Economy

The Government Strategy
Sectoral Trends
Privatizations
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Panama’s strategic location has been the backbone of its service-oriented economy from as far back as the 17th century when the isthmus was famous for the Portobolo fairs held by the Spanish whose galleons arriving from Europe brought merchandise for the new territories prior to loading the gold and silver destined for the court of King Ferdinand. The construction of the Panama Canal and the unique monetary system based on the US dollar since 1904, have led the country to become an important international trading, banking and maritime center.

While Panama’s neighbors in South and Central America battled to survive on-going crises during the past decade, the economy of Panama had sustained a relatively continuous growth, showing a performance higher than many other Latin American countries. Nevertheless, the global recession, combined with the tragic events of September 11th, have put some stress on the country’s economy. According to government officials, Panama’s gross domestic product per capita is one of the highest in the region with an estimated US$3,663 in 2001, though it reflects a general trend in the metropolitan area of Panama City and Colon where 75% of all economic activity is concentrated. Inequalities in income distribution remain a problem in rural areas.

The economy grew 0.3% in real terms in 2001, falling from 2.7% growth the year before and 3.2% in 1999. Although it was the lowest growth rate registered in a decade, the economic slowdown in the United States, which is Panama’s main commercial partner, was the factor that affected a decrease in exports, particularly traditional products. By October 2002, the government announced a GDP growth of 0.8% during the first quarter and of 1% during the second quarter of the year and forecast an annual increase of 1%-1.5%.

The banking sector, which provides some 10,000 well-paid jobs, has now developed strong regulations in compliance with the Basle recommendations. It remained stable despite the global recession and problems in Latin American countries, with assets totaling US$38.08bn at the end of 2001. By July 2002, total assets had fallen by 9.2% to US$ 34.53m mostly because of the financial problems in Argentina which forced several banks of the center to reduce their exposure in that country. Deposits fell slightly to US$24.18m down from US$26.59m in December 2001, of which internal deposits accounted for US$13.08m and US$11.095m for external deposits. The number of banks dropped to 77 in March 2002. There were 82 at the end of 2000, 104 in 1998. The drop is as a result of mergers and acquisitions. However the Banking Superintendency had granted five additional new licences to Latin American banks in June 2002.

The government strategy

When elected to office in 1999, the government of Mireya Moscoso pledged to increase social spending, reduce the level of poverty in which some 40% of the population lived, and diminish unemployment. During the Legislative Assembly sessions of 2000 and 2001, Ms. Moscoso lost the majority at the Assembly making it difficult for her to promote a number of reforms presented by her government. However, in September 2002, she successfully regained control of the assembly through political maneuvers that brought over to her side two dissident deputies of the opposition Revolutionary Democratic party (PRD) who had broken from party ranks. This was significant in a critical year when presidential candidates began their political campaign for the presidential elections due in May 2004. It also gives President Moscoso the ability to approve laws and projects of reforms that had been delayed in the previous years.

Although Ms. Moscoso ‘s policies marked a change from her predecessor’s economic policy and privatization programme, her government had renewed its commitment to abide by the agreements with the IMF, World Bank and WTO made by the former Revolutionary Democratic Party administration of Perez Balladares. The government signed a new standby agreement with the IMF in June 2000 which could not be completely fulfilled. An extension is likely to be approved before the end of this year. The IMF had recommended cutting fiscal deficit by 1% in 2000 and 0% in 2001 as well as structural adjustments to reform the social security system, adopt a tax reform and close two state-owned development and mortgage banks. The reforms were very unpopular and never made it to the Legislative Assembly mostly because the government did not have the majority to pass the legislation. However, the tax reform may be presented during the 2002-2003 Assembly session if a consensus is reached through the National Dialogue that includes political parties, business organizations and representatives of civic associations.

Some positive steps have been taken to reactivate the economy. The installation, in October 2001 of a National Dialogue, with ample participation of the sectors mentioned above, led to a law modifying the use of the Fondo Fiduciario (FFD, Trust Fund for Development set up with proceeds of privatization of public utilities). The bill establishes public debt ceilings and permits the use of former Canal Zone lands as payment for some public works projects. It also allows using some US$200m of the US$1.3bn fund for investment in public works that will generate employment and reactivate the economy. The fiscal accountability measures put a ceiling on total net public debt at 50% of GDP, net external public debt at 35% of GDP and fiscal deficit at 2% of GDP. These ceilings are to be achieved within the next 15 years.

After having passed a number of laws to curtail money laundering, Panama was removed in June 2001 from the OECD’s Financial Action Task Force black list of countries suspected of not co-operating in the fight against drug trafficking. In February 2002 Panama began talks on a tax information treaty with the U.S. and the government has also signed a memorandum with the OECD to improve the transparency of its tax system and establish a system of exchange of information on tax issues by December 2005.

US economic assistance to Panama for 2003 rose to US$20.7m, up from $13.7m in 2002. The extra money will fund anti-drug trafficking activities, training for Panama’s border police and programmes to strengthen democracy.

