Mon | May 29, 2017

Commentary: Panama: Into the light

Published:Thursday | April 2, 2015 | 4:00 AM
In this Wednesday, April 2, 2014 photo, government employees and their guests ride on a subway while participating in an invitation to test the wagons of the new Panama Metro in Panama City.

Panama is one of the most impressive economies of Latin America.

It's not just the shiny buildings that grace the skyline or the new set of locks that will be inaugurated soon; it is the fact that the country is becoming a major trans-shipment hub.

Less than 10 years ago, the port of Panama did not rank among the top 50. Two years ago, it was ranked 42nd, and next year, it should break into the top 25.

To put the situation in a comparative light, Hong Kong handled 22.3 million TEUs in 2013; Dubai moved 13.6 million TEUs, and Long Beach 6.7 million.

Next year, Panama is poised to handle more than six million TEUs. The private sector's massive investment in ports and handling has turbocharged the shipping industry and the Panamanian economy. While most of the region's economies are suffering from the collapse of commodity prices, the level of economic activity is set to expand more than six per cent y/y in 2015.

Government officials may be patting themselves on the back for the success of the logistics sector, but they had little to do with it. Indeed, they were more focused on the large-ticket items, such as the expansion of the canal, rather than the minutiae of logistical services.

The logistical advances occurred as private-sector firms looked for ways to skirt the constant increase in canal tolls, while taking advantage of pre-existing infrastructure. The old railway, which was mainly used as a tourist attraction, was converted into a freight line. Double-decker trains rumbled between the ports of ColÛn and Panama, moving containers between the Atlantic and the Pacific. This was supplemented by the newly-built ColÛn Corridor, a four-lane highway that connected the major ports with the ColÛn Free Zone.

high value-added sector

No longer just an express lane across the continental divide, Panama has created a high value-added sector that promises to expand the middle class and place the country on a more sustainable path of development. The proof is evident in the supermarkets and malls, with hundreds of European, North American and Asian expats stocking up on the goods and vitals of everyday life.

Despite the building boom, residential space remains in high demand. The same cannot be said for commercial space. There seems to be more supply than demand, but the slack will be taken out as more firms relocate to Panama.

The rapid transformation of the country has not been free. Many of the construction projects, such as the highways, airport and metro system, were kept off-balance sheet. However, as many of the turnkey projects are delivered, the government is dragging these liabilities into the light of day. Panama's debt-to-GDP ratio is about 40 per cent of GDP, but recognising the off-balance sheet liabilities could boost the debt load north of 70 per cent of GDP. This would surely imperil the country's investment-grade rating.

The government is already struggling with a fiscal deficit, which is above four per cent of GDP, and a current account shortfall of 11.4 per cent of GDP. The high pace of economic activity and relatively high inflation rate is forcing the country to lose competitiveness. This could become a serious problem for a country that has been dollarised for over a century and cannot devalue.

In the meantime, Panama has become a frequent visitor to the international capital markets. Earlier, this month, the country issued US$1.25 billion in debt. Six months earlier, it did a similar deal. In a way, Panama is using these debt issues as a means to shift some of these liabilities out of the shadows.

Off-balance sheet liabilities are not the only things that came into the daylight; so did the high level of corruption.

under the microscope

Former President Ricardo Martinelli and members of his cabinet are under the microscope. Although he was extremely wealthy before taking office, it now looks like members of his administration took extensive kickbacks for the approval of government construction programmes and projects.

Already, Supreme Court Chief Justice Alejandro Moncada Luna was convicted and sentenced to five years in jail.

The former president recently took up residence in Florida, but the investigation is moving closer. Earlier this month, the congress removed his immunity.

Martinelli claims that the investigation is a witch-hunt by incoming President Juan Carlos Varela. However, Varela served as Martinelli's vice-president and he could also be implicated. Therefore, it seems illogical that he would lead the legal crusade.

One prominent construction company, indicted in other corruption cases, was said to have paid eight per cent of each contract in bribes.

Perhaps this is the form of legal catharsis Panama needs, as it transitions from a developing country into a much more mature society.

n Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com