Site icon Occasional Digest

Panama: The Promise Of Positivity

Occasional Digest - a story for you

As a new government takes office, optimism is growing that economic expansion will resume in Panama. But fiscal challenges, plus troubles in the mining sector, suggest caution.

Shortly after taking office on July 1, new President José Raúl Mulino confirmed one of his biggest campaign promises: the start of the 391-kilometer Panama-David rail project that will link the country’s disparate regions.

At an estimated cost of $5 billion, Mulino described the rail line as “the most important work of my government.” Construction is expected to take six years and generate 6,000 jobs.

An even pattern of development is much needed in the isthmian republic. Panama enjoyed double-digit growth from 2007-2011 from Canal expansion and other infrastructure projects. By 2013, GDP growth fell to 6.9%, once those projects ended. Corruption and governance failings were also a factor in this decline. Foreign direct investment (FDI) fell from $5.01 billion in 2017, to a nadir of $588.7 million in 2020, $3.7 billion less than 2019. This can be attributed mainly to the pandemic but poor governance played its part.

Vital Statistics
Location: Central America
Neighbors: Colombia, Costa Rica
Capital City: Panama City
Population: (2023): 4,468,087
Official language: Spanish
GDP per capita (2023): $18,662
GDP growth (2023): 7.3%
Inflation: (2023): 1.5% YoY
Unemployment rate (est.): 6.7%
Currency: Balboa (PAB) and USD
Investment promotion agency: ProPanama
Investment incentives: Special tax rates for hospitality/tourism businesses in areas outside of District of Panama; special tax rates for exporters and import of machinery; assistance with business accreditation, licensing and visas, especially for energy sector. Includes discounts and exemptions on income tax, entry fees, and distribution or transmission rights.
Corruption Perceptions Index (2023): 108 (out of 180 countries)
Political risk: New government must address pension and social security reforms, fallout from nationwide demonstrations in 2023 against Minera Panamá contract. New finance minister has warned of the need for austerity.
Security risk: Almost 200,000 migrants have crossed the Darién Gap so far in 2024, leading to an uptick in opportunistic crime, with narco and people trafficking an increasing risk due to presence of Colombian gangs. Petty crime remains an issue in large cities, mainly Panama City and Colon and especially pickpocketing and robbery.
Pros
Geographical position open to all international markets
Panama Canal provides foundation for logistics hub
Mature banking sector; robust regulation means default unlikely
Conditions for nearshoring and technological boom
Free trade zones
Actively looking for FDI opportunities
Optimism for new government
Significant FDI incentives across a range of sectors
Undersea cables ensures telecom connectivity
Cons
Public finances in the red; Finance Ministry has warned of austerity
Pension and social security require reform
Recent nationwide social unrest, mainly over Minera Panamá contract
Future of mining uncertain
Moody’s has downgraded Panama to below investment grade; other reports due in 2nd half 2024
Public perception of corruption a major election issue
Inconsistent application of existing laws and regulations
Highly restrictive labor code; foreign workers can constitute 10%-15% of workforce
Over 500,000 migrants crossed Darién Gap in 2023; Panama recently reached an agreement with the US to return “illegals” to home countries.
Sources: World Bank, IMF, Moody’s, Fitch, S&P, Commerce and Industry Ministry (Ministerio de Comercio e Industrias Panamá), IADB, IDB Invest, INEC Panamá (Instituto Nacional de Estadística y Censo de Panamá) OECD, Panama Canal Authority, Panama Superintendent of Banks (Superintendencia de Bancos de Panamá), ProPanama, US Department of State, Transparency International.

Following an especially difficult 2023, the landscape is starker.

A new concession granted to Minera Panamá, the country’s largest exporter, to operate one of the world’s largest copper mines, which is responsible for an estimated 5% of Panama’s GDP, was declared unconstitutional. Social conflict that erupted the previous year, mainly over the Minera Panamá contract, reignited and ended in nationwide protests, sector-wide strikes, and violence.

The scale of the task the new government faces was apparent after an Economics and Finance Ministry transition meeting on June 12. Speaking to reporters, Mulino said, “All the figures are in the red.”

Fitch downgraded Panama’s sovereign rating to BBB– with a negative outlook (below investment grade) in March; Assessments from Moody’s and Standard & Poor’s are expected in the second half of this year.

“The situation is complicated because we are not coming from a time of great growth,” says René Quevedo, a business integration expert and consultant. “We must show a good face to bad weather.” Attacking legal uncertainty, sluggish job creation, and teetering international confidence will be key, he argues.

