Sowing Seeds of Populism in Panama

This post is focused on my country of Panama.  Much has happened since my last post in September.

In October I was asked to help with certain aspects of the organization and logistics of two important global conferences being held in Panama, the World Social Security Forum (November 14-18) and the International Anti-Corruption Conference (December 1-4).  This took me away from chart watching and gave me a chance to do something a little different.  As most may be aware, 2016 was not kind to Panama in certain respects.

Shortly after leaving my post as head of risk and portfolio management at a local brokerage in April, the International Consortium of Investigative Journalists made public a database of more than 11 million leaked files taken from Mossack Fonseca, a well known law firm that specialized in corporate and foundation structures, whose clients reside all over the world.  Mossack Fonseca, wasn’t doing anything illegal under Panama law, but it was selling services to citizens of countries where offshore entities are frowned upon.  Another major firm also came under scrutiny, Morgan & Morgan, though this firm has been able to avoid the muck.

Just after “The Panama Papers” leak, May 5th to be exact, a prominent economic group in Panama known as Grupo WISA, whose principals are Nikal Waked and Abdul Waked, was put on the Clinton List for alleged money laundering of international drug organizations.  The list of companies under the control of these two is extensive, including a small bank.  What ensued is effectively death by strangulation.  All entities tied to the Waked’s have been sentenced to death, regardless of whether or not they played a role in criminal activities.  This blanket action includes the oldest newspaper of the country, La Estrella de Panama (The Panama Star).  La Estrella has survived until today, thanks to extensions given by the US Treasury, but the latest expires on the 6th of January. A long standing bastion of free speech will likely fold.

Both scandals affected two very important pillars of the Panamanian economy, banking and legal services.  Banks immediately cut spending and the law firms scrambled to update the due diligence on their clients.  Some things have changed, others have not.  It is still easy to force Panama to heed the command of foreign powers.  Panama is a US dollar economy.  Just threaten to cut off the correspondent banking relationships and you have us by the throat.  Ask me if much has been done to improve transparency and strengthen institutional independence locally and my response will be “No”.  Certain aspects of the Panamanian economy are “too big to fail”, which makes sense when you realize that there is a long history of crossing lines between the government and law firms. I think you will find a fair summary of the issues by reading a recent article posted at the ICIJ here.

The reaction by Panamanian government and local law firms is rational.  They have long held that Panama is unfairly being singled out, while OECD countries such as the US, UK and Switzerland harbor law firms and banks that manage similar businesses.  It is hypocritical to sanction others before correcting your own shortcomings.  Unfortunately, the reality is that the US and EU have big sticks, Panama has toothpicks.

On the other hand, the global populist movement that began with Arab Spring and is spreading through the developed world is an opportunity to provide more transparency and correct the deviations that came with globalization and low interest rates.

Globalization is a good thing.  Low interest rates aren’t bad, either.  What is bad are the poor policies that exacerbated the wealth gap and opened the door to tax evasion and low investment in productivity.  Here is the killer data point: The top 0.1% of US household wealth equals the wealth of the bottom 90% (courtesy of Torsten Slok @DeutscheBank, highlighted by Dr. Ben Hunt @EpsilonTheory).

torsten-slok

I believe few will argue with me when I say that this is representative of what is happening all around the world, including Panama.  According to 2013 World Bank data, over 25% of Panama’s population lived in poverty and 3% of the country lived in extreme poverty.  The present government has spent much of the goodwill gained in the last elections by incarcerating many representatives of the previous government, which was plagued by allegations of rampant corruption and abuse of power.

Shortly after his party lost power in the elections in 2014, Ricardo Martinelli escaped the political backlash by moving to Miami and Juan Carlos Varela’s government has attempted in vain to bring Martinelli back to Panama to face questioning and certain prosecution.  Therefore, the Varela government has placed a number of people in jail to minimize the risk of flight, without sufficient proof to adequately prosecute, with the sole purpose to place enough pressure on them testify against their old boss.  I am not a lawyer.  All I know is Martinelli is still in Miami and the extradition request has not yet been granted.  Right or not, the extra limitation of power in denying people of their rights has not been taken well in civil society.  The call for a more independent judiciary and an overhaul of the constitution is a rising crescendo.

