April 2, 2010
Panama City, Panama

It’s been a great week so far in Panama. Each time I come back to this country I become even more sure in my conviction that Panama has a bright future.

For the next few days, though, I am going to set aside market forecasts and expatriation strategies… you see, my friends from the Atlas 400 club are starting to arrive, and I’m looking forward to a few days off at the very exclusive Tropic Star fishing lodge in Panama’s Darien province.

The cast of characters attending this event is really impressive– and I’m excited that several members of our own community will be there.

I’ll tell you more about it when I return on Wednesday. For now, though, let’s move on to this week’s questions.

First off, Jeff in Ohio asks: “Simon, thank you for the clarification about the new H.I.R.E. Act, I was really confused and concerned.  Why do so many people continue saying that this new law is the same as capital controls?”

It’s easy to overreact and say that the sky is falling.  To be fair, a layman’s reading of the bill makes it seem like the government is imposing a 30% tax on foreign bank transfers… but that’s exactly why I had my team of tax attorneys and CPAs analyze it– I wanted to know the truth.

The truth is, the H.I.R.E Act is an administrative enforcement of tax reporting; it’s bad news, but it’s no more capital controls than the qualified intermediary rules or withholding requirement for some payments to foreign companies.

The big problem is that this new law provides a disincentive for foreign banks to work with US customers… more and more, Americans are simply not worth the hassle for foreign banks.

There are still solutions, though. Americans who want to open a foreign bank account (as everyone should) ought to consider larger multinationals that already have a US presence. They’re accustomed to the paperwork already and are less likely to turn you away.

There are, of course, other jurisdictions that frankly don’t care much about the H.I.R.E. Act, and we can discuss those more in the future.

Steve writes, “Mr. Black, is Panama still self-reliant and independently wealthy if income from the Panama Canal drops off?”

This is a good question. Panama is heavily dependent on the Panama Canal, just as Saudi Arabia is heavily dependent on its oil supplies.

Fortunately, Panama has been able to diversify its economy away from transportation and trade– banking services, real estate, tourism, customer service, and others… but the Canal still generates the preponderance of external economic activity.

If global trade were to take a major hit (as it did in 2008/2009), Canal revenues would certainly decline and Panama would suffer economically… but bear in mind that Panama still posted positive economic growth last year.

I suspect that major economic pain would come only with a cataclysmic reduction in Canal usage, either due to another economically viable transportation route in the western hemisphere (unlikely) or a total collapse in global trade.

Mark writes, “Simon: I am a 65 year old disabled retiree.  Later this year I will have about $30,000 per year to reside on. Can you give me several ultra low-cost living places to consider that have SOME civilization?”

Everyone has different personal tastes and circumstances, but here are some ultra cheap countries that are safe and reasonably civilized: Malaysia, Ecuador, Thailand, Sri Lanka, the Philippines, Egypt, India, Paraguay.

There are more, but this should be a good start.

Anonymous asks, “Simon, if I have a civil judgement ruled against me, would that disqualify me from a second passport?”

No, not in most cases. Most countries require a medical exam and a criminal background check. If you have a felony conviction, that’s a red flag. Civil judgments are usually not problematic… you’d undergo more scrutiny testing positive for syphilis.

That’s it for this week. Remember, I will be at the closed-door Atlas 400 event for the next few days in the middle of the jungle, so you will more than likely not be hearing from me until next Wednesday.

I’m sitting in a comfortable, overstuffed leather chair this morning typing away at this letter while a team of local women give me a traditional Thai foot massage.  30 minutes in the chair will set me back about $4, and I can’t think of a better way to part with my money.

It is with great hesitation that I’m even sitting in this chair– not because I don’t like massage, but because this particular chair happens to be at the airport.  You see, I’m waiting for my departure to Europe, and if it weren’t for an important meeting in Spain that I’m looking forward to, I would be staying right here in Asia.

It’s not that I don’t like Europe– I love it, actually… the scenery, the people, the history, the architecture. It’s hard to not feel alive on a summer day in Krakow, racing down a ski slope in the Italian Alps, or driving a Porsche down the Croatian coastline.