The United States effected a smooth transition of the Panama Canal to Panamanian control on December 31st, 1999. Since then, the Panama Canal Authority (ACP, Autoridad del Canal de Panama) the successor to US-Panamanian Panama Canal Commission, has been intent on transforming itself into a market-driven, profit- making administration. Widening of the Gaillard Cut, as part of a US$1bn modernization programme, was finished at the end of 2001, increasing Canal transit capacity by 20%.

The ACP announced a toll hike increase of 13% in two phases of 8% effective October 1st 2002 and 4.5% to come into effect July 1st, 2003. Canal users protested the increase as ill-timed when the shipping industry is going through its worst period in 20 years. The last toll increase of 15.7% was in 1996, in two phases effective in 1997 and 1998. Canal authorities also changed the toll pricing structure of “one-fits-all”, in place since 1914, for a more customer-oriented structure of seven categories that will enable the ACP to “customize” their tariffs and services. The seven-category system includes container, passenger, dry bulk, liquid bulk, large bulk, and ro-ro and reefer ships.

To modernize the Canal to accommodate larger ships, the ACP is considering an estimated US$3bn-$5bn expansion project for which some 200 feasibility studies have been commissioned since 1998, the results of which will be ready by mid-2003. The 10-year project includes the eventual construction of a third set of larger locks to accommodate post-panamax vessels and a decision is expected to be announced by end of 2003.

Panama Canal officials will announce before the end of 2003 the Canal expansion plan at a cost estimated between US$3bn-5bn. Financing could be provided by increases of tolls and Global bond issuances and since the Canal Authority has no liability, it expects to receive an investment grade in order to go to the international market. The expansion will boost the economy and attract foreign companies and investments. It will also foster the maritime and port activity in creating a transshipment hub around the project.

Panama’s economy is based primarily on well developed service-oriented sectors that represent nearly 75% of gross domestic product. Services include the Panama Canal, port activity, the ship registry, legal services, insurance, banking, tourism and the Colon Free Zone. The participation of manufacturing (7.5% of GDP in 2001) and agriculture (6.2% of GDP in 2001) has decreased since the entry of Panama in the WTO, as many industrial companies reconverted into distribution of imported goods.

The government has been active in bilateral and multilateral negotiations to sign free trade accords with Central American countries, Mexico and Chile. It had also initiated conversations with the United States and Taiwan. So far, Panama has concluded a bilateral free trade accord with El Salvador, pending ratification in both countries and expects to finish negotiations with all its regional neighbors by mid-2003.

Although Panama’s GDP per capita is one of the highest in the region ( US$3,663 in 2001) the figure does not reflect the differences in income distribution. According to a UN Development Programme (UNDP) report published in February, a total of 40.5% of the population live under the poverty line of which 14% are classified as being in “poverty” and 26.5% in “extreme poverty” . This is in spite of high per head social spending, one of the highest in Latin America. Unemployment has been rising. 13.3% at end-2000. In 1999 it was 11.3%, in 2000 it was 13-3% and it had risen to 14.4% by the end of 2001.

The administration of Mireya Moscoso implemented the promises she made of increasing social spending to benefit poor rural communities and raising tariffs to encourage agricultural production. The government wished to use the Trust Fund for Development (Fondo Fiduciario) to buy back external debt but was unable to reverse previous legislation which did not permit this policy.

However, the government successfully reopened the Global 2012 bond, issuing an extra US$150m of paper. The government reportedly plans to reopen other global bonds to raise a further US$260m when it deems market conditions to be right. It repaid an outstanding sum of US$341.6m on a Eurobond due in 2002 on schedule in February; an early repayment on the bond of US$158.4m had already been made in July 2001.In addition, it also began to buy its own global bonds. Although it is not a buyback of its debt, it will simply pay interest to itself. Those measures show that in spite of fiscal difficulties, investor sentiment towards Panama is generally positive.

The targets recommended by the IMF stand-by agreement that included tax and social security reforms and closure of two state development banks, were not met. The goal of reducing fiscal deficit to 0% at the end of 2001 could not be reached and the year ended with a 1.4% deficit, although the government ended the previous year at 0.8%, bettering the IMF target of 1%. It is likely that the 2002 fiscal deficit may reach 2%-2.5%.

From the Trust Fund for Development, the government will use some US$200m for public works which will boost employment in the regions where highways and road repairs are scheduled. Foreign investments in the former US military bases, now under the Interoceanic Region Authority ( ARI, Autoridad de la Region Interoceanica) have lost some momentum because of the global recession. An international tender for the former Howard US Air Force Base had been postponed but is expected to be re-launched once market conditions improve. Until now, most of the major developments in the reverted areas had been approved under the previous administration. Investments since 1999 have been concentrated in the tourism sector, mainly in the beautiful area of Fort Amador where cruise port, shops and restaurants have created local and international tourist attractions.

