TAILORED SOLUTIONS

Panama 2014 | ECONOMY | REVIEW: ECONOMY

Panama's economy is on the crest of a wave that started building in 2007, when work began on a transformative expansion of the Canal's capacity.

Latin America's fastest growing economy has much to offer potential investors, as incumbent President Varela and his administration are keenly aware. Using the US dollar and a domestic variation, the Balboa, combined with a robust services sector focused largely around the unrivaled logistics capacity of the Panama Canal and the multi-purpose port facilities that serve it, Panama's economy is showing promising growth potential for the coming years. Economic growth for the past five years has been strong, with the country capitalizing on the canal expansion mega-project, an endeavor that has inspired confidence in the market, despite some recent minor setbacks in the implementation phase. A range of other major projects was started under Former President Martinelli's regime, within the rubric of the government's Strategic Plan for 2010-2014.

UNDER DEVELOPMENT

This document clearly outlined a policy that has been followed over the period in question, and which prioritized the promotion of opportunities for the fragments of society and parts of the country, which have been marginalized historically. In the six years leading up to 2012, poverty in Panama declined by 10 percentage points. In parallel, unemployment in 2006 stood at over 10%, and had dropped to approximately 4.3% of the labor force by March 2014.

In addition, a determined drive to reinforce government institutions and reduce corruption, while developing stronger, more transparent links with the private sector has been pursued enthusiastically. The challenges inherent in striving for a more equitable distribution of national fortunes, while maintaining competitiveness, have been deftly managed by the incumbent and previous governments, a fact borne out by international assessments of the economy. A Moody's Baa2 rating with a stable outlook, received in December 2013, indicated the consistently business-friendly policies that have been guaranteed by the authorities. The country's economic strength was rated as high, as was its fiscal strength, while institutional strength and susceptibility to events were measured as moderate. Similarly, Fitch and Standard & Poor's evaluations offered positive results, with Panama attaining BBB ratings from both.

COMMERCIAL CHALLENGES

The confidence being displayed by international investors and analysts is reflected in high levels of growth in FDI, and demonstrates just how well policymakers overcame a potentially alarming appraisal by the Organization for Economic Development (OECD) in 2009. In that year, the OECD briefly included Panama on its gray-list of tax havens, more precisely of countries which had not signed 'tax information exchange agreements" with other nations. These agreements are a stipulation of the OECD's Article 26, which calls on nations to disregard domestic banking secrecy laws to share tax information. Panama complied, and was promptly removed from the list, bringing it into line with international standards and guaranteeing a positive reputation.

Commercial ties with the hemisphere's principal economy have been bolstered by the signing of the US-Panama Trade Promotion Agreement, which was promulgated in 2011 and implemented in October 2012. This arrangement eliminated taxes for almost 90% of goods exported to Panama from the US, and facilitated the process of doing business with the Panamanian government. This has further opened up an already free economy, and improved macroeconomic prospects for the Central American nation.

MACRO CONSIDERATIONS

Upbeat predictions for Panama's growing economy are based on its solid macro-economic indicators. The country ended 2013 with a GDP of $42.648 billion, showing growth of 8.4% over the year, according to government sources. Inflation dropped to 4% from 5.7% in 2012, considerably lower than the 8.8% high of 2008. Approximately 78% of GDP is represented by the services sector, which encompasses the Canal, the considerable maritime base of the ports of Balboa, Cristóbal, Manzanillo, and Colón, among others, and the Colón Free Zone, as well as extensive logistics infrastructure. In addition to these primary contributors, the financial and insurance sectors, along with tourism, play a significant role in the economy. Industry accounts for around 17.9%, while agriculture rounds out the figures with 3.7% of the total.

FDI, as noted, continues to increase, having risen by 21% in 1H2014, compared with the same period in 2013. Specific sectors to have received substantial investment included $175 million in banks, $187 million in the banking license sector, and $158 million in free zone enterprises; figures that bode well for the rest of the year. However, the current account deficit (CAD), while acknowledged to be within reasonable limits by observers such as Moody's, is widening, reaching $4.66 billion for 2013. In the first half of 2014, this grew to 3.2% of GDP.

In an effort to curb this fiscal slip, President Varela announced the sale of $1.25 billion in ten-year bonds in the summer of 2014, following his accession. It is hoped that this move, in combination with the halting of over $600 million in infrastructure projects that had been taken on by the preceding government, will go some way to reaching a healthier financial state.

EL PRESUPUESTO

The budget for 2015 anticipates spending of over $4 billion on public social projects, out of a total of $19.5 billion, 7% more than the amount designated for 2014. Around $10 billion is intended for spending on public debt, with overall calculations based on predictions of economic growth of around 6.5% with an inflation rate of 4.3%. Costs left over from the previous administration include up to $2.7 billion for line one of the Panama City Metro, a key urban infrastructure improvement unveiled in April 2014. Of this outstanding debt, $250 million will be covered in 2015.

In spite of these involuntary responsibilities, the status of infrastructural development in the country is favorable, with the obvious example of the Panama Canal expansion project on course for completion in 4Q2015. Since being handed over to Panamanian sovereignty at the end of 1999, the waterway has seen a steady stream of traffic pass through its famous locks. This volume of cargo has precipitated high levels of investment in the maritime sector, at over $1 billion in value, prompting the 2006 referendum on expanding the canal to accommodate larger ships in higher quantities. Progress on this project has been consistent, and in spite of slight interruptions resulting from labor activism and issues related to construction materials, hopes are high for the renowned trade route.

HOW IT'S DONE

Though manufacturing represents a minor share of Panama's economy, other opportunities exist in sectors such as IT. However, human resources challenges are notable. Efforts to improve education and skills among citizens in the labor pool are ongoing, as the relatively small population of the country struggles to keep up with the uninterrupted growth of the economy. Attracting skilled foreign labor will remain a key concern of the government moving into 2015, as will the quelling of dissent from Panamanians who feel that immigrant employees from Colombia, Costa Rica, and other nearby countries are monopolizing the job market. Companies are continuing to invest in the sector, however, with major global corporations such as Dell, AT&T, Sprint, and LG each running subsidiaries on the ground. The country's sizable outsourcing segment also provides a certain impetus to the sector.

Panama, now well into its second century as a nation, and having just celebrated its canal's centenary, is in an enviable position. With canny guidance from the newly-elected Varela and a continuation of liberal economic policies, the sky is the limit for what can be achieved. Once the deficit is kept in check, and provided foreign firms remain confident in the advantageous financial and legal system, the cargo should keep rolling through, funding Panamanian dreams of regional economic preeminence.