A MAN, A PLAN, A CANAL

Panama 2014 | DIPLOMACY | YEAR IN REVIEW

While the widening of the Panama Canal, set for completion in 2015, will be a significant boon for the country, Panama is far from a one-trick pony.

Panama has long relied on the Canal that runs through its interior, connecting the Pacific and Atlantic oceans, as its economic lifeblood. But a significant financial services sector also drives growth, while the tourism sector has upped its game in recent years as an investment destination. That said, the impact of the Canal is unmissable and an ambitious project to widen the waterway is currently underway at a price tag of $5.2 billion. When finished, the enlarged Canal will be able to accept New Panamax ships, effectively doubling its capacity. The overall services sector, including the operation of the Canal, other transport and logistics, banking and insurance services, the Colón Free Zone, and tourism represent over three-quarters of GDP and 60% of employment. Industry represents just under 18% of GDP, while agriculture represents under 4%. Overall GDP grew by 8.4% in 2013, with the country posting a current account deficit (CAD) of $4.66 billion for the year, a legacy of the Martinelli administration, which initiated a number of megaprojects across the country. Juan Carlos Varela succeeded Former President Ricardo Martinelli, ineligible to run in the 2014 presidential elections due to a term limit, in July. A number of significant achievements have been made in recent years, such as a 10 percentage point drop in poverty between 2006 and 2012, while unemployment fell from over 10% in 2006 to 4.3% at end-1Q2014, helped along by the 30,000 jobs created by the Canal expansion project. Elsewhere, the US-Panama Trade Promotion Agreement has been in force since late 2012, while the country was also removed from the OECD's gray list of tax havens after it pushed through a number of double taxation treaties with various countries.

There are downsides, however, to straddling such a significant waterway. Panama has a relatively insignificant manufacturing industry, a result of having such easy access to international markets for imports—another reason for the high CAD. And while efforts to add value to exports have yielded some results, manufacturing still represents just 5% of the country's total gross added value (GAV), compared to the service sector's 80%. A variety of goods are produced in Panama, including clothing, shoes, leather goods, alcoholic beverages, papers, chemicals, cement, and tobacco products. Industry is focused around the capital, Panama City, and generates 20% of employment when bundled together with mining and quarrying, electricity and water, and construction. The latter is a sector that has had it all in recent years under the Martinelli administration, which invested significantly in new roads, hospitals, and dredging the Panama Bay, helping to boost the construction industry's growth by 30% in 2013. With all eyes now on President Varela, it seems he is determined to keep the ball rolling, committing himself to significant investment in public transport, of which the $1.8 billion Panama City subway system extension is a key part.

Given Panama's exotic location, tourism is naturally a big earner, with the government keen to solidify the country's position on the travel map. A further extension of Tocumen International Airport, the primary gateway to the country, in the form of a new terminal, will double capacity to 18 million passengers per year and greatly increase the prospects of Copa Airlines, the country's flag carrier, which is also set to have grown its fleet by 10% come end-2014. In terms of incoming guests, 2.2 million were registered in 2013, up from just 1 million in 2004 and a 5.6% rise on 2012. Of that 2.2 million, 1.53 million entered the country through Tocumen International Airport.

To deal with the increased interest, there has been a 74.16% increase in available rooms between 2010 and 2013. But foreigners don't always just come for a holiday, with an increasing number of retirees choosing to relocate to the country. In January 2014, International Living magazine ranked Panama number one as the retirement destination, the country edging out Costa Rica. And that has had a clear impact on the real estate sector, helping to push up property prices by 10% in 2013. Although, it is not just individuals interested in pitching up in Panama for good, with investors also becoming more acutely aware of the benefits. In 2013, FDI reached $4.65 billion, up 61% on the previous year. Increased interest from Colombian companies helped to boost the figure, joining the usual suspects of the US, Spain, and other European countries.

At a pivotal location in Central America, Panama's relative prosperity certainly seems fated. Not resting on its laurels, however, an expansion of the Canal is likely to cement its position as one of the world's most important trade hubs, despite talk in Nicaragua of building a competing canal. A new administration will also bring new prospects as work on the Canal draws to a close in 2015.