Panama: Political Economy

[killen39609]

The viability of Panama’s economy ought to be  a serious matter of concern for the property owner. This country’s fortunes have been  driven, for a century, by a notable work of infrastructure that is the foundation for the Colon – Panama City corridor; home to over half the population. This, and a well deserved reputation for political & legal stability has driven a long term boom in white collar businesses: ship registry, banking, legal services and property development. Natural beauty is driving a medium sized tourist industry, second home development, an air traffic hub, and there is some medical tourism, as well. But Panama has not been able to make the most of its outstanding location. The small work force is relatively high cost and has few skills, with the exception, granted, of high rise construction crews, which are outstanding.

For instance, the Colon Free Trade Zone, the world’s second largest, is surrounded by areas of high unemployment. However, it has not progressed beyond basic work: taking containers off one ship, stacking them and, later,  loading them aboard another. The job of breaking bulk and re-packing individual containers with small numbers of disparate products, suddenly needed at another port, is, as yet, a modest business. Virtually no light manufacturing and assembly operations have chosen to place themselves in this vital location, where time and shipping costs for components and finished goods could be minimized.

Costa Rica, with somewhat lower hourly wages, and possibly, better tariff protection for infant industries, sports an oil refinery and a vehicle tire manufacturing plant near the capital. I know of nothing similar in Panama, which ought to be a natural for an export refinery. Local boosters seem to think it is progress to have been selected for an oil storage and bunkering facility on the Pacific side. Why no large vessel shipyards and layup storage facilities on the rust-free, fresh waters of Gatun Lake ?

Not having any skin in the game, I am happy to contemplate cruising the unspoiled reaches of this world class nature reserve with some of my kayaks. However, this is an opportunity for blue collar Panamanians that the nation’s leaders have ignored. One subscribes to newsletters, like yours to obtain insights and answers to questions, like these.

The interior of Panama is a giant pasture. Some rice and cane sugar is produced, but these are minor activities. There must be some reason why corn cultivation is rather limited. Even this year, when the world price is high and fallow cultivating regions, everywhere, are being rushed into production.

I would imagine these broad topics are not directly pertinent to the thrust of inquiry for your specialized publication. However, it is wise to be informed about what is going on. And, More important; what is NOT going on and WHY. Any refernces to useful sources will be appreciated.

Sincerely,   Tim Killen    1 561 659 3742

 

 

 

[JESSICA RAMESCH]

Thanks for your comments, Tim.

Panama’s is a service economy. Here is a run-down:

Panama’s geographical location and famous canal are primary factors in the country’s strategic importance…in world trade, travel, banking, and more. In October 2006, the people of Panama voted to expand the canal in a nation-wide referendum. The immense undertaking is one of the biggest projects Panama has ever seen. The project itself is helping fuel Panama’s economy, providing hundreds of jobs and toll revenue. With massive “Panamax” size ships paying upwards of $200,000 for a single trip through the Canal, one can only imagine what the expansion—and each additional ship—will contribute to the nation’s economy.
 
 In preparation for the widened Canal, nearly $5 billion is being invested in port expansions countrywide. On Panama’s Atlantic side, Manzanillo International Terminal (MIT) has begun a new $250 million expansion phase to double its teu capacity and add new wharfage.
 
 Also on the Atlantic side, Evergreen’s Colon Container Terminal has begun its third expansion phase, while over $800 million has already been invested in the Pacific Port of Balboa expansion project.
 
 Panama’s Colon and Balboa ports were the region’s top two in terms of volume of cargo moved; that same year the ports grew at rates of 13.4% and 7.9%, respectively. Overall, Panama’s ports increased throughput by 5%. And the Panama Canal Authority has commissioned a $900,000 feasibility study and a concept design for a potential new terminal at the Pacific site of Corozal.
 
Panama’s growing cruise industry also brings in millions of dollars. In the January-April period of 2011, approximately 190,000 cruise passengers visited Panama, nearly 12,000 more than in the same period in 2010. In the 2011-2012 period, about 150 cruise ships docked in Panama, carrying a total of approximately 325,000 passengers.
 
