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Economic brain trust at work. Photo courtesy of the Presidencia
Forget any notion that we won’t be affected
How badly will the US financial problems hurt Panama?
by Eric Jackson
Denial ain't just a river in Egypt.
Yes, there are those who point out that Panama didn't suffer much and the Canal Zone didn't suffer at all during the US Great Depression of the 1930s. That's bit of commonly accepted wisdom from well before most people's personal memories, and of a time when Panama was mostly an agricultural and fishing economy for local consumption, before the rise of the Colon Free Zone and Panama City's banking center. Moreover, most evidence is that the much smaller part of the Panamanian economy that did have dealings with the world economy did slow down in the 30s. The US government employees, civilian and military, may have carried on their lives as usual back during the Depression, but in case you haven't noticed, nowadays that sector of the isthmian economy is gone.
Real estate and retirees
Moreover, before the US financial meltdown and sell-offs on stock exchanges around the world, the deflation of the US housing bubble was affecting Panama. It had something to do --- though not everything or even most things --- with the popping of Panama City's upscale residential real estate bubble. Americans who would like to retire here have been having trouble selling their houses up there for the prices they want or need for some time now, and that has slowed the ingress of middle class retirees from the United States. (The gringo millionaires who are dying to plunk down their money for an overpriced condo overlooking the polluted Panama Bay (until the next developer builds in front of them) are, in case you haven't noticed, only slightly more common than Bigfoot.)
There have been offsetting factors. A few days before the US financial crisis began to dominate the headlines, Henry Smith of Paradise Services, a micro-enterprise that specializes in helping foreigners to retire here, said that his business was continuing at about the same level, but with fewer American clients and more Canadians and Europeans. Colombians and Venezuelans are also still coming, Smith noted. That figures, and also jibes with the identities of the lower-end tourists seen around the Internet cafes, pensiones and other establishments near The Panama News office in Perejil.
So with European, Canadian, Asian and Latin American securities exchanges showing substantial drops in response to the US crisis, might that mean deeper economic woes around the world and a slowdown of business from those regions that have been picking up the slack from the Americans as well? We really don't know the breadth (or the depth) of the crisis that's unfolding. A US illness would be one thing, a global slowdown another.
You still have those cheerleader types like Jesse Levin, of Archer Group Investments, who wrote on Sam Taliaferro's Panama Investor Blog that "potentially decent spreads could be made buying from the eager US sellers one day and flipping to the relocating Venezuelans the next" --- but before the sentence was over he hedged that bit of advice.
By all credible accounts the Panamanian real estate market has cooled a bit, but the question remains how much.
The related construction sector remains strong for the moment, with several segments that are largely beyond the influence of the commonly recognized market forces.
First there are all the public projects, which are going full blast with a PRD administration seeking to reward its friends and keep the government under that party's control in next May's election. These include, along with many lesser public works, the Panama-Colon Autopista, the Cinta Costera, a new metro area sewer system and the Panama Canal expansion. Eventually global economics catch up with governments, but usually that takes some time.
Second, reputedly but surely not exclusively in the upscale residential part of the construction industry, there is the influence of organized crime. There are many ways to play it --- as builder, backer, buyer or seller, or as a person who purportedly provides materials or services to any of these --- but the laundering of money made from illicit drug trafficking or other criminal activities fuels a hard to precisely quantify part of the construction sector. Given the counter-cyclical economic tendency of many people to intoxicate themselves more frequently during hard times, this might even be a growth industry in a prolonged and severe US economic downturn.
Canal and commerce
The global trends are looking ever bleaker for Panama's principal industrial asset, the Panama Canal, and the sectors it drives. Yes, there is an expansion job underway and all those hundreds of canal construction workers are buying things from local merchants. But meanwhile the generally stated figure is that the canal is looking at a 25 percent drop in shipping traffic over the next year or so, and if the Panama Canal Authority (ACP) assures us that the slowdown is only short-term they also once guaranteed us that in this year we would be in the midst of a generation-long sharp increase in US imports from China, and told us that the canal expansion, which has provided jobs for hundreds of workers, would be providing work for 297,400.
So now that anyone with any sense discounts what Rodolfo Sabonge and canal administrator Alberto Alemán Zubieta's other mouthpieces say about the economy, what is the prognosis?
