COMMENTARY - April 2017

With more than 11,000 employees in 110 offices world-wise, McKinsey & Company is a truly global management consulting firm.  Widely considered the most prestigious management consultancy, McKinsey's clientele includes 80% of the world's largest corporations, and an extensive list of governments and non-profit organizations.  More current and former Fortune 500 CEOs are alumni of McKinsey than of any other company.  They publish extensively on a very wide number of topics.  

Since I accepted an invitation to join their global Executive Panel some years ago, they have kept me very well-informed of their work and that has certainly been a benefit to my analysis.  However, most of their reports are global in nature and Panama is rarely ever mentioned.  We are too small.  So Panama is simply included in the Latin America and Caribbean region (LAC).  Nations like Brazil and Mexico receive the majority of the nation-specific commentary.

Recently, they sent me a copy of the results of a study focused on LAC, but also comparing it to other regions.  I will share two charts based on their research here and later I will provide a link to anyone wishing to download a copy of their 26-page discussion paper.  

They are focused on how nations increase their national wealth (GDP).  There are two ways and only two ways to do that.

The number of workers employed can increase (Labor) or the amount each worker produces can increase (Productivity).  Of course, both can be factors and each can go down as well as up.

The best news is when the majority of the growth is from Productivity.  For thousands of years, Labor was the primary factor, so empires and slaves were critical to a nation's wealth.  No more.  The old colonial empires and slavery are gone.  If you can find any remaining examples of slavery somewhere on this planet, you are visiting an extremely poor community.

The first chart compares LAC with the other global regions as defined by McKinsey from 2000 through the end of 2015.  I appreciate this.  Most studies tend to just consider the last five or ten years.  Including all those available for this century is a nice addition.  After all, the first five years were not that exciting for Panama, so this helps reduce the impact of its more rapid later growth.  I am not looking for statistics that make Panama "look good", but those that help us accurately understand its position compared to other nations in this century.  

I will not go into all the detail here as found in the paper, but the first column demonstrates the growth rate of Productivity in each of the regions.  The last column shows the growth of GDP, national wealth.  The two columns in the middle indicate how much of that growth was due to increases in Labor and how much due to increases in Productivity.

What you want to see is at the bottom of that chart, labeled "Asia".  Very strong growth in Productivity and very strong growth in GDP, which is primarily driven by that increase in Productivity, not just Labor.

Latin America looks very weak in comparison to the other regions.  It gives us an idea as to why the LAC region is sometimes ignored in global economics, or mentioned only briefly.  Despite this period being one of the quietest periods in LAC history in terms of conflict and social disruption, especially compared to some of the other regions, it is far behind most and it is not catching up.

If I was using this chart to find a region for investing my money, Latin America would not be chosen.  Looking toward the future as all investors should, even Africa would be more interesting.

Panama is often ignored for no other reason that it is very small.  But beyond that, it has another problem.  It is buried in that statistic for Latin America.

So let us take a look at another chart, also from the McKinsey research, but this time, we see GDP growth broken down by individual LAC nation, nearly all of them, not just the big ones, and best of all, Panama is included.

For investors already active in the region, this may not be a surprise (although many are surprised who have no experience with Panama), but for investors who are not involved significantly in the LAC region, this is generally unknown.  When they turn to look at the region, they automatically look at Brazil, Mexico and the other large nations.  

When they cannot compare Panama with the others, they not only miss Panama's success, they also fail to learn the other factors (US$, stability, democracy, growth consistency, logistics, and many more) that, when taken together, make Panama stand out from every other nation in Latin America and the Caribbean.  But if you don't see the comparison so you ignore Panama, you miss the full story and the important facts.

When I wrote subscribers that this commentary would help explain “why Panama is being held back by Latin America”, this is what I meant.  That is a little extreme and could be considered insulting by others, but I wanted to get the message across in a few words.  We have to be aware of it and be ready to explain it.  It really is not that hard, if you have the facts available.

If you want to read the McKinsey Discussion Paper, you can download it here.

I will finish with a couple short notes.  Each could be a commentary and perhaps someday they will be, but for now, they are going to be simple.

Italy – I will spend very little time on this, but two Italian banks, Popolare di Vicenza and Veneto Banca, have both recently reported their 2016 figures. The figures show losses of 1.9 billion euros ($2 billion) and 1.5 billion euros ($1.6 billion), respectively. Both banks are requesting state bailouts to replenish their capital reserves, since they currently do not meet European requirements.

This is not the first time this has happened and the total of their losses is only a tiny portion of the estimated 360 billion euros ($380 billion) in non-performing loans in the Italian banking system.  The system is very fragile.  We watch it carefully because it may lead to a major crisis if it is not handled very carefully.  There is more to watch in Europe than simply the next election in one of the EU member nations.  Governments can change hands, but change can be slow (as in Greece).  But when banking systems fail, the results are dramatic and immediate.

Why should we care?  As more and more Italians arrive in Panama seeking a safe haven, they are becoming quite noticeable and welcome, as Europeans typically are.  Their numbers could increase dramatically.  And they are not alone as formal and informal evidence of increases in other European nationalities coming to Panama grows.   Fine, but we need to do a better job of finding out what they want when they come and making sure we have it.  

But there is an excellent source of “research” on this topic – Europeans themselves.  To Germans, Italians, French, Britons, Dutch and more, I have on simple message.

Do not just come to Panama to buy something.  Come to build something.  Now is the time to get started.