Panama: Opportunities for expansion
Ever since Panama obtained control of the Panama Canal from the US in 1999, the country’s economy has been one of the fastest-growing in Latin America. The current administration under President Ricardo Martinelli has recently laid out an ambitious economic and social programme led by a string of investments in infrastructure, chief among them a $5.25bn expansion of its famed waterway.
Panama instituted a series of business reforms and posted an average of more than 8% GDP growth from 2006 to 2010. The county has also jumped 11 places in the World Bank’s Ease of Doing Business rankings this year, coming in at number 61, although it still lags behind regional competitors Mexico, Chile, Peru and Colombia.
Furthermore, the country is expected to lead growth among Latin American nations in 2011 and 2012, posting GDP growth of 7.4% and 7.2%, respectively, according to the IMF. Plans to cut public debt by 10 percentage points from 45% before 2014 through increasing tax revenues also garnered an upgrading of the country’s debt rating to Baa3 from Ba1 by Moody’s in 2010.
According to the current administration’s Strategic Government Plan for 2010-14, public expenditures are expected to reach $13.6bn, with $9.6bn of the total devoted to major infrastructure works. Broken down by sector, government investment is expected to be allocated as follows: transportation (32%), education and health (30%), administration (12%), social welfare (10%), agriculture (5%), public protection (3%), housing (3%), industry (3%) and energy (2%).
Panama relies heavily on its services sector, which contributes nearly 75% of its GDP. With the goal of diversifying its economy and creating 860,000 new jobs in the next decade – no small feat considering the country’s population of just 3.5m – the government has identified four key sectors (agriculture, tourism, logistics and financial services) as crucial to the country’s economic development.
The $5.25bn Panama Canal expansion, which equates to nearly one-fifth of the country’s annual GDP, is due to be completed in its 100th anniversary year in 2014 and will allow for larger vessels that can hold 12,000 containers, compared to its current capacity of 5000-container vessels. The expansion is expected to more than double the national treasury’s annual revenues from the canal, from $500m to $1.25bn.
In 2010 the country reported net foreign direct investment (FDI) inflows of nearly $2.4bn, equal to 9% of GDP, according to World Bank data. Much of this can be attributed to the success of the Colón Free Trade Zone, which ranks as the largest in the Americas and second largest in the world. The free zone is a hotspot of economic activity for the country, boasting more than 2500 companies, 28,000 employees and handling around $16bn in trade each year.
The country’s growing financial services sector, which possesses roughly $33bn in deposits, attracts further FDI inflows. Panama’s financial system, which does not have a central bank and pegs its currency to the dollar, has more than 90 national and international banks. The tax-free “offshore” nature of the country guarantees the influx of capital, but the government has had to impose strict measures to combat money laundering over the past decade, and its use as a tax haven for major corporations has drawn criticism over the years.
Despite its significant macroeconomic growth and subsequent reduction in unemployment from 12% to a mere 5.9% in the past five years, Panama has not yet been able to achieve comparable progress in spreading prosperity throughout its population. Nearly one-third still lives in poverty, and nearly half that figure (15%) lives in extreme poverty.
Indeed, poverty reduction has been prioritised by the current government, which has pledged $3.8bn over the next five years in social programmes including the construction of schools, hospitals, social housing and sanitation infrastructure. Hastening poverty reduction, particularly through the development of skills and innovation, will be a key feature to maintaining the country’s rapid economic growth.
On October 21, 2011 Panama became one of 20 nations worldwide to boast a free trade agreement (FTA) with the US after the US House of Congress ratified an FTA dating back to 2007. The FTA is expected to vastly increase import-export revenues between the two nations and also marks a significant event in Panama’s economic progress, as it was required to assure the US of fiscal and tax transparency and the implementation of requisite labour laws through rigorous reform. Panama has three more potential FTAs in the works with Colombia, Peru and Canada, the latter of which is currently awaiting approval from the Canadian House of Commons and Senate.
In a statement to local press President Martinelli commented on his country’s FTA with the US, “Our long partnership is founded on common values and common interests. Ours is a mutual commitment to providing a better life for our citizens, which will create jobs in both countries and provide continued opportunities for economic growth and greater stability in the region through trade ties and a rising standard of living.”
While Panama has experienced a decade of staggering growth thanks in no small part to its soon-to-be-expanded canal, the challenge it will face over the next decade will be the expansion and diversification of its economy.
A great deal of the country’s continued growth will depend on the success of its investment in social programmes like education and professional training, which will have serious implications on private sector competitiveness. The current administration has done well in laying the groundwork and if they effectively execute their ambitious plans, Panama could remain among the region’s leaders in economic growth for some time.