The Panamanian maritime industry represents 20% of the Gross Domestic Product and is the fastest growing sector in the national economy. Since it became the world’s first open registry in 1993, Panama’s merchant marine has maintained its leadership by reg¬istering a fifth of the world’s fleet—more than 10,000 vessels, a large majority of them over 100 gross tons. Panama is the world’s largest registry by gross tonnage.
 
This has led many Panamanian lawyers to specialize, with great success, in maritime law and open international offices in Europe, Asia, and the U.S., where they are recognized as experts in the trade. According to the Panama Maritime Authority (AMP), the maritime register brings in around $70 million and an additional $200 million in services revenue to Panama.
 
Law guarantees equal rights for investors: On September 12, 2007 Panama’s Cabinet approved the Proposed General Statute of Ports, presented by the Panama Maritime Authority (AMP). The statute was proposed “with the purpose of guaranteeing the competence, and the rendering of equal conditions, to either current or future investors of the maritime sector willing to establish commercial relations.” The law promotes investment, economic growth, and helps generate jobs.
 
 But the canal and the ports are not the only things setting Panama and its economy apart from other prospective business destinations. For the greater part of its history, Panama has been a paragon of economic stability. Panama’s dollarized macro-economy boasts full financial integration and specialization in service exports. Panama owes this to the dozens of international banks operating here and acting as intermediaries with the international financial realm. The banking sector in Panama is highly competitive and helps equalize local interest rates with world rates.
 
With almost no government intervention (not even reserve requirements), the system allows for greater freedom for foreign investors, capital movements, and market-determined interest rates. Service exports, meanwhile, are consistent in prices and revenues, and diversified among activities, countries, and regions. This increases Panama’s stability factor and helps the export sector adjust well to shocks without disrupting domestic matters in areas such as employment.
 
According to the Washington, D.C. think tank Cato Organization: “The absence of a central bank ensures no monetary intervention, so Panama essentially has a private monetary system in which the stock of money is determined by the decisions of private agents and banks. The unified currency system eliminates foreign exchange risk, currency mismatches, and speculative attacks so common in other countries with central banks and “sovereign” money. The absence of “policy decisions” regarding monetary or exchange rate affairs reduces risk because less information is needed by outside investors.”
 
Furthermore, because Panama is not a large producer of goods, revaluations or devaluations of the dollar tend to shift demand between U.S. goods and Japanese goods. They don’t, however, tend to affect the Real Effective Exchange Rate (REER) or Panama’s dollarized economy…whereas other countries that aren’t able to say the same are often subject to significant terms of trade shocks.
 
An educated population: Panama boasts a large, educated, bilingual population. The literacy rate is high, with illiteracy down to under 6% in 2012. English language classes are compulsory in all K-12 schools (Panama’s schools tend to serve all ages from kindergarten to graduation around the age of 18). With new companies popping up daily, the demand for qualified employees is great. No other country in Central America could sustain such growth and do so well when it comes to providing the necessary labor (training programs sponsored by local institutions continue working at full tilt to try to meet this year’s high demand).

Unemployment in 2011 and 2012 hovered at about 4.5%, the lowest it’s been since 1966.
 
At about 10% of the workforce, unionism in Panama is not as prevalent as in North American and European countries and tends to be centered in the construction, government works and private manufacturing sectors. Though the Panamanian Labor Code is generally more protective of the worker than of the employer—in hiring and firing practices, for example—the many benefits of doing business here far outweigh the cons and continue to attract new business. These include low costs (minimum starting salary for shop and hotel employees is just under $500 a month, though low unemployment means many companies offer more to qualified employees). There are also tax, banking, import-export, and labor incentives.
 

 
The infrastructure features excellent roads, power and water service. Panama’s telecommunications are widely acknowledged to be the best in the entire region; five of the world’s major fiber optic cables intersect here and Panama offers high-speed Internet nearly everywhere you go.
 
In 2011, the Latin Business Chronicle announced that Panama had become the region’s “Technology King,” replacing Uruguay as overall technology leader. The index assessed technology levels in 19 Latin American countries, categorizing by Internet coverage rates, broadband availability, personal computers, wireless subscribers, and fixed telephony.
 
