Panama: The Challenges Ahead

Ángel Ricardo Martínez | Feb 13, 2013 | Comments 2

photo: ©cecifoto.com

Panama is one of the rising stars of Latin America’s economy. The construction of large infrastructure projects, such as the $5.2-billion Panama Canal expansion and a $1.8-billion subway in the capital city, have boosted the country’s economy to 10.5 percent growth in 2012, slightly less than the 10.6 percent in 2010, and reduced unemployment to 4.8 percent in 2012.
But as these mega-projects —most of them turnkey—come online, some analysts fear that the huge burden they will place on the country’s debt, and an eventual increase in unemployment, could have severe economic consequences. While the creation of a wealth fund sounds somewhat reassuring, it seems that the real challenge for Panama will be to position itself as a world-class logistics hub if it wants to consolidate its recent economic success. The inauguration of the new locks in early 2015 may give Panama a boost towards creating the kind of infrastructure it needs to truly take advantage of its strategic location.

In economic terms, the last decade in Central America and the Caribbean may well be dubbed “the rise of Panama.” Between 2001 and 2011, this country of 3.6 million doubled its GDP, and commanded a 45 percent employment expansion. This outstanding evolution has naturally been accompanied by several double-digit growth figures, the latest being 10.4 percent in the second quarter of 2012, and low unemployment levels, currently at 4.2 percent.

In the midst of the last few years’ global economic hardship, Panama’s achievements might sound like a great feat. But speaking with former President Nicolás Ardito Barletta (1984-85), one of the country’s top economists, one gets the sense that it was somehow meant to be. “Panama’s economy has been transformed over time. The handover of the Canal boosted our services-based economy, enabling the further development of a conglomerate of interconnected activities that revolves around the Canal and that generates 62 percent of our exports,” he says.

That conglomerate, according to Barletta, “includes the ports, which moved more than 6.6 million containers last year; the Colon Free Zone (CFZ), with yearly activity topping $25 billion; and Tocumen International Airport, which connects Panama with more than 30 countries and through which 24 percent of the CFZ’s exports leave.” All that, moreover, “is complemented by a dollarized, world-class banking system and the best telecommunications infrastructure in Latin America. If I have to sum up this country in one word, that would be ‘connectivity ’,” he adds.

It is this connectivity that puts Panama on the logistical map of the world. “These are the forces Panama has been taking advantage of. And they are all long-term forces. This is not a passing trend,” he concludes. According to Barletta, every dollar in Canal revenue generates an additional $1.27 in the local economy.

Despite this apparent inevitability, few economists dare ignore the fundamental role played by the construction of large infrastructure projects in the recent economic bonanza.

The two superstars are the $5.2-billion expansion of the Canal and the $1.8-billion subway in Panama City, but that’s hardly it. Overall, Panama’s public spending program will average some $8 billion a year in the 2010 to 2015 period. “What’s happening in Panama is that public investment has acted as a platform for private investment. That explains a great deal of the recent growth,” says Rodolfo Minzer, economic affairs officer at the United Nations Economic Commission for Latin America and the Caribbean (Eclac).

With the majority of the megaprojects still under construction, Panama’s 2013 performance is expected to continue along the same lines. “For next year, we expect Panama’s economy to grow between 7 and 8 percent, and we expect that trend to continue in the following years,” says Óscar Calvo-González, the World Bank’s top economist for Central America.

But as the completion dates arrive, many observers are already worrying about the possible effects of some of the more obscure aspects of the recent boom. The first headache is likely to be debt, with the country’s levels having swollen by 30 percent in the last three years, from $10.8 billion in 2009 to $14.15 billion in 2012. Linked to this are unemployment concerns: the Canal expansion employs 10,000 people alone. “We are worried about the pressure all these turnkey projects might exert on the country’s capacity to incur on debt and repay. Besides, many of these projects have not followed the proper allocation process, and there’s also the doubt that they are not as profitable as they claim to be,” says Roberto Brenes, executive vice president and general manager of Panama’s Stock Exchange. All in all, the current debt situation shouldn’t be a burden in the immediate future, provided the country maintains its outstanding economic performance. After all, FDI levels remain the highest per capita in Latin America, and authorities expect them to approach the $3-billion mark for the second consecutive year in 2012.

