Money and Banking in Panama
Located in Central America, many consider Panama as a financial hub given its robust financial and commercial sectors. Panama has built a reputation of openness to foreign financial institutions, its use of the dollar, political stability and low inflation rates. The combination of these factors has made Panama one of the world’s leading financial centers with a high financial depth (Cerdeiro et al., 2015). Although Panama came under scrutiny over a world financial scandal in 2016, the strength of the country’s financial sector continues to buoy its financial performance with a growing local banking sector, and a well-performing stock exchange market.
Panama has a strong banking sector, with its International Banking Center contributing immensely to the country’s GDP (the baking sector contributes 7.5% of the country’s GDP). According to Cerdeiro et al. (2015) and Moreno-Villalaz (2005), Panama has a well-integrated banking sector, a fact that has made the country the regional trade and financial hub. Aside from serving the international market, locals have faith in the country banking and financial sector as evidenced by the improvement in access to banking in the country as well as increased lending by local banks. The Oxford Business Group, in their 2015 report on Panama, indicated that Panamanians had confidence in the country’s banking sector as evidenced by the improved access to banking by the locals. The report also indicates that deposits to the country’s national banking system increased from $1.8 million in 2008 to $3.4 million in 2013 (Oxford Business Group, 2015). The report further states that the growth in the savings included close to 3 million savings accounts, even as 43.7 percent of the country’s population above 15 years held a bank account as of 2014 (Oxford Business Group, 2015).
The locals’ confidence and accessibility to the banking sector is further obvious through the growth in lending. Oxford Business Group (2015) informs that Panama’s national banking system had extended loans amounting $40.35 billion in 2014. The amount represented an 8.9 percent year-on-year increase. There was a wide diversification of loans including residential mortgages, personal loans, service loans, and construction loans.
Aside from a well-established and performing national and international banking system, Panama has a vibrant stock exchange that plays an important role in the country’s economic growth. Panama’s stock exchange is young, having come into being in 1990 through the establishment of Bolsa de Valores de Panama, S.A. (Rosas, 2013). The Panama stock exchange has grown over the years through consolidation of participants within the brokerage market, enticing more participants into the stock exchange, bringing more investors, and establishing supporting institutions for the market. Through these measures, the volume traded in the stock exchange has increased significantly. At its establishment in 1990, the market had a trading volume of $3.3 million; however, through the involvement of investors (local and international) the volume had reached $6,603 million in 2012 (Rosas, 2013). Political stability reestablishment, incisive economic reforms, and equalization of tax treatment through the elimination of biased tax regimes contributed to the improvement of the stock exchange’s performance.
Panama’s stock exchange has been instrumental in the growth of the country economy. Rosas (2013) contends that the stock exchange provided an important avenue for issuance of equity to the public. The issuance helped companies in raising capital for new and existing companies, through which the companies could expand their ventures. The expansion of the companies’ activities meant heightened economic activities, which are important for economic growth. Moreover, such economic activities contributed to the country’s GDP immensely improving the country’s economic outlook, which attracted more direct foreign investments.
Panama’s free market system largely relies on the banking system, especially in handling and addressing major economic problems in the country. Panama’s banking system operates without a central bank as the lender of last resort (Ahijado et al., 2016). However, despite the absence of a central bank, the banking system has been pivotal in addressing financial problems. One instance was the 1988-89 banking crisis, which the banking sector was able to stabilize (Ahijado et al., 2016). Given the absence of a central bank, Panama’s banking sector has adopted extreme market discipline through conservative risk management such as holding large liquidity, which has consequently buffered the country against any major financial crises.
The banking system’s ability to pull the country out of financial turmoil is however in question in light of the 2009 global financial crisis. The absence of a central bank and the free market system do not give the country a safety net against external financial turmoil. Moreover, the country’s market mechanisms are not fair in allocation of liquidity among local banks. The ineffectiveness of the mechanisms led to the total freezing of the banking sector in the 2009 financial crisis (Ahijado et al., 2016). The total freezing of the banking sector in 2009 points to problem in the banking market, particularly the underdeveloped interbank market, which then requires banks to hold enough liquidity buffers against large liquidity shocks as was the case of the 2009 financial downturn.
Ahijado, A. et al. (2016). Panama: Selected Issues. Washington, DC: International Monetary Fund.
Cerdeiro, D. et al. (2015). Panama: Selected Issues. Washington, DC: International Monetary Fund.
Moreno-Villalaz, J. (2005). Financial integration and dollarization: The case of Panama. Cato Journal, 25(1), 127-140.
Oxford Business Group. (2015). The Report: Panama 2015. OBG. Retrieved from https://www.oxfordbusinessgroup.com/overview/stable-growth-authorities-are-further-strengthening-sector-which-continues-perform-well
Rosas, J., C. (2013). Panama Stock Exchange—IPO Overview. Panama City: Rosas Y Rosas.