TRUST SERVICES, S.A.
Fiduciary and Corporate Services to
Professional Firms, Institutions and Individuals since 1981
LETTER FROM PANAMA
Some say that the origin of Panama’s name means "abundance of fish" and there may be something to it. Panama’s latest trade figures reveal seafood overtaking bananas as the country’s top export earner. It is shrimp in particular that is leading the way and Panama claims to be the fourth largest producer of farmed shrimp in Latin America as well as the main exporter of shrimp larvae. Total exports of seafood in 1998 reached over $135 million by October last year. The United States buys 80 per cent of Panama’s seafood exports. Panama has been continually diversifying its economy and this policy can be seen elsewhere in the region. Venezuela has suffered from the record low oil prices which have hit its oil industry badly. Oil has been the country’s principal source of foreign exchange. Now, coffee, once its leading cash crop, has taken off. The harvest ending this September is expected to reach a 50-year high of 1.38 million 60 kg. bags. Deregulation of the coffee industry has been the spur in a country where its 22 million inhabitants are among the highest consumers of the beverage in the world. But trouble, rather than coffee, is brewing as well. Hugo Chávez, the former paratroop colonel who took office as president in February, seems to be more concerned with political, rather than economic, reforms. Political uncertainty is the last thing Venezuela needs with its stock market in the doldrums after being the world’s best performing market only three years ago. Bad bank loans now represent nearly 6 per cent of the sector’s loan portfolio: a year ago the figure was only 3 per cent. The news isn’t much better elsewhere and the whole of Latin America could face a recession this year. Chile’s central bank yielded to pressure from politicians and business leaders in March and cut interest rates for the sixth time since last September as the economy continued its slowdown. This is just one regional example of the problems which have come from a sharp reduction in external financing, low commodity prices and relatively high levels of interest rates. Economies in Argentina, Brazil, Ecuador and Venezuela are expected to contract, whereas Chile, Mexico and Peru should improve in the second half of this year. Bankers believe that Ecuador and Venezuela might need to reschedule their foreign debts.
Praying for
Salvation
If Brazil can deliver
on the revised IMF agreement hammered out in March, there is every reason to think that
the feared financial melt-down in Latin America will be avoided. The Brazilian government,
however, will need the political strength, plus policy discipline, to honour its
deficit-cutting agreement with the IMF. The second draw of $9 billion from the $41.5
billion package should, and probably will, have been made before April. President
Cardoso’s new central bank governor, Arminio Fraga, used to manage funds for George
Soros and enjoys the confidence of most international fund managers. The President needs
this boost as he tries to chart a steady course between the markets, a grumbling populace,
the IMF and his state governors. Confidence is crucial, but this can only be restored
completely over several months and during that time it is hoped that two deadly enemies
can be avoided: inflation and severe recession. Mr. Fraga will have to maintain a sound
monetary policy with an inflation target and the old Brazilian habit of automatically
adjusting prices and wages in line with inflation must be avoided. The risk here lies in
rates remaining high to counter exchange rate swings, but rates must fall in response to
circumstances in order to contain the depth of the recession. It all suggests a miracle
and perhaps a prayer to a saint for bankers from Arminio Fraga will help. Giuseppe Tovini,
a 19th century Italian private banker who founded Banca San Paolo and Banco
Ambrosiano, has been made a saint by Pope John Paul. Ironically, it was Banco Ambrosiano
that embroiled the Vatican Bank in its worst financial scandal after going under with $1.3
billion of bad debt, not having a ghost of a chance – holy or otherwise – of
surviving. Lets hope Arminio Fraga’s central bank has better luck.
Published by Trust Services, S. A. which is a British-owned and managed trust company licensed by the Superintendency of Banks in Panama. Our website provides a broad range of related essays.