“It isn’t a threat as of now, and if the economy continues growing above our potential— above 6 percent— it won’t become a burden. We have the capacity to face it,” says Felipe Chapman, managing partner at Indesa, one of Panama’s top financial services firms. Barletta agrees, but issues a warning. “We have to be careful. Right now it’s fine, but what happens if we stop growing? It could become a problem, so it’s better to be a bit more careful and not push the limits.”

In line with Barletta’s arguments, the Panamanian government passed a law last September creating the Panama Savings Fund, known by the Spanish acronym FAP. The FAP is expected to serve as an economic stabilization fund during periods of economic recession or natural disasters. It will be kickstarted with $1.3 billion in seed money from a pre-existing fund, and will receive any payments the Canal authorities make to the government in excess of 3.5 percent of annual GDP, starting in 2015. By 2026, it could amass some $6 billion.

The question before Panama is how to keep the economy growing once the current megaprojects come online. For Eclac’s Rodolfo Minzer, the answer is simple: Panama should continue to work under the same formula. “If the secret is that public investment drives private investment, it is only logical to continue with those dynamics, so they should find new public projects. It will be complicated, but there are some things that can still be done.”

Panama City. Photo: ©cecifoto.com

So far, the subway’s second line could fill the gap. It is even rumored that the current government might allocate the project before leaving office. On the private side, the construction of a new $6-billion copper mine is expected to have a major impact. Work on the project will begin this year, and its peak employment demand is expected to take place around the time the expansion of the Canal is completed. It should become operational in 2016.

Even with renewed investment drive, Panama is facing a major obstacle in the form of education and professional training. A recent World Bank study shows that while Panamanians spend the same amount of time in school as students from the Oecd countries (11 years), their scores reflect the fact that the quality of their education amounts to only eight years. Furthermore, only 30 percent of those who finish secondary school attend universities, and only half of these actually complete their degrees. In addition, the universities’ output is not in sync with the needs of the market, with social sciences, administration and law proving the predominant choices for Panamanian freshmen.

“It is already a problem and it will become more acute in the future. In Panama, there already is a lack of human resources. That will be the biggest hurdle for the economy’s future,” says Eclac’s Minzer.

“The current training of our people is gravely poor, especially when you look at the results we get in areas like math, science, comprehensive reading or even English in international tests. We need a radical transformation of our educational system if we are to take advantage of our economy’s growth opportunities,” adds Indesa’s Felipe Chapman. In 2011, the English-teaching company Education First published a study in which Panama ranked 40th out of 44 countries in terms of English proficiency.

According to economists, the road ahead shouldn’t be so bumpy. “The transition will be pretty natural, because as investment dwindles, consumption will gradually replace it within the joint demand. If consumption, both internal and external, fails to replace the impulse given by public investment, growth rates will decelerate a little, but always as part of high or very high growth levels in comparison with the rest of Latin America and the world,” says the World Bank’s Óscar Calvo-González.

A key aspect of this will be the sharp increase in revenue from the expanded Canal. Between 2015 and 2025, the canal authority expects to contribute in excess of $30 billion to the government, $8.5 billion more than if the expansion had not taken place. “The expanded Canal will have a short-term impact: first, more revenue will be generated, part of which will be spent on new public projects. Second, and more importantly, as the Canal’s capacity grows, so does activity in the ports, in the CFZ, and in logistics centers like Panamá-Pacífico, making the conglomerate grow. Some people are wrong to think that once investments are off, the economy will shut down,” explains former President Barletta.

The enhancement of Panama as a world-class logistics hub seems to be the key to Panama’s economic future. “On top of the Canal’s business, we have built an operational port base. So the idea is not only to have the vessels cross the Canal, but also have them stop in the ports and perform cargo operations for Latin American distribution,” says Juan Carlos Croston, marketing director at Manzanillo International Terminal. “The next step,” he adds, “was to tell multinational companies to come. For them, Central America and the Caribbean is a complicated market. We’re telling them that our logistics operators understand those markets, so they can set up storage and added-value centers.”

So far, more than 100 foreign companies, including Adidas, Hewlett-Packard, Caterpillar, Procter & Gamble and L’Oreal, have switched their regional operations centers to Panama. “These companies add value to the port’s transshipment operations and, by extension, to Panama’s commercial route. It is important to understand the symbiosis between the Canal, the ports, and Panama as a logistics hub, because as one of us gets stronger, so do the rest,” says Croston.

Panama: The Challenges Ahead

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