Panama Canal: licence to print money?

14/03/2013 | Lucien Chauvin

The expansion of the Panama Canal is expected to boost trade and open the doors for ‘an enormous amount’ of investment

For nearly 100 years, Panama has been synonymous with the canal that bears its name.

Approximately 5% of world trade today moves through the Panama Canal, and a $5.25 billion expansion project, which will be completed in the first quarter of 2015 after eight years, will not only boost trade but have a massive impact on the country’s economy.

The canal expansion and the $2 billion construction of a subway system in the capital, Panama City, are the primary drivers of the red-hot economy. The economy grew by 10.7% last year, nearly matching the 10.8% growth the previous year. Growth is expected to dip to 8.5% in 2013, but authorities are not concerned.

“The canal project has opened the doors to an enormous amount of investment. Our potential for growth is unparalleled right now, and I think that you will see more projects and more investment when the expansion is finished,” says Luis Ferreira, an engineer and spokesperson for the expansion project.

The canal expansion and other infrastructure projects, however, are only components of a larger vision to transform the country into a logistic hub, taking advantage of its geographical location at the centre of the Americas.

Other countries, including Jamaica and Trinidad & Tobago, are also keen to become regional hubs, but Panama has a clear advantage. The goal is to emulate Singapore, a small country that is among the world’s top financial centres and home to one of the top five ports.

“Singapore is our model, but we recognize that we still have many years to go before we get to where they are today. We are definitely on the right track,” says Ferreira. 

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Port traffic in the country is already increasing, even though inauguration of the canal’s third system of locks, now scheduled for the second quarter of 2015, is still more than two years away. Port services increased by 5.4% in 2012, and the government forecasts a major jump by the end of this decade.

ON THE RISE

Panama is already home to the top two container-handling ports in Latin America and the Caribbean, moving more than 6.6 million 20ft equivalent (TEU) containers at two ports in 2011, according to Eclac (UN Economic Commission for Latin America and the Caribbean).

Preliminary statistics from 2012 have the Colon (Atlantic) and Balboa (Pacific) ports maintaining the first and second spots. Traffic at the Colon port increased 20% in 2011, while it grew 17.2% at Balboa. They both overtook Brazil’s Santos port in 2010. Santos is ranked third, with growth of 10% in 2011.

The canal alone is expected to move 8.6 million TEUs in 2016, the first full year the new locks are operational. The country is currently investing close to $500 million in upgrading existing ports to meet forecast demand, and the Panama Canal Authority has commissioned a feasibility study to build its own port. The study for the port, which would be located in Corozal, will be completed this year.

Initial investment would be $500 million, and the future installation would be capable of receiving the massive Post-Panamax ships that will navigate through the new locks. Ships currently passing through the canal have a capacity for 4,400 TEUs, with vessels using the new locks capable of carrying three times this amount.

The country’s airport, which has also undergone a major expansion, continues to see double-digit increases in traffic. Air travel through the country was up 21.4% last year. Investment in construction projects expanded by nearly 30% in 2012, according to the Finance Ministry.

STRONGER TRADE TIES
The government also expects more investment to flow into the special development zone, the Panama Pacifico Special Economic Area on the former US Howard Air Force Base. Legislation from the last decades creates special investment, labour and tax conditions for companies located in the zone.

President Ricardo Martinelli’s government has also focused attention on trade agreements, implementing FTAs (free trade agreements) with several countries in the region, including Canada and the United States.

It is also pressing for incorporation into the Pacific Alliance, a trading block inaugurated by Chile, Colombia, Mexico and Peru last June. It is currently an observer, but has the best shot of joining given its completion of bilateral FTAs with member countries, a prerequisite for full membership.

Alejandro Arreaza, an analyst with Barclays, agrees that Panama has the potential for becoming a hub and is bullish on the rising level of FDI (foreign direct investment) – more than $5 billion in the past two years, according to Eclac – but like other analysts, he cautions that the country also needs to get a handle on its fiscal deficit if growth is to continue strong.

The deficit last year was equivalent to 2.1% of GDP, which Arreaza says is “the main issue that should be concerning authorities and investors”.
Arreaza says the Panamanian government is not only spending heavily on infrastructure projects, but is constantly on the hunt for new projects that will keep driving growth without apparent interest in the deficit.

Fears that the government might spend even faster in the coming months as the 2014 elections approach have dissipated somewhat now that it appears President Martinelli will not attempt to change the constitution to run for re-election, but analysts still expect the purse strings to loosen a bit more. 
- Like every year, Emerging Markets daily newspaper covers the Inter-American Development Bank’s annual meeting, held in Panama in mid-March. Pick up your copy at the meeting, read the news on our website and follow us on twitter @emrgingmarkets

- You can watch the IDB's live broadcast of events by clicking here.

Tagged as: Panama Canal infrastructure Latin America investing in Panama trade

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