In terms of value for the money, however, Asia has Europe beat hands down.

Take this simple, $4 massage; it would be difficult, and entirely cost prohibitive, to find a team of European professionals who would be willing to provide this level of attention; Europeans feel that ’serving’ another human being is elitist, which is part of their egalitarian socialist dogma. The session would be courteous, at best.

Many cultures in Southeast Asia, on the other hand, are happy to go the extra mile, especially when there is a gratuity attached.  The ladies who staff this airport location, for example, wouldn’t even let me remove my own shoes and socks– they did it for me.

Having another person do that honestly makes me feel a bit uncomfortable… but providing this level of service is what they are accustomed to, if nothing else than for the gratuity at the end.

The motivation to earn more by providing excellent service is clearly more prevalent in the Orient than in Europe.  Neither mentality is right or wrong, just different. Naturally, though, as a consumer, I prefer a greater level of service.

Price is also a major factor. In Asia, with few exceptions like Singapore, Japan, and South Korea, you have to put up with some level of squalor– trash in the streets, gratuitous displays of poverty, etc. While these indications are not completely lost on Europe, it’s safe to say that cityscapes in the west, in general, are cleaner.

That being said, however, the price difference is enormous. The cost of living very well in Europe is easily five times the cost of living very well in Asia.  Is Europe five times as nice? Depending on what you are looking for, most likely not.

As I look around the world and price compare, I wholeheartedly believe that Asia and Latin America still provide the most value for the money.  My top picks for those regions are:

- Latin America -

1) Chile: Strong economy, beautiful landscape, modern and developed infrastructure. Living costs are low, and the cleanliness makes it feel like you are in Europe. The biggest concern with Chile is that it is growing too quickly; the Chilean peso is one of the best performing currencies in the world, so costs for foreigners are going up.

2) Panama: Also a strong economy with developing infrastructure and increasing local standard of living; costs in Panama City are going up, but if you get out of the city, you’ll find that you can still live incredibly well for very little.

3) Colombia: Clean, modern, and home to some of the best weather on the planet (especially in Medellin). You have to be willing to look past the “Colombia stigma,” but I guarantee it’s well worth the exercise in intellectual independence.

- Asia -

1) Malaysia: Home to a growing influx of Islamic funding, the country is on solid economic footing while maintaining very low living costs. Medical care is strong, and the “My Second Home” program provides an easy route to permanent residency.

2) Philippines: Stable economy, cheap real estate, and excellent English proficiency. Manila and Quezon can be tough, but just outside of the cities you can find inexpensive, pristine coastal property. I know many expats who are happily living out their years being fed grapes on a hammock with just a meager retirement pension.

3) China: Lack of English proficiency can be very frustrating… but China is becoming nicer and more livable by the day. In terms of its modernity, it will be the first developing nation in Asia to match the west, and it will happen in the next 5 to 10 years.

Naturally, I will provide more about these locations in future letters, but I wanted to give you a quick overview today; if you have any specific questions or your own additions, please let me know.

I’m flipping through channels at 1am here in Seoul, and do you know what I see? Math problems– nutty professors, Korean-style, working out complex partial differential equations and geometric progressions with the intensity and flair of a concert pianist.

In fact, it’s not just one channel… it’s five, roughly 20% of the entire late night channel line-up.

When you think about it, this makes perfect sense. South Korea, once dismissed as an Asian backwater where American GIs defended the frontiers of freedom, has developed itself into a formidable economy on the back of an incredibly hard-working, educated, entrepreneurial culture.

GDP per-capita is now about $28,000 per person, making South Korea’s economy roughly equivalent to Italy, Israel, and New Zealand.

It shows. The landscape is well-developed with wide, clean highways, soaring skyscrapers (at very high occupancy), extensive port facilities, and a highly advanced digital infrastructure.

The great unspoken fear of South Korea is that all of this beautiful infrastructure would be wiped off the face of the earth on the day that North Korea’s Kim Jong-Il threw a nuclear temper tantrum.