The National Authority for Government Innovation attributed the rise to government support for Internet access and success at luring new businesses. According to the LBC, more than 60 corporations, including tech giants like 3M, shifted regional headquarters to Panama in the 2007-2011 period. The 2012 Biz Fit Panama event explored Panama as an “Innovation Hub of the Americas,” with particular emphasis on the film industry, as new incentives are luring movie productions here. In December 2012, an event called Techno Show Panama became the nation’s first ever international technology fair, with more than 300 companies representing technology offerings in Panama and the region, and with visits from more than 25 international delegations.
 

 
Logistics is a big part of the reason Panama consistently ranks as one of the best places in Latin America to do business, according to the likes of the World Bank, the International Monetary Fund, and the Latin Business Chronicle. In the LBC’s 2012 Latin Entrepreneur Index, Panama again ranked second behind Chile.  According to the index, Panama offers the best access to loans and availability of venture capital in Latin America. The country also ranked high in time to start a business (eight days), number of procedures (six), and cost to start a business in per capita terms (9.9%).
 
 An economic prodigy
 
The young Republic of Panama is the confirmed wonder kid of Third-World Latin America. During the 2007-2008 period, Panama’s economy was hailed as the fastest-growing in the hemisphere, with unheard of growth of 9% to 11%. Due to the world financial crisis, Panama’s economy was expected to slow to between 2% and 3% in 2009, but it was still growing faster than nearly any country in the region. Panama was one of only five countries in the world that did not have a banking crisis, thanks to ultra-conservative laws that force the banks to limit lending and maintain liquidity. So, when capital flight became a problem in neighboring nations, Panama benefitted.
 
In the first quarter of 2010, it was already clear that Panama would close the year with a smashing comeback. Growth jumped from about 4% to 7.5% by the yearend.
 
It also helped that in 2010 Panama earned, for the first time ever, investment-grade credit ratings from the so-called “Big Three.” Fitch Ratings was the first, when it upgraded Panama’s long-term foreign currency and local currency Issuer Default Ratings (IDRs) to BBB- from -BB+. Fitch also raised Panama’s short-term foreign currency IDR from a B rating to F3 and the country ceiling from from BBB+ to A-.
 
The new ratings reflected fiscal discipline: a sustained improvement in public finances, low debt, and recent tax and fiscal reforms. Standard & Poors followed suit, upgrading Panama one notch to BBB- from BB+, and finally, mid-way through the year, Moody’s upgraded Panama’s sovereign ratings to an investment grade of BAA3 from BA1.
 
It’s no wonder that economists have predicted a rosy immediate future. The IMF and the LBC predict that Panama would grow more than any other country in Latin America over the 2011-2015 period. In June 2012, Bloomberg News reported that “Panama’s economy expanded 10.6% in the first quarter from a year earlier, fueled by government spending on infrastructure and expansion work on the Panama Canal.” The report added that government spending was up 41% over the same quarter a year ago, a pace that was “likely to continue and help drive 10% growth through the year,” according to Latin American strategist Boris Segura from Nomura Securities International.
 
In November 2012, an International Monetary Fund (IMF) mission reported: “Panama’s growth performance continues to exceed expectations, buoyed by the Panama Canal expansion and large public infrastructure projects. Annual real Gross Domestic Product (GDP) growth averaged about 9% over the past five years, the highest in Latin America. Panama’s financial sector is solid; banks remain well-capitalized, liquid and profitable.”
 

 
While global tourism has been hit by the international economic crisis, Panama has been largely spared. In the 2010 Latin Tourism Index, Panama remained in the top three, following Uruguay and the Dominican Republic, respectively. With 1.7 million visitors received in 2010, Panama took the number two spot for arrivals per capita and registered the third-highest rate of receipts per GDP.
 
In early 2012, local media was abuzz with the announcement that Panama had achieved a major goal: two million visitors in one year. The goal had been set for 2014, but was accomplished in 2011. Quite a feat for a country whose entire population totals just 3.5 million. The stat represented growth of approximately 18% over the previous year (double the amount of visitors in 2004, when Panama broke the million-visitor mark for the first time in the republic’s history).
 
In the World Economic Forum’s 2013 Travel & Tourism Competitiveness report, Panama ranked fourth highest in all the Americas, making it one of the most improved countries in the index, compared with 2012. “The country’s most important competitive advantage is its rich endowment of natural resources, with its diverse fauna, significant protected land areas, and a number of World Heritage sites,” said the report, tracing Panama’s improvement over 2012 to the country’s massive infrastructure investment. “Tourism infrastructure has been developed, most notably with more available hotel rooms,” says the report, adding that the quality of ground transport had improved “across almost all modes.” Other significant improvements included port infrastructure, railroads, air transport, stadium capacity, and creative industries exports.
 
