Riding off of an unprecedented period of prosperity and growth, the Panamanian government recently created a National Savings Fund (the “Fund”) as a forward-looking initiative aimed at safeguarding the country against future negative shocks (e.g., natural disasters, tail risk events, economic recessions, etc.).1 The product of an extensive canvasing of sovereign wealth funds from around the world and a review of their respective best practices, the Fund Law seeks to provide the Panamanian government with a sophisticated and transparent investment vehicle to manage the country’s surpluses.
The Fund Law establishes the Fund’s overarching mandate, which is divided into four central directives. The first directive requires the Fund to provide the country with a mechanism to accumulate and preserve its long-term savings. Second, in addition to being a savings fund, the Fund is required to function as a stabilization fund, capable of deploying capital to mitigate any major negative shocks. The third directive requires the Fund to serve as a “lender of last resort” during times of crisis and/or economic recession. The final directive requires the Fund to assist in the management of budgetary deficits.
Assets under Management (“AUM”)
The Fund will receive its initial AUM from the government’s existing “Development Fund,” which is a trust fund that was created pursuant to Law 20 of 1995. Subsequently, the AUM would increase from contributions received from the following sources of capital: (i) any funds which by law are assigned to the Fund; (ii) any private/public donations, grants and/or bequests; and (iii) the Rule of Accumulation (as defined herein).
The “Rule of Accumulation” requires that any and all monies received by Panama’s National Treasury – from distributions from the Panama Canal Authority (“ACP”) – in excess of the equivalent of 3.5% of the country’s nominal GDP must be deposited into the Fund. By way of background, the ACP contributes to the National Treasury a sizable percentage of its profits (i.e., pursuant to a disbursement that is analogous to a yearly dividend payment). In the event the ACP’s yearly contribution to the National Treasury is larger than 3.5% of nominal GDP, the excess would be diverted to the Fund.
The Rule of Accumulation will come into force in 2015. The hurdle will initially be set at 3.5% of nominal GDP for any given year. It may be revised once every five years beginning in 2020. However, in order for it to be effective, the revised Rule of Accumulation must be approved at the Cabinet level as well as by the plenary session of the National Assembly.
Investment Guidelines/Investment Policy
The Fund Law establishes strict investment parameters that must be complied with during the preparation of the investment guidelines and subsequently the investment policy. The central tenet is that the Fund may only invest in foreign issuers and/or securities. A very limited carve-out was created for public debt instruments issued by the Panamanian government (i.e., government bonds). 2 This limited carve-out comes into force beginning in 2015. However, aside from this exception, the Fund must pursue a global (ex-Panama) investment strategy.
The Ministry of Economy and Finance (“MEF”) is charged with the responsibility of preparing the Fund’s investment guidelines. These guidelines flesh out the government’s investment objectives and provide the Fund’s Board of Directors (the “BoD”) with a clear set of parameters for developing the more comprehensive investment policy. The investment guidelines will define, among other things, specific performance benchmarks, minimum credit rating requirements for investments, asset allocation requirements, and other such investment parameters.
The BoD is charged with the responsibility of preparing the Fund’s investment policy. This comprehensive policy sets out detailed instructions regarding the investment of the AUM. Throughout this process, the BoD is assisted by an in-house financial advisory team known as the Technical Secretariat. Once the investment policy has been finalized, the BoD remits it to the National Bank of Panama (“BNP”), which is responsible for executing the investment policy and managing the AUM.
In response to a common critique of other sovereign wealth funds, the Fund Law incorporates very stringent transparency requirements to ensure that the Fund’s year over year performance is a matter of public record. Accountability would be achieved through a combination of periodic public disclosures and robust internal controls.
The BoD is required to prepare an annual report of the Fund’s performance and operations by no later than March 31st of each year. The BoD must present this annual report to MEF and to an independent supervisory committee consisting of members of civil society. A copy of the BoD’s annual report must also be presented to the Economy and Finance Commission of the National Assembly.
After this annual report has been vetted, MEF and the BoD must in turn prepare a detailed presentation of the Fund’s performance and operations, which must include the Fund’s audited consolidated annual financial statements (including the external auditor’s opinion letter). The Minister of MEF and the President of the BoD must appear before the plenary session of the National Assembly to give said presentation by no later than June 30th of each year.
Additional public disclosures are required to be made by the BNP and the Technical Secretariat. The BNP will publish the Fund’s audited consolidated annual financial statements, which must be audited by an external auditor. In turn, the Technical Secretariat will divulge information through the Fund’s website regarding the performance of the Fund’s portfolio, the Fund’s annual budget, as well as on material decisions taken by the BoD.