The strengthening of the US Dollar over the last four years has had a noticeable impact on the economy of Panama, a dollar-based economy whose official currency is the Balboa which is pegged 1:1 with the dollar.
Here are the pros and cons of a strong dollar for Panama:
● Imports / Exports: Since Panama is primarily a service-based economy, most consumer goods, heavy equipment, and medicine have to be imported. Exports tend to be re-exports from the Free Trade Zone and exports of agro and natural resources such as melons, shrimp, and minerals such as gold and copper. A stronger dollar theoretically should decrease the cost of imports to the benefit of consumers, which seems to be playing out because of the low inflation despite 6% GDP growth. Panamanian exports, on the other hand, are now more expensive for non USD-based markets, which is already having an impact on jobs in the Free Trade Zone and on export-dependent companies.
● Immigration: A strong dollar has also seen a rise in net immigration from non-dollar earning countries and a corresponding increase in remittances. Unemployment remains low (4.9% as of December 2015) but is under pressure. Immigration rules may also tighten, which could slow the tide of immigration experienced in recent years.
● Tourism: Panama is now a lot more expensive for Latin American travelers, who have traditionally represented 50% or greater of tourist arrivals. That is already directly impacting the tourism industry, with continued lower-than-historical hotel occupancies and more recently, lowered spending in tourist-focused malls. In the case of Colombian tourists, many of whom would come to Panama for 3-4 day shopping trips, costs to purchase dollar-based goods have increased nearly 35% this year alone.
● Real Estate: The interesting thing about real estate in Panama is that there is almost always liquidity, but it moves into different sectors as cycles unfold. Panama’s explosive real estate boom from 2006-2009 was fueled mostly by foreign buyers of luxury properties, many of whom came from countries like Spain, Russia, Canada, Colombia, and the United States. That real estate boom has shifted to an entirely different demographic, namely product that meets the demand from Panamanian (and in many cases immigrant Venezuelan and Colombian) buyers seeking workforce housing and shorter commute times. Most affordable housing is outside the city, while workers are increasingly demanding housing that is convenient to jobs and services. Therefore, projects like BASIS International’s “Casco View”, which is located downtown, have seen strong demand for their mixed-use, mixed-income, 136-apartment complex that overlooks Casco Viejo and 360 degrees of the entire downtown. With smaller apartments ranging in price from $90,000 to $250,000, this is the project type at the sweet spot of the current cycle.
Conclusions: The increased value of the USD will help consumers, force export-oriented businesses to adjust, and could place a pricing cap on luxury apartments because of a smaller number of international buyers. As always, when things slow a bit, it’s a great time to buy into the next cycle.
Multi-nationals continue to move to Panama to locate their regional headquarters, which means that the rental market of corporate apartments should remain attractive even if the number of buyers in the market has slowed down. Meanwhile, smart workforce housing projects could produce faster yields in the short-run.