CDs, Bonds, And Factoring Opportunities In Colombia, Panama, And Paraguay

The latest monthly report for my investment in a factoring program in Colombia arrived in my email over the weekend. The projected yield from this investment is 13% annualized. That’s a phenomenal return when you consider that money market yields in the United States are less than 1% right now and CD rates are not much better.

While the risks for this investment in Colombia include political and currency factors, 13% versus 1% was enough for me to take them. If you don’t agree and don’t buy into Colombia the way I buy into Colombia, you have other options for getting better-than-typical short-term interest returns.

Many banks in Panama right now offer U.S. dollar CDs that pay 4% or more on terms ranging from two to five years. Minimum deposits are typically US$10,000 or more. The banks are able to pay that kind of CD interest because they are lending for mortgages at variable rates of 6.5% and at fixed rates of 8.5% and more for car loans.Other countries with banks offering even higher interest rates on U.S. dollar deposits include Ukraine, Afghanistan, and Iraq. I’d say though that those places come with higher country risk than Panama or even Colombia.

The October issue of my Simon Letter advisory service featured Paraguay, where you can earn double-digit yields, as high as 20% in the local currency, the guarani. The highest yields come from local credit unions, which are safe. Bonds from local companies in this country pay a few points less, between 14% and 16%. The upside, though, is that it’s easier for a foreigner to open an account with a brokerage house than a credit union. To open an account with one of the credit unions, you’re going to have to speak Spanish.

Back to the factoring program in Colombia. This isn’t a banking product. It’s an investment in a judgment against the Colombian government. Colombians who have sued the Colombian government and won must then wait for the government to pay out the settlement amount. Sometimes, the wait can be many months. A colleague’s firm in Medellin buys the judgments from plaintiffs, meaning they get their cash immediately.

The firm researches dozens of cases for every one it decides is right for investment. Once they select a case, the plaintiff is offered a discounted cash payout. If he accepts, he signs over his rights to the judgment. The judgment goes into the government’s queue, and the clock starts ticking. The government has 10 months to pay out, or penalty interest kicks in.

The opportunity for the investor (that is, you) is to buy into one (or more) of these factored judgments.

Investors earn a 13% yield during the first 10 months of the payout period and 16% after that. Most judgments are paid within 12 months, as the government doesn’t want to pay the penalty if it can avoid doing so.

My point is that you have options for parking your cash that are more interesting than the anemic vehicles available right now in the United States and Europe. You simply have to decide what levels of currency, country, and product risk you’re willing to accept. You can skip currency risk by going with a CD in Panama at 4% to 5%. This would tie up your cash for at least two years and maybe as many as five. Colombia and Paraguay vehicles can yield you more than double or even triple the rates possible in Panama, without tying up your cash for such extended periods, if you’ve the stomach for it.

Whatever your risk profile, you can’t afford to let your cash sit in an account earning less than 1%. Even with inflation at less than 2% in the United States, you’re still losing money over the course of a year. Get your money working for you offshore.

Lief Simon

“So, Lief, does a U.S. citizen not have to declare income from property overseas on any IRS form?”

V.P.

No, that is not correct. If you have a rental property in another country, you must report the income, just as you would any income from a rental property you might have in the United States. You do this on the Schedule E for Form 1040 (assuming the property is held in your personal name or in an offshore pass-through entity).

Any taxes you pay on that income in the country in question can be taken as a tax credit on Form 1116.