Sun | Oct 22, 2017

Walter Molano | Panama after the papers

Published:Friday | September 30, 2016 | 12:00 AM
A formal ceremony welcomes the opening of the expanded Panama Canal on June 26, 2016.

The publication of the so-called Panama Papers deeply sullied the country's reputation.

Although many of the accounts were outdated and a significant amount of the offshore entities were legitimate, they cemented the perception that the country was a cesspool of money laundering and deceit.

Many small financial institutions saw their operations curtailed when their correspondent banks cut their lines.

To help counter the negative view, Panama's leaders, regulators and banks went out of their way to improve the transparency of the financial system. Property transactions that were normally settled in cash immediately came under greater scrutiny. Car purchases settled in cash also raised red flags.

Such cash transactions are commonplace across most of the developed and developing world, but now they require much more disclosure and justification in Panama. Of course, you cannot blame the government for going to such extremes. Panama is undergoing a vast transformation that is converting it into a global hub for a variety of advanced services.

A global hub

The inauguration of the canal locks, that were designed to carry the NeoPanamax or New Panamax ships, was heralded with great fanfare. The technological wonder became a source of national pride. However, traffic through the locks has not been as robust as the government agency expected.

At the time of the inauguration, in late June, the Panama Canal Authority announced that it had 140 reservations for the new locks through the end of the year. This was less than one transit per day, which is well below the intended daily capacity of eight to 10 vessels. The high tolls and low oil prices forced some ship operators to look for alternate routes.

The ship building boom of the past decade has left the sector burgeoning with excess supply. This has pushed freight rates lower and forced some companies out of business. The sudden collapse of Hanjin, the Korean shipping behemoth, is a case in point. This was the largest shipping bankruptcy, in terms of capacity, since 1968. Hanjin had more than 150 ships and it transported more than 100 million tons of cargo annually.

The shipping companies do not have the luxury to pay the high tolls levied by the new canal. One exception is the natural gas industry, which is using the expanded waterway as a conduit to ship LNG from the energy-laden Gulf of Mexico to the hungry markets scattered around the Pacific Basin.

An estimated 12 million metric tons of LNG is expected to transit the canal each year, with 550 vessels making the route. Furthermore, there are plans to convert Panama into a major natural gas distribution point. This will include building new processing facilities, power plants and pipelines.

AES is taking the lead, recently winning a competitive bid to build a 350-megawatt combined cycle plant. The company won a separate contest to build a major storage and regasification facility. The operation will include 170,000 square metric meters of bunkering capacity, which will allow Panama to become the principal distribution centre for natural gas in the Caribbean and Central America.

Other sectors are taking a closer look at the country, new office complexes and huge warehouses line the corridor from the airport to Panama City. Costa del Este has become a veritable oasis of multinational firms and banks. It is also a melting pot of nationalities, adding to the general sense of diversity.

A universe of fine restaurants has flowered throughout the city, as the best chefs and restaurateurs from crisis-ridden Caracas were forced to decamp for the abundance and prosperity of Panama.

The hubbub of activity has given the Panamanian economy a great deal of resilience, despite the end of the canal construction program. With an expansion rate of 5.8 per cent y/y in 2015, it was the fastest growing economy in Latin America. During the first quarter of this year, the economy grew 4.6 per cent y/y. It could end the year, closer to six per cent y/y.

Panama's GDP growth rate would be higher were it not for two important problems that still plague the economy. The first is inflation. After years of inflation rates that were significantly higher than the United States, Panama has become expensive. Prices for non-tradables are exorbitant. Even a hot dog at a stand in the airport costs US$6. The second problem is the large devaluation in neighbouring countries, particularly Colombia. The Panamanian economy has lost competitiveness, and its current account deficit is expected to be north of 6.5 per cent y/y of GDP.

A common thread in both these problems is Panama's dollarisation. The lack of having its own currency makes it difficult for the country to counter the competitive effects of high inflation and large devaluations in trading partners.

These are some of tribulations the country has to confront as it emerges from noise that was unleashed by the publication of the Panama Papers.

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

wmolano@bcpsecurities.com