It won’t happen. South Koreans do not live in fear of North Korea– it simply doesn’t register on their radar. The North Korea invasion fear, which have kept a US military presence in the south for roughly 60-years, is one of the biggest scams in geopolitical history.

Today, the North Koreans are as much of a military threat to South Korea as the Russians are to Germany (which begs the question– why are US troops still in Europe preparing to defend the Fulda Gap against Soviet Hordes?)

If US troops pulled out of South Korea, the economy would take a short-term hit and present a major buying opportunity. But within 3-years, the private sector will have reallocated the economic resources formerly tied to US military bases– it happened in Panama between 2000 and 2003 after US troops left, and I would venture to say that Panamanians are not half as good businessmen as the South Koreans.

The export-centric Korean economy took quite a hit at the start of the crisis because of the slowdown in global trade. Korea’s large conglomerates like Samsung, LG, Hyundai, POSCO, etc. all suffered in the early days as demand cratered and economists pontificated about whether Asia’s economies could decouple from the west.

Exploring this ‘decoupling’ issue was one of my primary missions in going to Asia… I wanted to put boots on the ground and see for my own eyes whether or not these economies are still dependent on the west.

My conclusion? The slowdown in U.S. consumers activity will continue to be a weight on the shoulders of the Asian exporters. But, while western consumers are dying, Asia’s massive pool of consumers are just beginning to bloom.

I saw it in China, where the level of Chinese consumer activity can only be described as ‘overwhelming.’ I saw it in the Philippines where remittances from overseas workers support domestic spending. I saw it in Singapore where the slowdown seems to have had minimal impact; and I can see it here in South Korea.

Asia is exporting to itself, building up vibrant domestic economies while governments spend their increasingly worthless dollar reserves on stimulus projects. To me, this is a clear indication that Asian currencies will continue their rise against the dollar (as well as the euro) since ‘cheap’ currencies relative to the west are no longer a priority.

But which ones to buy?

The Japanese yen is not a good option in my opinion– Japan is an aging economy that still depends heavily on the United States, and my expectations is that the government will not allow the yen to appreciate much beyond 85 yen to the dollar.

The Chinese renminbi is also not a good option for now– China plays too many games with its currency, and exchange controls are a capitalist’s nightmare.

I do like the Thai baht and think that Thailand has a great future in general, though I would definitely wait to invest until its 81-year old King passes away, leaving the country in temporary turmoil.

The Taiwanese dollar (TWD) and South Korean won (KRW) are good bets for now as proxies on thriving Asian tiger economies; I also really like the Australian dollar (AUD), which has great fundamentals, as an extension of Asia’s growth.

Remember the 7 expat categories from last week?

Well I have to say that Manila is paradise for a few of them…

I come through here from time to time on business and it definitely ranks as one of my favorite places in Asia– cheap, modern, relatively clean, but still with a hint of seedy underbelly to it.

I discussed the financial infrastructure yesterday; until recently, the Philippines had one of the most secretive banking systems in the world patterned after what Hong Kong used to be. In fact, a lot of things here are patterned after Hong Kong, or at least try to be.

Perhaps it’s the influence of having been a Spanish colony for so long, but most things in the Philippines fall just short of the mark– there are soaring skyscrapers in Ortigas and Makati City… with slightly unlevel floors. There are broad, clean motorways… yet still mind-numbing traffic.

Perhaps this is why our local friend remarked to us months ago that “Manila is what Hong Kong would look like if it were turned over to the Mexicans.” He’s right.

Frankly I’m delighted with Manila despite its professional shortcomings. The level of service and hospitality is absolutely incredible, the nightlife is energized, and the scenery is spectacular. All of this makes Manila ideal for several groups.

Hedonists: You will love it here. If you are foreign looking in any way, you will feel like an international celebrity given the level of attention you receive. There are quite a few, eh, venues… for which you are sure to find and endless supply of entertainment at all hours of the day and night.

If you’ve ever had the dream of living in a tropical paradise being fanned and fed grapes by adoring concubines attending to your every whim, this is one of the places where you can live it on the cheap.

