Country Report Panama
Economic growth in Panama is strong due to multiple large infrastructure projects. Whether these projects will boost growth structurally, to an extent that it will outweigh the loss of short-term infrastructural investment-driven growth, remains to be seen.
Strengths (+) and weaknesses (-)
(+) Favorable geographical location
Panama is exploiting its favorable geographical location. Due to large infrastructural investments Panama is becoming one of the most important trade hubs in the region.
(+) Long-standing monetary stability
Due to the full adoption of the US dollar, Panama does not have its own currency and central bank, which contributed to monetary stability for a long time.
(-) Corruption and rule of law
Corruption is problematic, also at the highest levels. Besides, indigenous communities are not fully protected against land bribes (for mining purposes).
(-) Lack of an educated workforce
Panama’s educational system is weak and its workforce is relatively low educated.
1. Economy slows down a little
In 2013Q2, Panama’s economy expanded by a ‘marginal’ 7.6% year-on-year. Looking at the sectorial breakdown, the transport and communication sector, which accounts for a quarter of the economy, is slowing down. The reason behind this slowdown is the dispute between Panama and its trading partners Colombia and Venezuela. While Colombia has imposed additional surcharges on imported goods such as clothes and shoes, Venezuelan traders are having difficulties exchanging bolivars for dollars, leaving them with a debt of USD 1.2bn to Panama’s free trade zone. Growth in the construction sector also declined, from more than 30% yoy in 2012Q4, to 25.5% yoy in 2013Q2. The slowdown is caused by the fact that some major infrastructure projects are reaching completion. For this and next year economic growth is expected to be around 7%.
2. Infrastructure projects
In recent years, the government of Panama has invested substantially in infrastructure projects to improve Panama’s position as regional trade hub. The most prominent projects are; the extension of the Panama Canal (USD 5.2bn); new metro lines in Panama City (USD 2.2bn); and road projects (USD 1.1bn). The first metro line will reach completion in 2014, while the extension of the Panama Canal is planned to be finished in 2015. The question is whether the profits these projects will generate structurally are going to offset the loss of infrastructural investment-driven growth. Besides, as the project currently accommodates 10.000 workers, a slowdown of investment could lead to a rise in unemployment. We also point at two other recent trends relating to these projects. First, Nicaragua has awarded a concession to a Chinese company to build a canal across Nicaragua, which would also link the Pacific Ocean and the Caribbean Sea. Although the canal trough Nicaragua will have some natural disadvantages, and is still a long way from being operational, it could mean some competition in the long run. Second, part of the infrastructure projects are financed based on the turnkey principle, meaning that the government will only pay when the construction is finished, which enables the Panamanian government to postpone public expenditures. In case economic growth remains strong the government can well cope with this additional expenditure in the future. However, in case economic growth falls substantially, this way of financing may turn out very risky, a lead to a strong deterioration of public finances.
3. Mining projects may be a new source of growth
Given Panama’s natural resource endowment, mining could be one of the sectors that could overtake the construction sector as the main growth engine of the economy. The government, however, only partly succeeded in its objective to build up this industry. While the Cobre Panama mine will produce copper, gold, silver and molybdenum by 2016, the Cerro Colorado mine – which contains one of the largest untapped copper reserves in the world- will be left untouched. The latter relates to the fact that this mine is located on indigenous lands, and the communities living there strongly object to mining operations.
4. Presidential elections in May 2014
There are currently three candidates in the race to become Panama’s new president. Juan Carlos Navarro from the opposition Democratic Revolutionary Party is currently leading the polls with 28% of the votes. He is a former businessman in ecological dyes and served two times as mayor of Panama City. José Domingo Arias is the representative of the ruling party, Democratic Change. He is a former businessman and minister of housing. His backlog is both minimal and diminishing. The last candidate is Juan Carlos Varela from the Panameñista Party. He is the current vice-president, and has – like the two other candidates – experience in business. With 17% of the votes, he seems to have to smallest chance of becoming the new president. All three candidates are likely to maintain the business-friendly policies of current president Ricardo Martinelli. However, Navarro may change this course a little, as he is also an environmentalist. Generally speaking, the backgrounds of the three candidates show that there is strong linkage between politics and businesses.
5. Frequent corruption allegations, but no conviction
Panama currently ranks 83 out of 176 on the corruption perception index. Although president Martinelli had announced that he would fight corruption in his presidential term, he himself has been accused of corruption multiple times. Last year, stories popped up that Martinelli would receive or had already received kickbacks from Italian businessmen connected to the purchase of radar installations, digital mapping services and helicopters; the building of hospitals and prisons; and contracts relating to the extension of the Panama Canal. More recently, Martinelli was accused of stock trading with insider knowledge. Martinelli responded to this latter allegation was political motivated, since the lawyer of the accuser is a candidate for deputy for the opposition Democratic Revolutionary Party (PRD). Although none of these allegations have officially been proven, they suggest considerable problems with corruption in Panama, especially since, next to Martinelli, other high government officials are also named in scandals.
In recent years, the government has focused on increasing Panama importance as a regional trade hub. This is reflected is large infrastructural projects, such as the extension of the Panama Canal, which will be completed in 2015. Mainly due to these projects economic growth averaged almost 9% in the last five years, the highest rate in Latin America. When these projects are completed Panama’s economy will be even more open and be more integrated in international trade. The high growth figures are however not accompanied by a substantial increase of the skills of the workforce, leading to an inflow of workers from abroad. In addition, not all Panamanians seem to have benefited from the increase in welfare; youth unemployment is substantially higher than the overall unemployment rate, and social indicators have been improving only slowly.
An important characteristic of Panama’s economy is that it is fully dollarized, and therefore does not have its own central bank. For monetary stability; the stability of the US dollar exchange rate; Panama’s competitiveness; and the difference between both inflation rates, are important. As all three are currently favorable the adoption of the US dollar is today one off Panama’s strengths.
Although the party of President Martinelli has a parliamentary majority, strong opposition - both in Congress and by the public - has prevented him from passing all planned legislation. Legislation regarding mining concessions and the privatization of state assets has been mainly affected.