Much of this success is thanks to Copa, the nation’s airline, which has done much to make Tocumen International the “Hub of the Americas,” Adding direct flights to Panama from Los Angeles, Las Vegas, Chicago, Newark, Miami, and more. Panama’s tourism authority has also been hard at work, lobbying airlines around the world to establish flights to Panama.
 
In 2010, Dutch Antilles Express (DAE) inaugurated twice-weekly direct flights from Curacao to Panama, Iberia started a direct flight from Madrid, and German airline Condor began a weekly flight between Frankfurt and Panama City. Ecuador’s Tame also began flying here three times a week from both Quito and Guayaquil.
 
Other airlines may soon follow suit. Australia’s Qantas, Emirates Airlines, flydubai, and Japan’s All Nippon are interested in establishing flights to Panama in the near future. With its international airport becoming a mega-hub, a growing roster of international conventions, and more hotel rooms in the pipeline than nearly any other country in the region, Panama is poised to profit from a steady increase in arrivals.
 
Panama’s hotel boom: Panama has recently seen an unprecedented boom in hotel construction. According to a 2011 report by market researcher STR Global, Panama’s capital beat out other key markets in the region to take the top spot, for the second year in a row, for most hotel rooms in the development pipeline that year: 7,593. Among the countries in the region, Panama also had the largest expected growth (64.4%). With the Trump Ocean Club and Hard Rock Hotel nearing completion (both are currently open for business), data indicated that in 2012 and 2013, Panama City would continue to grow its room supply by another 29.5% and 17.3%, respectively.
 
In July 2012, Panama reported 55.4% occupancy for year-to-date, an approximately 8% year-over-year decrease according to data from STR. But global brands and local developers were still keen, with 31 projects comprising 4,808 rooms in Panama’s pipeline.
 
Wyndham, which operates four hotels in Panama, announced it would continue to “prudently” build up the marketplace. The brand will open several more properties in Panama over the next couple years. In December 2012, a JW Marriott hotel opened in the beach and golf community of Buenaventura, about two hours west of Panama City. “Panama remains one of the most vibrant countries for new development in all of Latin America,” said Rob Steigerwald, chief operations officer for the Southern Americas at Marriott International. (Marriott’s other Panama properties include a 380-room Panama City Marriott, the 248-room Courtyard by Marriott Panama Real Hotel, the 120-room Courtyard Panama City MetroMall and the 126-unit Marriott Executive Apartments in Panama City.)
 
Hilton Worldwide’s first Latin American Waldorf Astoria hotel—the Waldorf Astoria Panama—will open this year. So will Grace Panama. With hotels in Greece and Beijing, Grace Hotels says this will be its first Central American property. Carlson Rezidor Hotel Group has five hotels in operation in Panama with a Park Inn by Radisson under construction. And the group still sees “big potential.” The group said recently it was in “advanced negotiations” to bring its Radisson Blu brand to the country. Panama announced in March 2013 that the 2010-2012 period has seen investments of over $1 billion in hospitality nationwide.
 
Trade shows bring in the dollars: According to APATEL, expos, and conventions such as annual trade show Expocomer are the tourism industry’s biggest moneymakers. Over 15,000 people visit Panama City’s Atlapa Convention Center every year for Expocomer, which generates over $120 million in revenue. In addition to the revenue from business transactions, the most recent event generated over $25 million in tourism sales. According to the Panama Convention Bureau, over 20 additional conventions result in another $25 million in revenue for Panama every year.
 

 
Panama has one of the region’s largest international banking districts with over 80 banks operating out of the tiny country. The Colon Free Zone is one of the world’s two largest free zones. Panama has its own stock exchange, a growing insurance industry, and Special Economic Areas like the City of Knowledge and the Panama Pacifico SEA, one of the region’s largest and most successful such projects. A few days ago, the Canal Authority announced that it was already studying several mega-projects (including port and bunkering projects) that will make use of unused land under its control, following the Canal expansion. All this will continue to fuel Panama’s economy into the next decade.
 

 

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