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Panama's economy grew more than 8.5 percent on average in the past 5 years but may dip to 6 percent in the next 3 years. (Photo: Mario Roberto Duran Ortiz)
Wednesday, July 9, 2014
Perspectives

Slow Growth Challenges Panama

Panama’s new president Juan Carlos Varela’s key challenges include dealing with slower economic growth, rising inflation and the goal of reducing poverty.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

What are the major economic challenges confronting Panama's new president Juan Carlos Varela? What do his cabinet choices so far say about his plans? Will he be able to fulfill his campaign promises to maintain public investment, tackle rising food prices and clean up corruption in public works contracts? 

Juan Sosa, president of the U.S.-Panama Business Council and former Panamanian ambassador to the United States: Some of the challenges that President Varela will confront include maintaining economic growth, dealing with increased public debt, updating an education system to not only continue generating jobs but well-paying jobs, reinvigorating and making the agricultural sector more competitive, controlling the rising cost of living and closing the gap between the rich and poor, among others. One of the most difficult challenges will be changing the way of doing politics with more dialogue with civil society and insuring governability despite being the third party in Congress. The presidential transition is only eight weeks long. The [president] has devoted this time to carefully choosing his cabinet, made up of professionals with experience and knowledge. Members of his cabinet seem fully supportive of the government program he proposed during the election, which gives priority to social, environment and personal economic issues. Varela's style suggests that he will provide the direction he wants his government to go but will seek consensus with his cabinet and not behave in an autocratic manner. Varela ran a very disciplined and consistent campaign. This suggests that he will pay attention to his campaign promises. In the period of transition he has given indications that he will channel energies to controlling the cost of living and having a more transparent government. This is a refreshing style that bodes well for the future.

Joydeep Mukherji, senior director of Latin American sovereign ratings at Standard & Poor's in New York: Varela has to manage a decelerating economy, new social pressures and the need to strengthen the rule of law. His party has only 12 seats in the 71-seat Congress. Hence, much depends on his ability to negotiate with other parties to get legislation through Congress. Panama's economy grew more than 8.5 percent on average in the past 5 years but may grow 7 percent in 2014 and dip to 6 percent in the next 3 years. Rapid growth, along with near full employment, has contributed to inflation. Slower economic growth in the future, along with a recent cut of $2.6 billion (over 2015-18) in the government's revenue estimate from the Panama Canal, could pose fiscal challenges. Lower revenues could undermine the effectiveness of Panama's sovereign wealth fund (FAP), designed to insulate the economy against shocks. Based on new projections, the fund is not likely to receive any money from the Canal without changes in fiscal policies and the FAP law. Varela will have to balance the need to maintain investment and growth while meeting demands from a more affluent population increasingly concerned about issues such as income inequality, public services, corruption and the environment. Many people perceive that the quality of life has not risen in line with GDP in recent years. Poverty has declined impressively but inequality remains high (the Gini coefficient is above 0.5). Panamanian students score worse than their counterparts in Mexico, Brazil and Colombia in international test scores, reflecting a weak public school system. Some Panamanians feel that public institutions, especially the judiciary, were weakened in recent years.

Jaime Figueroa Navarro, secretary of internal affairs and a member of the board of directors of the Panama Business Executives Association: Key economic challenges for Panama during the period 2014-2019 include preserving the vigorous growth that has placed Panama atop the region during the last decade and aiming at further private sector investments through the implementation of new legislation to attract key ventures in the pleasure and leisure sector in order to reinforce bleak hotel occupancy rates, especially in Panama City. An important domestic economic challenge will be to harness inflation, particularly in the food and energy sectors, a most difficult task in a sizzling economy. Fortunately for Panama, given that the U.S. dollar is the local currency, low interest rates still prevail making this chore more palatable. Another important challenge is to maintain full employment levels at the historical highs recently achieved. The labor force requires a bold transformation in both quality and accomplishments. In order to become a world-class international service and logistics center, much emphasis should be place on education, languages and quality. The cabinet members' selection has not been on par with Varela's promise to 'govern with the best,' maintaining Panama's reputation of a medley of supporters, cronies and campaign funders holding key posts at home and abroad. In the future, Panama needs to be more selective in order to reach the next tier. Varela holds a mandate to return to separation of powers, institutionalism and control rampant corruption in order to strengthen Panama's democracy. A watchful eye will be maintained by constituents during the honeymoon phase of the new administration to see if in fact independent audits are conducted in all government entities and convincing actions taken against fraudulent activities. A failure in this respect will be seen as more of the same déjà vu typical of Panama's politics.

Orlando J. Pérez, associate dean of the School of Humanities & Social Sciences at Millersville University: Panama's economy is projected to show economic growth of over 5 percent in 2014. While still robust, this rate represents a decline from the average growth rate of 9 percent experienced since 2010. The slowing of economic growth represents a challenge for the new administration, which must find a way of maintaining the levels of investment and spending in order to fulfill its campaign promises. Mr. Varela campaigned on continuing many of the social spending and infrastructure projects initiated by the Martinelli administration. Additionally, President Varela will have to find a way of implementing price controls, a major campaign promise, without negatively affecting already low domestic production and generating shortages of basic goods. Successful completion of the expansion of the Panama Canal without significant additional costs will be another important challenge. President Varela's cabinet represents a preference for low-profile technocrats from within his own Panameñista Party. At the foreign ministry, Varela continues the tradition of naming the vice-president, Mrs. Isabel Saint Malo de Alvarado, as minister. Mrs. Saint Malo has worked for the UNDP Panama office and at Panama's mission to the United Nations, so she is familiar with some international issues. In a sign that he values continuity regarding Panama Canal issues, President Varela chose to keep Martinelli's minister of canal affairs, Roberto Roy. The only prominent non-member of Varela's party to be named to the cabinet is Milton Henríquez, as minister of government (interior), who heads the Partido Popular, an ally in the winning electoral coalition. Yet to be resolved as Mr. Varela takes office is a legislative coalition that would help to push the president's agenda through the National Assembly. With only a dozen or so deputies out of 71, Mr. Varela will be forced to seek alliances with opposition parties. 

Alvaro Almengor, attorney at Mossack Fonseca Group in Panama: Panama has had constant growth in the last ten years, which at times has reached up to 10 percent. Despite the international financial crisis of 2008 and 2009, our country has managed to maintain a moderate growth rate. Of the factors fueling the Panamanian economy, the main one has been our solid democracy, which guarantees the rotation of power every five years. Another factor has been the more prosperous sectors of our country, such as building construction, the Panama Canal services, expansion of the Canal, investment in Special Economic Zones, public investment in infrastructure, port services, shipping services and bank services. We should stress that our country did not suffer from the bank crisis because bank services in Panama are regulated by strict standards in respect of due diligence and the granting of credit. This means there is no speculation in the granting of loans. Finding ourselves in the midst of such a scenario, we know that economic growth in our country will remain steady, as investors can rely on our democratic institutions and respect of their investments. The main challenges the [president] will face are reducing poverty, increasing security, containing public spending and maintaining investment in infrastructure. Owing to our solid democracy and policy of investor respect, Panama has become one of the best economies in the region, and we firmly believe that we will remain at the forefront during these five years and throughout the coming decades.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor 

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