Mirror, mirror on the wall, which is the fairest Latin credit of them all? You guessed it – as of January, Panama overtook Chile as the darling of bond investors.
You could say it all came together in 2017. In September, Moody’s had already upgraded Panama’s outlook to positive (from stable) and the IMF declared the Panamanian economy one of the most dynamic in the region. Still, the year-end numbers came in stronger than many thought.
Growth on the back of a diversified economy
Panama’s growth has been broad-based for over a decade now, with solid and sustained growth in financial services and construction, not just the maritime trade that comes immediately to mind to observers. And these diversified industries have contributed to making the country’s fundamentals stronger: stable and low inflation, sustainable public debt, a declining current account deficit and a stable financial sector.
So what is propelling Panama’s economy?
No surprise, much of the growth last year came from the expanded Panama Canal, which, in turn, benefited from expanded global trade. In 2017, 13,548 vessels passed through the Canal carrying a record-breaking 404 million Panama Canal tons, up 22% over the last year.
And, this number is only expected to increase in 2018, as the Panama Canal Authority is planning on boosting the number of daily transits allowed in the Canal. The Canal will also continue to strengthen its market share, particularly in the Asia-U.S. East Coast trade routes, which make up close to 40% of total cargo. (The U.S., of course, is the top source and destination of all shipments, accounting for almost 70% of all cargo, and China is a distant second at 18%).
But other driving forces of the service economy – the Colón Free Trade Zone, the second largest free port in the world, and the Trans-Panama Pipeline, which transports crude oil between the Pacific and Atlantic coasts – have been equally strong contributors to growth.
Mega infrastructure projects on the horizon
And don’t forget the big infrastructure projects — both public and private — that are transforming the face of the country. Private mega projects include Panama’s first natural gas plant at Colón, set to start production in a few months, and Minera Panama’s Cobre mining venture. On the public side check out our lowdown on the myriad of projects going on across Panama City. These projects all fit together like parts of a puzzle and will continue to solidify Panama’s standing as a trade and logistical hub for years to come.
Boosting government coffers
All in all, GDP growth, which is projected to reach 5.6 percent in 2018 (more than double the regional average in Latin America) is in turn swelling tax receipts and leaving the country with a budget deficit equal to less than 2% of GDP.
As fiscal transfers from the Panama Canal to the central government alone reached US$1.7 billion last year, Panama’s sovereign wealth fund (the so-called Panama Savings Fund, FAP) is also benefiting. Created in 2012 using surplus revenues from the Canal, all transfers over 3.5% go straight into the FAP for rainier days.
Looking ahead (or east, to China)
The establishment of formal diplomatic relations with China last year should fuel further growth. China’s influence in Latin America has been visible on the horizon, surpassing Europe as the region’s #2 trading partner — it’s now #1 in several countries across the region. In Panama, this power shift is on full display: the establishment of new diplomatic channels meant opening the doors to access Chinese markets and attract new sources of strategic foreign investment. The month after the diplomatic shift, China Engineering Company was awarded a US$166 million contract to develop the cruise terminal at Panama City’s Amador Causeway together with Belgium’s Jan de Nul.
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As the U.S. retreats from leading Transpacific trade relations, a future Panama-China free-trade agreement, perhaps part of a broader free trade pact or free trade zone might just be on the horizon. Panama should think big, right?
In the meantime, let’s see if we can get that Moody’s credit upgrade this year.
