business & economy

Which way is Panama's economy headed?
by Eric Jackson

The report on "The Engines Behind the Growth" conference that appeared in the February 20 Bloomberg News was glowing. "There is no bubble here," proclaimed Michael Fernández, economic director for the Panamanian Chamber of Construction (CAPAC). The US real estate bust, he maintained, doesn't apply to Panama.

At the same forum, former President Nicolás Ardito-Barletta claimed that "42 percent of the new luxury apartments built last year were sold to foreigners seeking a second home in Panama."

Of course, Nicky Barletta has a long-standing reputation for fraud, to the extent that many Panamanians have called him "Fraudito" since with Ronald Reagan's and Manuel Antonio Noriega's backing he stole the 1984 Panamanian presidential election. More recently he was the author of the government-financed fantasy that a canal expansion that will directly generate fewer than 7,000 jobs will indirectly create some 240,000 jobs, more than two of them for every unemployed Panamanian at the time he made that canal expansion "yes" campaign prediction. The grateful Panama Canal Authority (ACP) --- one of "The Engines Behind the Growth" conference co-sponsors --- showered millions of dollars in advertising contracts on Barletta's family's businesses, and during the campaign upped the job creation prediction to 297,400.

From whence comes the 42 percent figure, and the tale of foreigners buying second homes? No citation was made to those things. People in the real estate industry say that only about 10 percent of the luxury apartments built in the last year or so have sold to people who actually plan to live in them, and that since the cancellation of three major skyscraper projects last year all but the stupidest flippers have disappeared from the Panama City market. There are a few rich people, mostly not Americans, who have second homes here, but among these a major sector is composed of Colombian gangsters who are essentially laundering the profits of underworld enterprises here.

One developer told The Panama News that "I don't think [former President Barletta] knows what he's talking about. The only thing that's keeping sales up are Venezuelans right now.... Things are very slow in the real estate area."

So how would that stuff get into Bloomberg News? Maybe it was the reporter, Carlos Barletta. Maybe it helps to know that Bloomberg has a history of being taken for Panamanian rides, like when it worked out of the offices of now incarcerated "offshore asset protection guru" Marc Harris.

But Nicky Barletta and CAPAC are not the only people talking up the Panamanian economic miracle. Take Bear Stearns. They're advising people to invest in Panama, predicting 9.5 percent economic growth in 2008 and saying that next year this country's bonds might become investment grade. But Sam Taliaferro's Panama Developers Blog asks a rhetorical question about Bear Stearns: "Didn't these guys float the Trump Tower $200 million bond?"

The reality of Panama's economy is complicated, but these are some of the salient facts and growing consensus predictions:

• The influx of millionaires wanting second homes here is mainly a myth, and to the extent that there are grains of truth in it these people tend to be rich Colombians or Venezuelans. The American who comes down here to buy real estate is typically a middle class person who has sold his or her home in the USA and plans to live here full-time. These buyers are more attracted to the Interior than to the high-end properties in Panama City.

• The influx of American retirees is being affected by the slowdown in the US housing market, because people who would like to make the move are finding it hard to sell their homes at prices they would accept and they can't afford to buy here without the proceeds from a sale there.

• The basic revenue premise behind the canal expansion's "yes" campaign, that there will be 20 straight years of the same rate of increase in US imports from China that was experienced from 2000 through 2006, has already been disproven. As the American economy has slumped, so has the number of cargo containers from China passing through our canal en route to the USA.

• The canal project is definitely going ahead and it's creating jobs and having a certain multiplier effect as expected, though on nothing close to the scale that the ACP promised in the referendum campaign. So far, however, the Panama Canal Authority has not figured out how it will finance the expansion and that may be an indication that international lenders are skeptical about the business plan that was sold to the voters and thus are demanding higher interest rates. Not only has the plan's assumption about US imports from China proven false, but as the ACP assured voters it wouldn't, the Northwest Passage through the Arctic Ocean melted to the point of navigability last summer and that at least prospectively calls into question the shipping industry's assumed lack of options with respect to increased canal tolls on many of the most important routes. Then the ACP's $5.3 billion expansion price tag doesn't withstand cursory examination. It all adds up to high risk from a lender's perspective and high interest payments from the point of view of the Panamanian taxpayers who will be ultimately responsible for paying the bill.

• The economy in northern Latin America is still rather strong, due in large part to high oil and gas prices that accrue to the benefit of Venezuela, Colombia, Ecuador and soon Bolivia, and because of this the prognosis for the Colon Free Zone, a major player in the Panamanian economy that's essentially a regional wholesaling and warehousing center, is fairly strong.

