive industries in Panama, which reduces the need for large volumes of funds.
Another key feature of the Panamanian capital markets is the importance that the government has for domestic capital markets. The state is undoubtedly the most important player in the market. That can be seen by the impact brought by the large government issuance in 2012. The $2.4bn growth in public securities represented 73% of the $3.2bn increase in the volume traded on the BVP between 2011 and 2012. From 2008 to 2011 the annual growth of volume traded on the BVP was on average 20%, well below the increase seen from 2011 to 2012. Another sign of the importance of public securities is that even with the 31% growth in share values from 2012 to 2013, the reduction in public issuances ($3.6bn to $1.3bn) led to a 24% decrease in the volume traded on the BVP. In short, the performance of the volume traded is closely linked to the level of government activity in the markets.
Back To Normal
Thus, this 24% decrease from 2012 to 2013 can be seen more as a return to the normal pattern of the BVP, since the public issuance in 2012 was something of an exception. Taking the proportion of public and private operations, 2012 was the only time in the past few years that private operations were not larger than public ones. In 2013 public operations were 26% of the total, 55% in 2012, 37% in 2011, 36% in 2010, 31% in 2009 and only 12% in 2008. The high issuance of public debt on the BVP in 2012 was not solely a technical decision but also a strategic one. As Brenes told OBG, there could be advantages to issuing debt on foreign markets, but the government decided to do it locally, with an eye towards developing the local capital markets and the benefits that could bring.
Abbo believes that this could be positive, although it has its limitations. It can increase the volume traded on the domestic capital markets, but it does not change the concentration of the prevailing debt instruments. For example, it does not deal with the institutional and cultural issue mentioned above.
To address the lack of liquidity in local markets, the government created the market maker programme in 2011, which increased liquidity in the secondary market. Comparing the secondary and primary markets over the past few years, while the primary market grew by 86% from 2011 to 2012 and fell by 29% from 2012 to 2013, the secondary market grew 131% in the first period and decreased 11% in the second.
The Panamanian government has been taking actions to shed the country’s image of a tax haven. Such efforts include cooperation with international institutions such as the IMF and the Bank for International Settlements. Due to these efforts, it was taken off of the OECD’s “grey list” in 2011. Another important action taken recently was the approval of Law No. 47 in August 2013, which will enter into force in two years and establishes that the owners of bearer shares must deliver them to an authorised custodian and the final beneficiaries of the shares will have to be identified. This law is another step forward for the country to comply with international standards of transparency and information exchange.
There have been efforts from regulators and private entities to improve financial education and to try to change the conservative profile of Panamanian investors and companies, so that the market for more sophisticated financial instruments can be developed. This is, however, an institutional feature that is difficult to change and it is a common feature of other small and/or less developed economies. In this sense, based on the domestic economy, it is unlikely that there will be more than incremental growth.
There is more potential for growth, however, on the international transaction side. Panama has significant potential to serve as a regional base for international financial institutions operating in global financial markets. As Brenes told OBG, the limited size of the domestic market can be overcome in part by the creation of a niche market designed to attract companies from the region that do not have the qualification to raise resources in the biggest markets but are still good firms and could issue resources (in dollars) through Panama. Besides, as pointed by Christopher Schech, the chief financial officer for Banco Latinoamericano de Comercio Exterior, the Latin American Integrated Market, which comprises Peru, Colombia and Chile, could potentially provide a larger exchange to transact Latin American stocks compared to the relatively small national exchanges found across the region.
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