As the global COVID-19 crisis shows signs of slowing, markets seem to be on the road to recovery. But investors are rightly concerned about the potential for lingering volatility. The pandemic has emphatically highlighted the need for diversification and investors, as well as central banks, have responded in kind. Emerging market allocations, such as investing in Panama, can be an attractive option for investors looking to branch out from conventional asset classes.
The Federal Reserve announced on Monday, June 15th, that they would be purchasing up to $250 billion in individual corporate bonds. While unprecedented for the US central bank, direct government intervention into the market has been a global phenomenon since the BOJ’s 2013 announcement that they would be purchasing ETFs on the Nikkei. This intervention is a critical form of financial support in the wake of the global Covid-19 pandemic and offers investors a chance to breathe a little easier during one of the most complicated economic environments of the past 100 years.
Other banks around the world are mirroring the Federal Reserve’s decisive action, albeit in different ways. Panama has recently issued $2.5 billion worth of bonds to protect its economy in the face of the crisis, offering investors an attractive opportunity to gain exposure to a strong emerging market’s foreign debt instrument. Emerging markets like Panama present market participants with the chance to invest in a growing nation on the ground floor when both parties need it most. Panama has some of the strongest rated sovereign debt in its neighborhood, making it an even more enticing offer for investors seeking global diversity. Rated at BBB, Panama’s debt is considered by global rating agencies such as Standard and Poor to be solidly investment grade.
There are additional factors that highlight the attractiveness of investing in Panama. The Central American nation uses the Balboa as its currency, pegged at 1:1 with the US dollar. With access to ample US dollar reserves due to this peg, FDI inflows to Panama have been trending steadily upwards for the past 25 years with no signs of slowing down. This strength is doubly noticeable in the wave of a global pandemic.
The difference between sovereign emerging market debt instruments and corporate debt instruments is a topic with which many investors are already familiar. In order to have a fully diversified, global portfolio, investors are wise to seek exposure to both types of instruments. Corporate debt in emerging markets presents a higher average return than most other types of bonds, with some EM corporate bonds offering 4.75%, a hefty premium when considering the context of Covid-19. Finding investable private companies in emerging markets can prove difficult, and nations like Panama present a lucrative opportunity in the form of domestic stability, ample dollar reserves, and historically sound fiscal policy.
Panama lacks a central bank, further contextualizing the nation’s corporate-friendly environment. While this means that Panamanian companies lack a lender of last resort, it also incentivizes domestic financial institutions to maintain a higher level of fiscal responsibility to not only foster trust with domestic enterprises but also to court the FDI needed to expand their balance sheets. Thus, Panamanian banks have maintained a debt-to-GDP ratio of 35-40% in recent years, far lower than other emerging markets and even developed nations. This low ratio demonstrates Panamanian fiscal responsibility and the budgetary room that domestic financial institutions have to weather difficult situations such as the Covid-19 crisis.
The services industry currently dominates the Panamanian economy. To some degree, this is natural due to the nation’s role as a global trade hub, in no small part thanks to the Panama Canal. Nonetheless, like many emerging markets, Panama is seeking to diversify its economy to increase its resiliency to unexpected global events such as Covid-19 as well as attract more diverse FDI. Industry as a portion of the Panamanian economy has risen from 19.8% in 2008 to 29.1% in 2018. Conversely, agriculture diminished from 4.5% of the Panamanian economy to a mere 2.2% in 2018. While this presents a strong case for FDI in Panama for both the industrial and agricultural sectors, the increasingly ESG minded global investor can find great opportunities in the emerging market of the Panamanian ag industry.
Emerging market corporate debt presents fantastic opportunities for investors to diversify their portfolios globally. In particular, SME agricultural debt allows emerging market participants to leverage their sustainable natural resources to participate in the global economy more broadly. This investment opportunity is also a win-win as emerging markets are the most likely to need assistance in developing and expanding their economic sectors as the Covid-19 pandemic abates.
Panama is one of the nations that leads the way in this regard, with a low debt-to-GDP ratio, a responsible domestic financial sector, ample dollar reserves, and abundant ESG investment opportunities for FDI participation. As the global economy rebounds throughout 2020 and into 2021, these emerging markets are likely to enjoy comparatively large growth spurts on the world stage.
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