Expeditioner: You will feel very much at home here; there are more Starbucks than I can count and several spectacular 5-star hotels to fulfill your most capricious need (I strongly recommend the Mandarin Oriental… make sure you visit Melody in the 17th floor lounge).

But at the same time, you are an hour’s distance by flight, road, and sea ferry to unknown wilderness complete with guided tours… so there is plenty of opportunity to quench your sense of adventure without giving up creature comforts (like complete Botox treatments for $300).

Internationalist: Move here and set up shop without a second thought for the safety of your family. You are safe in Manila… and not because of an overbearing police presence, but because it’s simply not a violent culture. There are plenty of western style amenities for the kids– schools, sports, etc. and enough of an expat community that no one will feel isolated.

Retiree: If you hate waiting in line to see the doctor, you will like Manila. Healthcare quality is good, and your retirement check will go a long way here– 3 bedroom house for $479/month? Done.

Other important points– English is widely spoken here… and by “widely”, I mean 99.999% of the population. You will probably have to travel to a small village without electricity to find a single person who doesn’t speak English.

And as for that recession? It basically skipped the Philippines. The economy here certainly slowed down, but there are no signs of massive economic destruction like we see in Spain, California, Argentina, and Dubai.

To give you an excellent comparison, I honestly believe that Manila has a very similar feel to Panama City… so if you have been to Panama and like the city, you will probably love Manila.

With tax rates ranging from 5% to 35%, the Philippines can hardly be called a tax haven.

And yet, in a very public “guilty until proven innocent” attack several months ago, the OECD black listed the Philippines along with Uruguay, Malaysia, and Costa Rica.

The OECD is an aged, irrelevant organization comprised of mostly insolvent western nations; the organization has a penchant for bullying smaller countries into changing both their laws and local culture in order to assimilate.

Frankly, these coercive tactics constitute modern day imperialism and demonstrate an overwhelmingly ignorant worldview.

Case in point, the OECD has gotten itself into a twist over the years because Singapore issues a 10,000 Singapore dollar (roughly $7,000 US) note.  The OECD views this as a crystal clear indication of money laundering.

Hardly the case… carrying a lot of cash is merely a cultural tendency in many parts of Asia, so the government makes a super-sized bank note.  Western bureaucrats ignore this simple reality and instead try to beat smaller countries into submission.

The Philippines has recently fallen victim– but so far has only suffered a flesh wound. I spent a large part of my day today talking to bankers here in Manila; the general consensus among them is that  financial transparency has increased in the Philippines… but only slightly.

For example, bankers in the Philippines do not require personal information on beneficial shareholders for corporate accounts.  This is a stark contrast to other popular banking destinations like Panama (which did not make the OECD black list).

Honestly, there are not too many banking jurisdictions that do not require beneficial shareholder information for corporate accounts. Off the top of my head, I can think of the Philippines… and…. oh, right: The United States of America.

Funny how the Philippines ended up on the black list and the US was the one leading the charge.  But I digress.

Customer information at Philippine banks is not shared with tax authorities… or any other authority for that matter.  The one exception is by judicial decree, and only if the customer is undergoing litigation in the Philippines.

To open an individual account, a prospective customer must provide two valid forms of identification, a photograph, and an ‘alien certificate of registration,’ which indicates residency disposition.

For non-resident foreigners, the easiest thing to get around residency requirements is incorporate a business– in this case, the Department of Trade will provide certification.

Assuming all the documentation is in order, it only takes about 10-15 minutes to open an account, and at many branches the ATM card (on the worldwide Maestro network) can be acquired immediately.

Bank accounts can be opened in a variety of currencies, including US dollar, Philippine peso, euro, yen, and Australian dollar. Furthermore, bank accounts in the Philippines are protected by a depository insurance organization similar to the FDIC (except that it’s not insolvent).

The “PDIC” as it is called, insures deposits up to 500,000 Pesos or equivalent (roughly $10,000).

I met with the branch manager at one of the larger banks in the Philippines… they are willing to accept customers of any nationality as long as the basic requirements I described above are met.  I have no personal experience with any of the banks here though, so I cannot vouch for anyone specifically.