The World Social Security Forum was an opportunity to share information on labor and health issues, in addition to putting Panama back on the map as a global conference site.  Unfortunately, the social health services provider, the Social Security Fund, has long been riddled with mismanagement and corruption, so much so that the organization is in the midst of an institutional crisis.  The Fund also has a growing hole in the unfunded future liabilities department as well.

When the Varela government came in to power, many of the service and supply contracts to government institutions came under extreme scrutiny, so much so that approval and execution of those contracts were delayed, due to administrative fears of being labeled as corrupt or compromised.  This means that hospital supplies were delayed and drove the Social Security Fund into crisis.   This institution, in addition to the Ministry of Health, represents over 90% of the hospital beds available in Panama.  Therefore, any delays in provisioning and contracting is felt almost immediately by the populous.

Unfortunately, the director of the Fund was incapable of communicating the benefits of hosting a global event.  Given the medical supply shortfalls, the criticism was understandably intense.  A global forum that would cost $2.4 million dollars was considered money spent on items not , to add insult to injury, by reducing the cost to $1.5 to make the event more palatable the Fund only gave fuel to critics’ claims that something nefarious was going on from the get go.  The country’s comptroller rejected the initial approval request.  The director of the fund then used a recourse that obligates approval, which then caused the comptroller to sue to rescind the new contract.  All this happened in the days just before the forum began and continued as we hosted the event. Therefore, yours truly took part in hosting an event that might never be paid for by the Panamanian government.

Two weeks later, the 17th International Anti-Corruption Conference came to Panama.  This event, hosted by Transparency International and the National Transparency and Access to Information Authority of Panama, was an opportunity to increase the level of awareness in Panama and to highlight the commitment of the Panamanian government in fighting corruption.  Obviously, the Panama Papers was a big topic, but so was Lava Jato, the investigation into massive Brazilian corruption practices.  This event was much better received in Panama and participation of civic leaders and representatives of government was a very positive development.

The Odebrecht bribery allegations have reached Panama as well, though this too will pass.  The company has been asked not to participate in any more government project tenders, until it can assure the government that it will come clean regarding bribery payments to win tenders.  Now, it is important to note that Odebrecht has been doing business with the past three governments (including this one), so it is reasonable to question whether or not there were excessive costs built into projects or improper payments made to decision makers.  Odebrecht admitted to as much, although the name of those involved and other specifics are still unknown.

Sadly, many questions will likely remain unanswered.  The government has not shown much commitment to investigating these scandals, preferring to read the results from other jurisdictions.  That lack of commitment is proven through the lack of funding and inability to levy charges for inappropriate behavior.  Holding suspects in jail without prosecuting appears to be merely a tool for something else.

It is one thing to suspect, it is another to prosecute and the political elite have just gained another shield from prosecution.  The country’s Electoral Tribunal is responsible for managing the individual identification system and, more importantly, monitoring and regulating all aspects of political party and electoral processes.  As an “independent” government institution, it has the power to protect or lay bare politicians involved important cases.  It is considered the guarantor of democracy in Panama.

On the 3rd day of this new year, the legislature voted for a new chief judge of the Tribunal, resulting from what is an apparent alliance between the governing party and the party run by Ricardo Martinelli.  Social media was on fire Tuesday evening, because the vote gives rise to the thought that the alliance was borne of a common or negotiated need.  With the present government cracking down on Martinelli’s party, this made for a suspicious pairing.  Mind you, Varela and Martinelli were two halves of the same government back in 2009, when Varela was vice president.  Twenty six months later, they split acrimoniously and the poison has been dripping from their tongues ever since.  Many now suspect that their may be some truth to claims that both have skeletons hidden in the same closet and an alliance in certain issues would be mutually beneficial.  The present composition of the Electoral Tribunal is of 3 people, two of which required Martinelli’s party clout to gain a seat.  Let THAT simmer for a bit.

So, Panama continues to debate transparency in government and business.  Panama needs a strong leader to push the change needed to increase institutional independence.  This is a country that is stuck in a political grudge match, while business goes on as usual.  If things keep going as they are, we may well have a full-fledged populist movement to complicate things in the elections to be held in 2019.  In the meantime, the economy is expected to grow at one of the highest rates in the region, hiding the issues that are festering under the surface.

 

 


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