Financing People and Businesses: A Two-Pronged Approach to Help Panama Weather the Economic Turmoil of COVID-19
During the past decade, Panama has been an economic engine powering Latin America. Gross domestic product has grown 6.3 percent a year on average since 2010.
The rapid growth was already slowing in the late 2010s, but the COVID-19 pandemic pitched the economy into a tailspin. Like so many countries, Panama has required many businesses to close temporarily for the sake of public health. At their strictest, the lockdown measures limited time outside of one’s home to two hours, every other day.
The pandemic creates several challenges that are particular to Panama. Sharp declines in international trade during the first few months of the pandemic hurt revenue from the Panama Canal, creating economic ripples, before traffic recovered in the second half of 2020. The tourism industry, another important driver of Panama’s economy, has not been so fortunate. Also, Panama is a fully dollarized economy, which precludes any possibility of responding to this economic shock with independent monetary policy.
The Multilateral Investment Guarantee Agency (MIGA) is working with the Panamanian state-owned bank Caja de Ahorros on a two-pronged effort to bring liquidity to Panama during the crisis by providing a loan guarantee on $400 million in financing being arranged and provided by Banco Bilbao Vizcaya Argentaria S.A. (BBVA) and Citibank N.A. (Citi).
Caja de Ahorros will use the financing to on-lend to businesses struggling with liquidity in the wake of the crisis, and to provide mortgages to low- and middle-income households, which had been underserved by commercial banks even before the pandemic put pressure on bank balance sheets. Caja de Ahorros has the distinction of making 50 percent of such home loans to women, an effort that will continue with this new tranche of financing. At present, more than 70 percent of home loans in Panama go to households headed by men.
To ensure that it is low- and middle-income households that benefit, Caja de Ahorros will use the proceeds from the MIGA-guaranteed financing exclusively for mortgages on new homes valued at up to $120,000 under the Ley Preferencial, the government’s mortgage-subsidy program. Supporting new home ownership has the added benefit of bolstering the construction industry, a major source of employment, and helping to remedy a chronic housing shortage.
For this transaction, Citi financed their loan to Caja de Ahorros through Kairos, an investment vehicle set up to raise money from institutional investors. The name means propitious moment in Greek. In addition to the financial terms of the transaction, institutional investors are attracted by the ESG characteristics of the project: The recipients of these mortgages will be lower- and middle-income households, many of which are headed by women. Such ESG investments—ones that meet criteria for good environmental, social, and governance practices—are in high demand, MIGA underwriters say.
MIGA is insuring BBVA and the Kairos vehicle against the non-honoring of a financial obligation by a state-owned enterprise. The guarantees have helped Caja de Ahorros secure long-term U.S. dollar-based funding from international capital markets for the first time, and at a reasonable cost. For the future, a track record with international lenders could help the institution finance itself through loans or the bond market.
By lending to businesses as well as households, Caja de Ahorros aims to support the Panamanian economy as it manages the fall-out from COVID-19. In addition, increasing access to mortgages for women and lower and middle-income households could help address income inequality in the long term. Panama is ranked among the 15 most unequal countries in the world. It has the fourth-highest level of inequality in Latin America, with a Gini coefficient of 0.50 (a Gini number of 0 means everyone has the same income, while a Gini of 1 means one person has all the wealth).
As of early January, Panama has had over 250,000 cases of COVID-19, despite taking strong measures to contain the pandemic. The country diagnosed its first case on March 9, 2020. Soon after, it shut down all non-essential activities, closed schools, canceled events, and suspended most commercial flights. As a result, the economy is expected to contract for the first time since 1988.
Together, MIGA hopes that the additional lending that Caja de Ahorros will be able to provide, thanks to the guaranteed loans arranged by BBVA and Citi, will help Panama’s economy recover from the scourge of COVID-19 and make progress on the country’s structural problems of lack of adequate housing and unequal access to financing. If so, these two loan guarantees could, indeed, make this a propitious moment.