WHAT A YEAR

Panama 2015 | DIPLOMACY | YEAR IN REVIEW

Impressive growth figures far ahead of the Latin American average are a testament to the government's business-friendly policies. The resolution of Canal expansion in 2015 should also provide a boost, with dollar appreciation the most dangerous shark in the water.

Having come to power in 2014, President Varela has consistently renewed his mandate through solid GDP growth figures, mainly driven by works to expand the country's lifeblood; the Panama Canal. The country's dollarized economy, however, is sensitive to external factors and appreciation of the currency could create obstacles.

The economy grew 6.4% in 2014, a country mile ahead of the Latin American average of 1.7%. Also giving Varela's supporters bragging rights is the successful realization of anti-corruption campaign promises, putting the administration on solid footing as the Canal expansion nears completion. The use of the dollar, as well as the promotion of business-friendly business practices, has seen Panama move away from manufacturing and agriculture and toward a services-based economy, centered on the transport and logistics benefits of having the only waterway to pass between the Atlantic and Pacific Oceans, as well as a sturdy financial sector and significant tourism draw. And Panama wears its merits on its sleeve; it boasts of more than 20 free trade agreements, FDI inflow worth approximately $2.8 billion, and an “Investment Grade” debt and sovereign debt rating of Baa2 with a positive outlook from Moody's. Some examples of what makes the country popular with foreign firms include no limits on foreign ownership of property, nor on mergers, acquisitions, or joint ventures, as well as handsome tax exemptions, including no income tax for creditors or banks. But the country certainly isn't resting on its laurels, and is looking to more strictly enforce its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) program, as noted by the Financial Action Task Force (FATF), in a bid to further boost transparency in the finance sector. Some standout figures from that finance sector include a net interest income figure in the banking sector of $196 billion for January–December 2014, up 8.5% YoY. Other income of $148 billion was up 1.3%. Operating income of $3.45 billion was up 5.3%, while liquid assets of $17.6 billion as of December 2014 were up 23.7% YoY. The loan portfolio of $55.5 billion was up 11.3%, while deposits of $67.1 billion had risen 12.7% YoY. The total assets of the banking sector as of December 2014 came in at $90.2 billion, a YoY increase of 12.5%.

It is worth noting that delays in the Panama Canal expansion in 2014 resulted in slightly slowed GDP growth in 2014, a detail offset by good news on other fronts; unemployment dropped to a touch over 4% in 2014, having stubbornly sat at around 10% until 2004. GDP per capita stands at $11,809, while inflation has also dropped from 4% in 2013 to 2.6% in 2014, the result of falling global oil prices. Moving forward, and while construction activity may slow as works on the Canal wrap up, the expanded capacity will afford growth in new areas, while the coming online of the much-anticipated Minera Panama copper mine will open up new revenue streams. The country's current account will also breath a sigh of relief as the related costs of importing materials and equipment for use on the Canal expansion cease to be a burden. Indeed, the CAD ran at 11.4% of GDP over 2014, and it may be 2016 until it settles into a new range. A quick look at the country's other accounts reveals a budget deficit of 4.1% of GDP over the year, with public debt standing at 40% of GDP. By 2019, free from the need to make large capital expenditures, the administration expects the budget deficit to fall to a mere 0.5% and public debt to drop to under 4%.

Elsewhere, a plan is underway to diversify Panama's energy generation matrix, which has historically relied too heavily on hydro sources, at 64%. Efforts in clean sources have been underway since 2006, with solar, wind, and thermal generation in the authorities' crosshairs. Adding to the challenge, however, is growing demand, which is set to average 8% annually over the next decade. While an estimated $3 billion in investment is required to cover this demand alone, Panama isn't going it alone; foreign investments are on the rise, especially in the renewables area, with the International Finance Corp. (IFC) pumping $300 million into a wind power project that is set to meet 5% of the country's overall demand.

No overview of Panama would be complete without a look at the country's significant tourism setup. The sector accounts for 7.7% of jobs in the country, and the Tourism Authority of Panama (ATP) presides over a $100 million kitty through to 2019 to boost visitor numbers. And while many of those filling seats on flights with Copa Airlines, the Panamanian flag carrier, are destined for white sands on Panama's many beaches, the country is also growing as a MICE destination. The country recently climbed to sixth place in the Ranking of the Americas by the International Congress and Convention Association. And elsewhere, infrastructure developments such as a comprehensive subway system, the Panama Metro, and the expanded Tocumen International Airport are making the country more accessible than ever.

All things considered, it has been a good year for President Varela. But while the general view is rosy, there is still plenty to do. Over 1 million Panamanians live below the poverty line, a result of uneven wealth distribution. Efforts to contain corruption will also need to be maintained, while leveraging expanded transport capacities will be key to ensuring long-term revenue streams.