• However, last year was an extraordinary growth year, with Panama's Gross Domestic Product leaping by around 10 percent according to some estimates. Almost all of Latin America was in boom times. But it seems that growth throughout the region, including in Panama, is slowing a bit. A Standard & Poors report for Panama and Central America said that "average GDP growth in the region may fall to 4.5 percent in 2008 from 6.5 percent in 2007, although the size of the drop is dependent upon the extent and deepening of the decline in the US economy and its impact on the overall global economy." Fitch Ratings predicts a 2008 Panamanian growth rate of 6.5 to 7.5 percent, at least two points below its estimate of 2007 growth.

• Inflation is a problem and will continue to be so, but its burdens, like the benefits of last year's economic boom, will continue to be unevenly distributed. People with lots of competition, who include most of those on the bottom of the economic ladder, will have little opportunity to raise the price of their labor or merchandise to match inflation, while those with little competition will be in a position to raise prices above what the market might otherwise demand. Inflation undermines one of the main attractions for foreign retirees, relatively cheap living costs.

• Panama's debt is at record levels and will go higher with the canal expansion project. It may be a minor problem or no problem in the short term, but at some point it will have to be paid back and could cause big problems.

• Due mainly to the canal project and the public and private sector construction booms, the percentage of the work force in the formal economy went up slightly last year after years of decline. Still, about 40 percent of Panamanians work informally and that's not likely to dramatically change anytime soon.

• One of the bright spots is Panama's growing status as an air hub and retail shopping center for Latin America and the Caribbean --- something that Miami boosters and Chamber of Commerce types are strenuously denying, but is reflected in many ways here. This is the product of US unfriendliness toward all foreigners under the Bush administration, which has driven many Latin American and Caribbean citizens by choice or due to denial of visas to change their former habits of passing through Miami and avoid the USA. It may shift with a new administration in Washington. The bottom line for Panama at this time is more direct flights to and from Europe and the Caribbean, and new upscale shopping malls that couldn't exist without the new foreign customers who are coming here.

• We are into an election cycle now, so there is and will be plenty of public spending and ribbon cutting aimed at boosting the ruling party's continuation in office. This has rarely been a particularly effective electoral strategy --- it certainly didn't work for Mireya Moscoso --- but politicians use it just the same.

Look for slower growth in 2008, but nevertheless some substantial growth.

Look for more Venezuelan exiles, but how much wealth they will bring with them is harder to predict.

Look for serious problems in the Panama City luxury housing sector, but you may have to look hard because a weak market is no big deal to the important money laundering component of the real estate boom. Meanwhile, the lower end of the housing market, where there is a severe shortage of homes for young Panamanian working families, will probably remain strong.

Look for a decline in canal activity but maybe not revenues, because despite fewer containers, tolls have been raised.

Despite all claims of immunity, if the economic downturn in the United States gets really bad it could drag Panama's economy with it. But as difficulty selling homes in the USA may keep some retirees away, massive job reductions by GM and other big companies may lead to an influx of people taking their buyouts, selling what they have for what the market will bear and coming down here in search of affordable living. The coming presidential decree on immigration law changes may affect the ingress of foreign retirees.

Notwithstanding the predictions of influential US Representative Steny Hoyer (D - Maryland), the US - Panama free trade deal will probably not be ratified by the United States in 2008. The cited irritant, Pedro Miguel González, may finish his term as president of the National Assembly on September 1, but then the United States will be into the final months of a national election campaign and the Democrats won't want to deal with a divisive issue at that time. Economists, people in various different economic positions and to a much lesser extent politicians will still disagree about whether that's a good or a bad thing.

The sky is not about to fall in on Panama, but to the extent that expectations that have been raised throughout Panamanian society are not met, this year's economy might not be the best news for incumbent politicians.

Meanwhile, the Nicky Barletta and friends show was marketed to the right wing of the American community here, especially to newcomers who have no real feel for the realities of Panamanian business. The Navy League, whose past president infamously wrote a book about living in Panama which had as its central theme that rabiblancos are lazy and dishonest and that Americans who seek to do business here should suck up to them, got a special invitation. The conference's English-language promotions promised "a deep analysis of the main economic fundamentals" for those interested in "expanding their network of business contacts" and gaining "privileged access."

But Americans experienced in doing business here and Panamanian academics were conspicuously absent among the presenters. This was a PRD hustle for gullible foreigners, a state-financed exercise in denial of the serious problems Panama faces and mostly a non-event for the Panamanian press.

Some of the serious economists in this country's universities are holding another forum, on March 1 at the University of Panama's Centro de Investigaciones Educativas y Nacionales. That event's entitled "The Economic Crisis in the United States and its Impact on Panama."