March 31, 2010
Panama City, Panama
It appears that not all is amiss with sovereign debt: Panama may be one of the only bright spots, at least in the western hemisphere… the country recently had its debt rating upgraded by Fitch to ‘investment grade’ with a positive outlook.
Now, I have been quite vocal about my disdain for the ratings agencies… these organizations completely missed the boat before the financial crisis, slapping AAA ratings on shaky subprime bonds. And yet, for whatever reason, the financial community as a whole listens to them.
An investment-grade debt rating is still a major badge of honor for developing countries– something they all strive for but few achieve. In Panama’s case, even though I take umbrage with the rating agencies, the upgrade accurately reflects the country’s very sound economic fundamentals.
Last year, Panama was past of a very small, exclusive club of countries that experienced positive GDP growth. The combination of capital inflows to the banking sector, multiple public works projects, and of course, the expansion of the Canal, kept Panama afloat.
Over the last several years, Panama’s economic trend has been quite positive. In 2004, the country ran a deficit of 4.9% of GDP and had a debt level of 70% of GDP.
By 2008, the country had reduced its debt level to less than 50% of GDP and had run 3 straight years of budget surpluses. Even last year, Panama ran only a slight deficit of 1% of GDP– a completely negligible number in the world of sovereign finance.
Thanks to sustained growth, substantial tax reforms, and increased toll revenue from the Panama Canal, the government expects that it will cut its debt level to 35% of GDP by 2014.
By that time, Panama’s sovereign debt rating will likely surpass that of Greece or Spain.
Other strong economies in the region to watch in the short-term are Peru and Chile.
Peru has reduced its debt to 26% of GDP and also posted positive GDP growth in 2009. Lima has transformed itself from a run-down punch line just a few years ago to a thriving capital city, full of commerce and culture.
With major exports of copper and gold, Peru is well positioned to capitalize on a resource boom, particularly having diversified away from the United States– it has established strong trade ties with Brazil and China, and also decreased its ‘dollarization’ from 82% to 46% over the last decade.
Chile, despite the recent seismic disaster, is also well positioned to capitalize on a resource boom. The country has strong incentives for foreign investment, and it continues to be the continent’s beacon of political stability.
I could go on at length about these two economies, and I likely will in future letters… but for now, suffice it to say that we will likely see the strongest regional growth in the near term from Panama, Chile, and Peru.
Due to their limited size, and the fact that markets are more transfixed by Brazil (and other shiny objects), there is no easy way invest in these countries, at least through a major North American or European exchange.
Many foreign brokers will be able to set you up with a local trading account, though my assessment is that the property markets pose more value for small investors.
As I wrote in yesterday’s letter, capital controls are coming… when Joe Biden suggests that redistribution of wealth is really just being ‘fair,’ capital controls are truly a foregone conclusion… and it’s the same conclusion in most developed western nations.
Unless you want your money trapped in an economy that is guaranteed to inflate and tax your savings away, you should think about moving at least some money overseas… and for now, buying foreign property is one of the best ways to do that.
Naturally, it’s better to consider countries with thriving economies and solid fundamentals that are indicative of continued growth and stability. In the Americas, that certainly includes Panama, Peru, and Chile.