Sectoral trends

Some sectors have performed and continue to perform well. The maritime, financial and telecommunication sectors have registered constant growth in the past years. The telecommunication sector will be liberalized in January 2003 and some 23 companies have requested licences to operate though it is likely that only a few of those companies will enter the market of international calls which seems the most profitable. Mobile telephone concessions held by Bellsouth and Cable & Wireless expire in 2007.

For the second consecutive year, in 2002, the US Embassy ‘s Country Guide noted the sectors with more potential for foreign investors as ports, maritime services, telecoms, tourism and non-traditional agricultural exports.

Global recession and the aftermath of the September 11th terrorist attacks were the primary contributors to economic slowdown in 2001 in sectors such as port activity, tourism and exports. Construction, a main source of employment, fell 9.7% in 2001 with the conclusions of major public works, following increases of 7.5% in 2000 and 16% in 1999. Delays in the tender of the US$90m second bridge over the Panama Canal and its access roads affected the completion targets, but this and the expansion of the ports of Balboa, Manzanillo International Terminal and Colon Container Port may reactivate the sector early next year. Some US$200m in public works mostly road maintenance and widening of the Inter-American highway from Santiago to David, were also imminent.

Panama’s agriculture fell by 3.3% in 2001 down from a mere 0.1% growth a year earlier. Traditional products were badly hit by low international prices and economic contraction in the USA, their main buyer. Coffee, bananas and sugar exports fell by 30.7%, 17% and 6% respectively. Banana production’s future is dim because high costs of production have lowered its competitiveness on international markets. The sectors that experienced highest growth were fisheries, 21.14%, cattle, 21.6% and melons, 35.5%. Shrimp exports increased after the industry recuperated from the white-spot virus. Panama was certified in May as complying with international regulations to protect sea turtles which should boost exports to the US in the next months.

Panama’s total exports grew by 4.9% in 2001 to US$809.6m, up from US$771.4m in 2000. Mining, less than 0.5% of GDP, dropped 12.8% for the second straight year as the low world market discouraged mineral explorations. In June 2002, with financing from the IDB, the government began to review the legal framework of the mining industry. A new legislation is expected for next year.

Industrial activity decreased by 5.7% in 2001, after a fall of 1.5% in 2000 and further decline was forecast for 2002 as a consequence of the entry of Panama in the WTO and lack of competitiveness and markets for industrial products, but once the regional free-trade negotiations are concluded they will open new markets for Panamanian products, exports and services.

Port activity grew by 13.3% in 2001 and remains one of the strongest contributors to economic growth although the sector was badly affected in the last quarter of 2001 as world shipping declined strongly in the aftermath of the September 11th terrorist attacks. Container movement grew by 15.9% and in teus by 16.3%. The trend continued in the first half of 2002. The Panama Canal Authority saw a few less transits in fiscal year 2001 (October-September) down to 13,492 from 13,653 in 2000 but tolls income grew to US$579.5m from US$574.2m a year earlier. Cargo transported fell slightly to 193.1m long tons from 193.7m in 2000 with an increase of Panamax-vessels transits to 4,424, up from 4,359 in 2000.

Colon Free Zone activity suffered from slow demand from its main Latin American customers, Colombia, Ecuador, Venezuela. Imports fell 0.6% to US$4.6bn in 2001 while exports rose to US$5.3bn, up 1.4%, with net exports growing marginally to US$718m.

Tourist expenditures were up 8% in 2001 and the number of visitors increased by 5.9% to 519,000. The government had begun a US$10m advertising campaign in Europe, the US and Latin America that should foster the sector. Three cruise port terminals, Colon 2000, and Cristobal, on the Atlantic side and the new Fort Amador Cruise Port, on the Pacific side, welcomed over 150,000 visitors during the latest season. More cruise lines are putting Panama in their schedules. The Tourist Bureau (IPAT) signed an accord with the Miss Universe contest to hold the world competition in Panama in 2003. The international event is expected to focus world attention on the isthmus and boost the image of eco-tourism and the “ less travelled path” Panama is advertising worldwide.

Privatizations

After privatization of the telecommunications and energy sectors in recent years the administration of Mireya Moscoso has said it will not proceed with the sale of the public water company IDAAN, as announced by the former government, and was opposed to further privatizations. An agreement was reached with the International Monetary Fund to restructure IDAAN with a board of directors and more financial autonomy. Proceeds from legislation modifying the use of the Trust Fund for Development will help IDAAN to modernize the institution and installations.

Tocumen International Airport privatization was also put on hold but the government announced it would create a state corporation to administrate Tocumen airport with more autonomy. Airport users, including airlines, pilots and concessionaries were promised seats on the board of directors.

The only concession granted by the Moscoso government was Atlapa Convention Centre. Atlapa, after a number of delays for lack of international interest was finally put to tender in 2002 and a Brazilian-Panamanian consortium selected for the ten-year concession, starting in 2003. The center was built in the mid-eighties and will need complete refurbishing to accommodate the international conventions the new consortium plans to organize.