business & economy

Prognoses vary, but the world trend is bearish
by Eric Jackson

Yes, and back then Mr. Sabonge, pointing to an ACP PowerPoint display, said that the canal expansion would create 297,4000 jobs. Nobody at the ACP or in the Torrijos administration will acknowledge that bogus promise now, but even if people were making campaign pitches intended to be forgotten, nobody had expected economic problems for Panama at this point.

Apart from the hubris of pretending that they could predict world economic trends over two decades or more and making business plans on the most optimistic of such predictions, the economic problems Panama faces aren't the ACP's fault, and are mostly can't be fairly attributed to the Torrijos administration either.

What we have is a US recession provoked by the bursting of a real estate bubble into which the banking and financial sector was heavily invested. Americans have less money to buy things and so are importing fewer things via the Panama Canal.

We also have a deflation in Panama's upscale real estate market and a slowdown in the retirement communities in the Interior, because in the city prices were highly inflated and then there was a scare when several high-end projects were canceled. When several major developers canceled pre-construction purchase contracts so that they could sell the units at higher prices to other people that tended to drive the last of the condo flippers out of the Panama City market. Then when home prices fell in the USA a number of Americans who had intended to retire here found that they couldn't sell their existing houses in order to pull up stakes and move here, or at least they couldn't sell their properties at the prices they had expected.

Venezuelan millionaires preparing their escapes from Caracas, a few corporate headquarters moving here from Venezuela or elsewhere, some Canadians and Europeans looking for bargains in light of the weak US dollar and an awful lot of Colombian and Mexican drug money being laundered are the factors keeping Panama City real estate arguably afloat. US Homeland Security's hostility to foreign visitors is also propping up our capital as a regional shopping center and enhancing our status as an important air travel hub.

So which of these things are lasting, and which are likely to be ephemeral?

The executive secretary of the Economic Commission for Latin America and the Caribbean (CEPAL), José Luis Machinea, projects modestly decreased growth throughout the region after last year's rapid region-wide expansion. He says that the slower growth is largely a function of a global business downturn that's starting in the United States.

Meanwhile --- much to the GOP's chagrin in this election year --- American billionaires differ about what's going on in the United States.

Texas oilman T. Boone Pickens is pessimistic about the US economy upon which the canal largely depends. In a CNBC interview, he said "[w]e are now paying out... an estimated $600 billion a year for oil. It's four times the cost of the war in Iraq...." He says that the problem is that the world is demanding 87 million barrels of oil per day, but global production is $85 million barrels per day and can't be economically raised to meet the excess demand. Pickens also thinks that after the Beijing Olympics the economy of China, another major economy upon which the Panama Canal largely depends, is likely to see some troubled times.

Investment manager George Soros is also pessimistic about the American economy. He told CNN that what's happening in the US economy is actually the bursting of two bubbles, one about housing prices and the other an era of expanding easy credit. While he gives the authorities in Washington good marks for emergency measures to fend off an immediate financial collapse, his longer-term prognosis is grim: "The days of rapid financial wealth creation are over. We're now in a period of wealth destruction." He largely blames it on decades of "market fundamentalism," and says that America and the world are simultaneously facing recession, inflation and a flight from the US dollar.

Leave it to corporate raider Carl Icahn to defend the US economic policies of the past few years, disagree with the recent economic stimulus measures. At a May 22 press conference in New York he predicted that the election of Barack Obama and a filibuster-proof Democratic majority in the US Senate would cause "runaway inflation." Are there problems in the US economy? Icahn, much more than Pickens or Soros, expects that the market will solve them and opposes political tinkering.

The political power of US financial clout is already a shadow of what it was. One of the twin flagships of the Bretton Woods financial system, the International Monetary Fund, has an investment portfolio less that 10 percent of the size it used to be. The Doha Round of World Trade Organization talks has been stalled mainly because an alliance of countries led by Brazil, India and South Africa is unwilling to accept subsidized US agricultural exports.

The Americans will surely get past the current economic woes, but a return to old arrangements is probably not possible and Panama probably shouldn't count on it. Certainly a steady growth in US imports from China on a scale projected by the "yes" side in the canal expansion referendum campaign is unlikely to happen, and despite all of the ACP's denials global warming means that the canal is going to start losing business to Arctic Ocean routes within just a few years, even though those routes will be frozen over for most of every year.

The longer-term shifts of world economic power will be harder to predict, although the continued if not steady rise of China, India and Brazil as major players would seem probable. What future Panama and its canal may have in emerging new paradigms raises a number of new questions.

One possible indication of our economic prospects as largely decoupled from US - China trade comes from the Colon Free Zone. To be sure, that commercial center handles merchandise from the United States and particularly from China, but its business orientation is mainly as a wholesaling and warehousing district for merchandise bound for northern South America. For the first four months of this year, total Free Zone business was up 8.2 percent over the same period in 2007. However, that was measured in unadjusted dollar values of the merchandise. Adjusted for inflation the increase is a bit less impressive. Another trend stands out when one breaks the figure down into is import and export components --- exports rose 10.2 percent while imports rose only 6.1 percent. The duty free import - export zone, the heart of Panama's commercial sector, seems to in real terms be experiencing the real but less than outstanding overall growth projected by CEPAL for the whole region, and its merchants appear to be hedging their bets by reducing inventories. The part of our economy most tied to South America is, at the moment, better off that the part of our economy most tied to the United States.

For the next year or so the employment side of the Panamanian economy will be propped up by government spending but we're likely to see problems in the shipping, commerce, real estate and financial sectors and a lot of people who can't afford to buy as much food as they used to are not going to be impressed with claims of this country's economic growth. Recognizing this, the Torrijos administration has reversed course from a few months ago, when it decreed a minimum wage increase that fell way below the rate of inflation, and is now promoting a wage indexing law.

However, we don't control the size and general trends of the world and regional markets our canal and commercial sectors serve. Nor can we accurately predict what indexed wages, our traditional use of the US dollar, a high public debt, climate change and dependence on certain foreign political and economic trends might have on Panama's ability to compete in the world. As a commerce-dependent economy we can affect our fate but it will largely be in the hands of other, as it always has been, and maybe not the other hands that we had expected to hold the controls.

None of that should be so bad. All economies go up and down. Panama's special problem is that we have staked the national economy on a mega-project, the Panama Canal expansion, whose financing is predicated on the 2006 canal usage projections that were based upon certain global economic assumptions that at this point look rather dubious. La Critica, the gory sensationalist tabloid that also happens to be Panama's largest circulation newspaper, put the concern this way in a May 21 editorial: 

We can't forget that the studies to justify the construction of this work are based on an increase in toll revenues, to make the project self-financing.

There exists a reality that if the economic crisis in the United States persists, canal revenues --- even with the toll increases that have been adopted --- will not be as estimated by the administration.