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Panama's relative debt levels are low, with gross debt to GDP at 41 percent. Here capital Panama City. (Photo: Mario Roberto Duran Ortiz)
Wednesday, December 2, 2020
Perspectives

Panama: The Good and the Bad


COVID-19 hit consumer consumption and tourism.

BY WALTER T. MOLANO

Panama is the only Spanish speaking Central American country that was not part of the Viceroyalty of New Spain, which was headquartered in Mexico City. In fact, Panama was part of the Viceroyalty of New Granada, which was headquartered in Bogota, Colombia. This historical difference has left a lasting legacy that has helped differentiate Panama from its Central America peers, often for good—but sometimes for bad. The isthmus served as a transit route between the Pacific and the Atlantic. An estimated 60 percent of the gold and silver that made its way to Spain crossed through Panama. It also served as an important transshipment hub under the colonial system. Every year, convoys of Spanish vessels, loaded with European goods, would converge in Portobelo, a colonial fort on the Caribbean coast. These would be exchanged for local goods, such as silver, gold, cocoa and furs. The products would then be transported to the main colonial cities, such as Potosi, Lima, Bogota Quito and Santiago. Over the centuries, the commercial trading ebbed and flowed, eventually evolving into the Canal Free Zone after the end of World War II, and today serving as one of the most important multimodal transshipment hubs of the modern globalized trade system.

The Panamanian economy has benefitted enormously from globalization. It has multiplied more than five-fold since China became a member of the World Trade Organization (WTO) and globalization entered into high gear. For the past five years, the economy has averaged a GDP growth rate of 4.6 percent y/y. Much of this was aided by the construction of new canal locks and the additional traffic that resulted. However, the economy began to slow down prior to the onset of COVID-19. Trade wars between the U.S. and China, the slowdown of the U.S. economy, the collapse of the Venezuelan economy, and the effect it had on the Canal Free Zone, as well as the new restrictions imposed by the U.S. government on offshore tax havens in the aftermath of the publication of the so-called Panama Papers, took their toll on the economy. This year, the IMF expects the Panamanian economy to contract 9 percent y/y, with Moody’s expecting it to fall 10 percent y/y. Next year, the economy should bounce about 4.5 percent y/y. Nevertheless, Panama is the only investment grade sovereign credit in Central America. It is rated Baa1/BBB+ and has been on an upward trend in rating actions, which is completely opposite to most of the other countries in the region. This allowed the government easy access to the international capital markets, recently placing a 10-year $1.25 billion bond at a yield of 2.25 percent. Unfortunately, all three rating agencies placed it on negative outlook this year, mainly due to the problems associated with COVID-19. Even though the impact on the population has not been as great as in other countries, the lockdown has taken its toll on private consumption. Moreover, traditional services, such as tourism, have also taken a hit. The good news is that the country’s relative debt levels are low. Panama’s gross debt to GDP is only41 percent. Yet, it is important to note that the stock of debt has been growing at the same pace as the geometrical rise of the economy. With 17 bond issues totaling more than $21 billion, and representing a third of all Central American debt, it is a sizeable number for a country with a population of only 4.2 million. Low financing costs have also helped keep the fiscal deficit under control. The operational fiscal deficit is less than 1 percent of GDP. The toll revenues generated by the Panama Canal Authorities (ACP) boost the fiscal accounts, and allow the country to spend more generously on basic services, such as education and health. Today, Panama has a literacy rate of 95 percent and a life expectancy of 78 years. This rivals most developed countries.

While the economics of Panama have been representative of developed countries, the politics are more in line with the regional zip code. Former President Ricardo Martinelli used the country as his personal piggy bank, and his successor, Juan Carlos Varela, was implicated in the Odebrecht corruption scandal. In July 2019, President Laurentino Cortizo of the PRD was sworn into office.  A long-time political operative, he was the former head of the Legislative Assembly and he has brought many party loyalists with dubious backgrounds into the administration. Unfortunately, this is business as usual in Panama, a country with strong economics and poor politics.

 

Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development. 

 
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