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Walter Molano | Panama: The good and the bad

Published:Friday | December 4, 2020 | 12:15 AM

Panama is the only Spanish speaking Central American country that was not part of the Viceroyalty of New Spain, which was headquartered in Mexico City.

In fact, Panama was part of the Viceroyalty of New Granada, which was headquartered in Bogota, Colombia.

This historical difference has left a lasting legacy that has helped differentiate Panama from its Central America peers, often for good – but sometimes for bad. The isthmus served as a transit route between the Pacific and the Atlantic. An estimated 60 per cent of the gold and silver that made its way to Spain crossed through Panama. It also served as an important trans-shipment hub under the colonial system.

Every year, convoys of Spanish vessels, loaded with European goods, would converge in Portobelo, a colonial fort on the Caribbean coast. These would be exchanged for local goods, such as silver, gold, cocoa and furs. The products would then be transported to the main colonial cities, such as Potosi, Lima, Bogota, Quito and Santiago.

Over the centuries, the commercial trading ebbed and flowed, eventually evolving into the Canal Free Zone after the end of World War II, and today serving as one of the most important multimodal trans-shipment hubs of the modern, globalised trade system.

The Panamanian economy has benefited enormously from globalisation. It has multiplied more than fivefold since China became a member of the World Trade Organization and globalisation entered into high gear. For the past five years, the economy has averaged a GDP growth rate of 4.6 per cent. Much of this was aided by the construction of new canal locks and the additional traffic that resulted.

However, the economy began to slow down prior to the onset of COVID-19. Trade wars between the United States and China, the slowdown of the US economy, the collapse of the Venezuelan economy, and the effect it had on the Canal Free Zone, as well as the new restrictions imposed by the US government on offshore tax havens in the aftermath of the publication of the so-called Panama Papers, all took their toll on the Panamanian economy.

This year, the International Monetary Fund expects the Panamanian economy to contract 9 per cent, with Moody’s expecting it to fall 10 per cent. Next year, the economy should bounce to about 4.5 per cent.

Nevertheless, Panama is the only investment-grade sovereign credit in Central America. It is rated Baa1/BBB+ and has been on an upward trend in rating actions, which is completely opposite to most of the other countries in the region. This allowed the government easy access to the international capital markets, recently placing a 10-year US$1.25-billion bond at a yield of 2.25 per cent.

Unfortunately, all three rating agencies placed it on negative outlook this year, mainly due to the problems associated with COVID-19. Even though the impact on the population has not been as great as in other countries, the lockdown has taken its toll on private consumption. Moreover, traditional services, such as tourism, have also taken a hit.

The good news is that the country’s relative debt levels are low. Panama’s gross debt to GDP is only41 per cent. Yet, it is important to note that the stock of debt has been growing at the same pace as the geometrical rise of the economy. With 17 bond issues totalling more than US$21 billion, and representing a third of all Central American debt, it is a sizeable number for a country with a population of only 4.2 million.

Low financing costs have also helped keep the fiscal deficit under control. The operational fiscal deficit is less than one per cent of GDP.

The toll revenues generated by the Panama Canal Authorities – the ACP – boost the fiscal accounts, and allow the country to spend more generously on basic services, such as education and health. Today, Panama has a literacy rate of 95 per cent and a life expectancy of 78 years. This rivals most developed countries.

While the economics of Panama have been representative of developed countries, the politics are more in line with the regional zip code. Former President Ricardo Martinelli used the country as his personal piggy bank, and his successor, Juan Carlos Varela, was implicated in the Odebrecht corruption scandal.

In July 2019, President Laurentino Cortizo of the PRD was sworn into office. A long-time political operative, he was the former head of the Legislative Assembly and he has brought many party loyalists with dubious backgrounds into the administration.

Unfortunately, this is business as usual in Panama, a country with strong economics and poor politics.

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

wmolano@bcpsecurities.com