Panama can still rely on the canal, a beneficial geographic position as a global trade nexus, decades of experience as a logistics hub, and a high-tech banking system. The Panama Canal Authority (ACP) expects to return to the previous norm of 38 ship passages a day by 2025, which was halved during the 2023 drought.

Sound Banking And A Plethora Of Projects

Panama’s banking system remains an attractive proposition for potential investors. The country maintains a dollarized economy, with the balboa tied to the dollar at a one-to-one ratio.

That does not mean there are no clouds overhead. In its June Article IV conclusion statement, the International Monetary Fund stated, “With no lender of last resort and deposit insurance, it is imperative that the banking system remains well-capitalized and liquid. The Panamanian banking system appears broadly resilient against severe downturn scenarios, but risks have increased amidst higher interest rates and a slowing economy.”

Currently, Panama is home to 55 banks: two state-owned, 40 domestic, 13 international, and 10 bank representational offices. The state-owned Banco Nacional de Panamá carries out some central bank roles as well as offering commercial services. Overall, they present a healthy picture.

“Panama has a capital adequacy ratio regulation of 8%; it is currently 15%,” notes Patricio Mosquera, head of the Financial Studies Department at the Superintendencia de Bancos de Panamá (SBP). “Settlement levels are well above what is required, too; 30% is the standard, but currently we are around 58% to 60%. This means that the banks are well-capitalized, well-regulated, and have sufficient liquidity both for operational issues and additionally for the issue of regulatory equations.”

Along with a solid banking sector, Panama is pinning its hopes on an array of development and industrial projects now either underway, or soon to be.

Many of these medium-term projects have an environmental, social, and governance element, given the impact of the drought on the canal and the effects of climate change. News of compliance with international backers on Panama’s ability to issue green bonds is expected in early July. Along with Bhutan and Suriname, Panama is one of three countries that describes its emissions as “carbon negative.” In April 2024, Panama issued their first blue bonds for $50 million backed by Ecuador’s Banco de Austro.

Latinex, the Panamanian stock market linked with El Salvador and Nicaragua, expects to issue the first joint Caribbean and Central American blue bond this year. Panama’s Ministry of Environment—MiAmbiente—is also working with Latinex on the nation’s Voluntary Carbon Market.

Funded by $11.5 million in government investments, the Panama Digital Gateway data center opened in June 2023; it is one of two free tech zones, Tech Valley Free Zone being the other, that the state is hoping will ultimately attract 620 companies that will add to the more than 2,000 businesses in the country’s more than 20 other free trade zones.

“The free zones are supervised as a non-financial sector,” Mosqueda notes. “They have had a very positive performance. The Colón free zone has had significant growth, exceeding 20% annually.”

Along with Costa Rica, the US selected Panama for a semiconductor partnership worth up to $500 million in July 2023, a product of the 2022 US CHIPS and Science Act, which aims to boost global manufacturing and research.

“There has not been a company that requested the subsidy from the American government to finance the establishment of semiconductor facilities and plants,” says Quevedo. “Perhaps that could be a first?”

In May, Ansberto Cedeño, associate professor of Computer Science at Florida State University’s Panama campus, estimated that semiconductors could add $7 billion to Panama’s economy by 2029.

Keeping Growth Going

All told, Panama is home to some 199 multinational companies as well as several multilateral institutions. Part of the attraction is the Sede de Empresa Multinacional (SEM), a 2007 initiative aimed at attracting administrative operations such as payroll and accounting. In August 2020, this was complemented by Empresas Multinacionales Para La Prestación De Servicios Relacionados Con La Manufactura (EMMA), which seeks to attract FDI in manufacturing, maintenance and repair. Companies that are licensed under SEM automatically qualify for EMMA.

CAF—the Development Bank of Latin America and the Caribbean—chose Panama for its regional headquarters in  2023; over the next five years, it plans to invest at least $2.5 billion in the country.

In May, Huawei selected Panama for its first Cybersecurity and Transparency Center. On the flip side, however, telecom operator Digicel announced in March that it was closing its Panama operations. The following month, Sinclair Oil closed its concession in Darién, which had been operating since 1923.

Given this mix of developments, voters are hoping that Mulino’s new administration will be a link to Panama’s recent “golden age” of economic growth, when FDI regularly reached $3.4 billion to $4.4 billion a year. In 2023, this had fallen to $2.2 billion and a KPMG report last year placed Panama as ninth most attractive for FDI in Latin America, below Argentina.

“We have to reverse that image that was damaged, but we will do it,” says Quevedo.

The post Panama: The Promise Of Positivity appeared first on Global Finance Magazine.

Source link

Exit mobile version