Publish in Perspectives - Wednesday, June 25, 2014
Some parts of Panama are under electricity rationing for four hours a day, while many of the new skyscrapers are being forced to rely on diesel generators. (Photo: Etesa)
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.