Panama: Out of the shadows

There is no lack of ambition in Panama. With soaring skyscrapers and dozens of new projects on the drawing boards, the Panama that existed only half a dozen years ago is a distant memory.

And, the country will be totally unrecognisable by the end of the decade. Gone are the gaudy school buses that served as the main form of transportation and the fleet of gypsy cabs that used to work the streets.

They were replaced with modern buses and scores of brand new yellow taxis. Soon a subway line will become the main form of urban transportation, whisking commuters throughout the city and connecting the growing suburbs with the urban centre.

After pouring endless capital into creating a sleek skyline, Panama is now pouring billions of dollars into modernising its infrastructure.

New roads and bridges will bring the country closer. Expanded waterworks, sewage facilities and electricity generating plants will provide the basic services needed to sustain the growing metropolis.

All of this activity will ensure that the Panamanian economy will continue its impressive growth rate for the rest of decade.

In 2012, the Panamanian economy grew 10.7 per cent y/y, and it is on track to grow more than 8.5 per cent y/y in 2013.

In less than 15 years, the Panamanian economy tripled in size - exceeding an annual output rate of US$35 billion. Fortunately, the capital keeps on pouring in.

There are dozens of new projects in the works to build malls, resorts and exclusive gated communities. While major hotel chains are a rare commodity in megacities like Rio de Janeiro and Bogota, they are not in short supply in Panama.

Yet, the investment that is pouring in is not relegated to services. Panama is starting to tap the rich mineral resources that lurk right below the surface.

Several years ago, Canadian firms began mining gold in northern Panama. This led to further exploration and the discovery of a major copper deposit 120 kilometres west of Panama City. Today, Inmet, a Canadian mining company, is channelling more than US$6 billion into the construction of one of the largest open-pit copper mines in the world. Not only will this diversify Panama's exports, but it will create thousands of new jobs.

The construction of the new set of locks and the opening of the new mining facilities will be necessary to stabilise the country's balance of payments. Panama's current account deficit is running at 10 per cent of GDP, and some local economists believe that it could crest over 13 per cent of GDP during the next three years.

Huge capital

A great deal of the capital inflows is in the form of foreign direct investment (FDI). Last year, FDI into Panama topped US$5 billion, and it is expected to be higher in 2013 and 2014.

In addition, the political and social problems in Venezuela are convincing hundreds of households to flee for Panama. Most of these Venezuelans are well off, thus bringing much-needed capital and talent to the country.

However, a lot of the capital flows are also in the form of debt instruments. The problem is that much of the new debt obligations are off balance sheet. Many of these obligations are being contracted at the state-owned companies, such as the Panama Canal Authority.

Although the rating agencies and the market continue to have a positive regard for the country's sovereign credit, the government needs to consolidate these obligations. They need to come clean with the off-balance sheet debt before it becomes nightmare.

This is already creating some havoc for the government's finances. Last year, the fiscal deficit was 2.1 per cent of GDP. Most of it was easily financed in the local market.

However, the government is considering tapping into the international capital markets in order to obtain larger amounts of longer-dated financing.

In the meantime, the country continues to surf the wave of growing prosperity. Even though the presidential elections are little more than a year away, few people are taking notice.

President Ricardo Martinelli has not been the most honest of chief executives nor the most inclusive, but the country enjoyed an unprecedented period of economic growth during his mandate.

There are a few names that are making the rounds. Juan Carlos Navarro recently swept the PRD primaries, winning 95 per cent of the vote. But, regardless of who wins next year's presidential elections, no one believes that there will be any meaningful changes to Panama's economic model.

Therefore, the two stars of the Panamanian flag can expect to continue burning brightly in the constellation of the fastest-growing economies of Latin America.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. wmolano@bcpsecurities.com.

MCT