Panama’s next president faces electricity problems and rising inflation.

BY WALTER T. MOLANO

Electoral surprises are a rare occurrence in the emerging markets these days. Improvements in polling techniques, the recruitment of top political consultants and outright electoral fraud ensure that the results are known well in advance.

Yet, the May 4, presidential elections in Panama produced a surprise that no one was expecting. The victory by Juan Carlos Varela, who was trailing in third place, took the nation by surprise. Varela is a leading business man, with an engineering degree from Georgia Institute of Technology.

BRAINS BEHIND EARLY SUCCESS

Many considered him to be the true brains behind President Ricardo Martinelli’s early economic successes. He served in the cabinet until 2011, when the two men had a falling out. The electoral outcome was particularly surprising in a country where the outgoing president ran the nation like it was one of his supermarkets, deciding what was done and at what price. Varela’s discomfort with the high level of corruption was what supposedly triggered his departure.

Given the delicacy of the situation, Martinelli had a keen interest in ensuring that his candidate, Jose Domingo Arias, would win the day. This way he would make sure that a lid was kept on many issues. To ensure his grip on power, Martinelli put his wife on the ticket as Vice President. Yet, the outcome was not as he expected. There was so much furor and rancor in the Palazio de Garzas that the president refused to call and congratulate the newly-elected leader, quipping “May God help us.” His decision to do so may only make things worse in the medium to long run, particularly as the new government begins to investigate many of the irregularities that took place under Martinelli’s watch.

Things are so messy that the new president is having difficulties in filling cabinet posts. However, the payback will not only be political in nature. The Panamanian economy is starting to pay the price of unconstrained growth.

ELECTRICITY PROBLEMS

Panama’s electricity sector is under a great deal of stress.  Despite the country's torrential GDP growth, building boom and massive immigration, the government was lax in expanding the sector. In its aim was to channel its financial resources into sectors with higher public visibility, such as the new metro and highways. Hence, the government failed to push ahead with projects to expand the availability of electricity, such as the construction of a new transmission line between Panama and the north. The Martinelli administration also directed the distribution companies to source their power from the three major hydroelectric generation plants, Fortuna, Bayano and Changuinola. This was done as a means to reduce electricity tariffs. Unfortunately, it may end up having the opposite effect. A severe drought, due to the ongoing El Niño, allowed the dams to run low.

As a result, some parts of Panama, such as the new financial district known as Costa del Este, are under electricity rationing for four hours a day. Many of the new skyscrapers are being forced to rely on diesel generators, pushing up operating costs. The three large electricity distributors, Ensa, Edemet and Edechi, are petitioning the government for reimbursement for overages that they suffered in order to source additional power from thermal generators.

Similar bottlenecks are appearing in other parts of the economy, such as skilled labor, as the country’s economic expansion continues unchecked. While many of the government's investment programs and public works were announced with great fanfare in order to maximize the political effect, the implementations and designs were often ad-hoc and improvised, thus leading to the problems that the country is currently experiencing.

RISING INFLATION

The proliferation of bottlenecks and shortages is putting upward pressure on consumer prices. Panama's inflation rate has been on the rise for a number of years, but it is now becoming a serious problem. Countries that lose competitiveness due to increases in domestic prices can always devalue their currencies.

However, this is not an option for Panama because it is a dollarized economy. Therefore, it is little wonder that the government announced a series of prices controls on 22 basic consumer staples, including eggs, rice and meat. Unfortunately, such policies never work. They only introduce distortions that complicate the macroeconomic environment.

Therefore, it is payback time for Panama. It is payback time for the political chicanery that took place during the last four years, and it is payback for the all economic excesses of the past decade.

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.