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Panama Canal: New Head Faces Challenges
The US-China trade war top challenge for key waterway.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
Ricaurte Vásquez Morales on Sept. 5 was sworn in as the new administrator of the Panama Canal, replacing Jorge Quijano, who was in the position for seven years. Vásquez said the canal faces different circumstances than it did nearly 20 years ago when it was transferred to Panamanian control and pledged to “redefine and readapt our business.” What are the most significant priorities facing Vásquez in administering the canal? What major investments is the waterway likely to need in the near future? To what extent is the Panama Canal expansion project, opened in 2016 after nearly a decade of work, paying off?
Joaquín Jácome Diez, senior partner at Jácome & Jácome in Panama City and former trade minister of Panama: Inaugurated in June 2016, the Panama Canal expansion has fulfilled national and international expectations. Since then, 6,500 neopanamax ships have transited the canal. More than 50 percent consist of container ships, 26 percent are LPG vessels and 11.3 percent are LNG vessels. The ideal number of neopanamax daily transits is 12, but the average so far is 7.5, and there have been some days with as many as 13 transits. Roughly 50 percent of the Panama Canal toll income is from neopanamax transits due to the expansion. In terms of contribution to the national treasury, 2017 and 2018 are record years with $1.6 billion and $1.7 billion respectively. Unfortunately, Panamanians so far don’t have the final cost of the expansion due to several international arbitrations cases, which could significantly alter the $5.2 billion originally estimated. Nearly 6 percent of world trade goes through the Panama Canal, and until now, the trade war between the United States and China has not negatively affected the waterway. However, this could change if the trade war continues to escalate. The United States is the premier user of the canal, and Japan recently replaced China as the second. The new Vásquez administration has several goals ahead. Among them is a priority to maintain the competitiveness of the Panama Canal route. Recently, after wide consultations with users, a new toll structure was approved and will take effect in 2020. Major investments are to develop complementary projects to the Panama Canal. These include multimodal ports, logistics parks and energy and tourism projects to enhance Panama’s potential as well as to create economic prosperity. A mostly domestic, but crucial challenge to the new Panama Canal administrator is strengthening labor relations with the more than 9,000 employees who maintain the canal’s stability.
Gláucia Calp, managing director and head of Latin American global infrastructure and project finance at Fitch Ratings: First, we do not expect that the change in administration will affect Fitch’s view on the Panama Canal Authority. We believe Vásquez, as its new administrator, will prioritize the canal’s ability to adapt to a changing commercial environment. The latter is derived from several factors that include trade tensions between the United States and China, which count for a significant portion of the container cargo going through the waterway. Additionally, it is likely that the canal will also face challenges related to the new marine sulfur regulations beginning in 2020, when a sulfur cap of 0.5 percent in fuel will take effect, potentially increasing fuel costs for shippers. Furthermore, it is important to keep an eye on operational efficiency and local factors such as hydrology levels, which could make the locks’ operations more challenging. Since the opening of the third set of locks in late 2016, the canal has been able to achieve records in tonnage, taking advantage of economies of scale and carrying more tonnage per trip. Because of this investment, the canal has more than adequate capacity to accommodate expected cargo levels in the medium term. As such, we do not see any major investments in the upcoming years; however, we do expect certain capital expenditures in connection to a new roll-on/roll-off terminal.
Rogelio Douglas, president of the Caribbean Sustainable Development Group in Limón, Costa Rica: Undoubtedly, the Panama Canal continues to be a major factor in Panama’s economy, contributing $1.7 billion to the country’s treasury in 2018, which complements the country’s growing logistics industry and an extensive financial sector. Collectively, the services sector represents a whopping 65.2 percent of the overall economy, dwarfing that of the industrial and agricultural sectors. Thus, a strength becomes a weakness. While very successful by most means, a continued reliance on the services industry is a huge risk. Exposure of the Panama Papers a few years ago was a warning and major blow to the financial sector, and the country is still recovering. As Panamanians were breathing a sigh of relief, the canal’s two largest customers started a tit-for-tat economic sandbox argument, which still shows no signs of resolution. Last year, 62.8 percent of the total cargo through the canal originated from or was destined for the United States. Any long-term negative effects from the trade war will directly affect Panama’s economy. It’s clear that the new government’s immediate challenges should include navigating the waters of the trade war. Just as important is prioritizing investments for economic diversification in building new industries with a goal of targeted population inclusion. In Panama, some 17 percent of the population lives below the poverty line, and, as in most other countries in the region, the next 20 percent to 30 percent is barely surviving below a living wage or in the off-the-books economy. As the OECD said, ‘Only by involving the entire population in economic progress’ can a country develop sustainably.
Robert McMillan, retired attorney and former chairman of the Panama Canal Commission: The new administrator will have his hands full amid the continuing trade talks between the United States and China. With the two countries being among the largest users of the Panama Canal, the outcome of the trade talks will have a real impact on the operation of the Panama Canal. Fortunately, the new administrator will probably not have to deal with a canal across Nicaragua, as it appears that project is not going forward. As for the operation of the Panama Canal since the expansion, the waterway has operated just as effectively for trade as under United States control before the transfer on Dec. 31, 1999. And the canal has just indicated changes in the price of tolls for shipments through it. Beyond the tolls, Panama has just instituted a program to help poor residents of Panama to live better lives. None of this would have been possible without the canal’s good management. I expect a well-run Panama Canal going forward.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