Bloomberg News and other international business media reports that worldwide orders for new container ships --- including those post-Panamax jobs for which the canal is being expanded --- are down about 50 percent. The Panama Canal has reported small declines in containers passing through the canal in the last year or so.
A source in the local shipping industry said that in recent weeks there has even been a slight increase in canal traffic. But our source warns of serious trouble looming over the canal, both on its traffic and expansion financing sides. "I suppose that people will always have to eat, so commerce in grain and petroleum and other basic commodities will continue, but China's the industrial engine and if people can't buy their products they'll be sending fewer consumer goods through the canal, and they'll also be importing fewer raw materials," he told The Panama News. The shipping agent also dismissed the ACP's boasts about its supposed AAA bond rating, pointing out that "Lehman Brothers was AAA too," and opined that in a tight worldwide credit market the funds to expand the Panama Canal will range from expensive to commercially unavailable.
These sorts of canal concerns were echoed by Roberto Brenes, the manager of Panama's Bolsa de Valores securities exchange, in an interview with La Prensa.
The question mark over the canal business was accentuated by the worldwide October 6 decline on world stock exchanges, which also affected Brazil. If the Brazilian economy continues to grow with its US counterpart in decline, that might provide a cushion from the Panamanian transportation and commerce sectors' perspectives. But if Brazil joins a worldwide slowdown that's another economic hit to Panama. What goes on in the economies of Chile, Peru, Ecuador, Colombia and Venezuela is also a matter that affects the canal and in most of these cases of the Colon Free Zone as well.
A strong euro and a weak US dollar changes the nations from whence many of our tourists come. However, a public policy emphasis on students at all levels learning English to the exclusion of all other foreign (or indigenous) tongues limits our ability to attract European and Asian tourists.
Other countries in the Latin American and Caribbean region that have had similar tourism strategies to ours are seeing contractions as the result of US economic problems. In Costa Rica, more than $1 billion in hotel construction projects have been put on hold. In Jamaica, Prime Minister Bruce Golding denies that his country's financial sector is at risk but warns that its tourism industry is going to take a very hard hit from the US financial crisis. In anticipation of a tourism slowdown the Jamaicans have announced a subsidy to American Airlines to maintain its flight schedule to and from the island even if the number of paying passengers doesn't in itself justify it.
Here, Tourism Authority spokesman Ricardo Ledezma announced that the international situation will not affect tourism or tourist infrastructure development. He based that on the requirement that to be officially recognized as a tourism development an enterprise must demonstrate that it has the necessary funding for its project.
Negative situations in the USA have been one of the factors driving part of Panamanian tourism. It used to be that rich folks from the Andean and Central American countries preferred to go shopping in Miami or New York, but in the years after Osama bin Laden's attacks on the United States it has become harder and more expensive to get a US visa and the welcome that Latin American travelers get at US ports of entry tends to be unfriendly. Thus Panama City now has a lot of upscale retail stores that cater largely to foreign buyers and we are a growing alternative air hub for Latin Americans who wish to travel around the region or to and from Europe without stopping over in Miami. Some of these factors that worked to Panama's advantage may change next year as the result of November's US elections.
And our government...
If the Bush administration first reacted to the financial meltdown by demanding that complete control be put into the hands of the former CEO who drove Goldman Sachs into the ground, the Torrijos administration acted with similar creativity.
On October 1, as some of the heaviest US financial blows had yet to fall, the bailout had yet to come before Congress and world stock markets had yet to react, the Panamanian president assembled the PRD's economic brain trust --- except for those old party stalwarts who had warned that the canal expansion was a risky venture --- to analyze the world economic situation and review its possible effects here. At Torrijos's right sat former World Bank vice president Nicolás Ardito Barletta, who was proclaimed president of Panama after a 1984 Noriega-engineered election fraud. Second on the list of experts was former planning minister Guillermo Chapman who, along with Barletta, predicted that once multiplier effects were counted the Panama Canal expansion would created 240,000 jobs. (The expansion itself will employ about 7,000 people, most of them not for the duration of the whole project. The ACP gave the Barletta family's ad agency a publicity contract worth more than $1 million and fudged the Barletta / Chapman jobs number up to 297,400 for the 2006 canal referendum campaign.) Also present at the president's meeting were economists / apparatchiki Marco Fernández, Fernando Aramburú Porras, Orville Goodin, Hernán Arboleda, Pedro Mora and Horacio Estribí; bankers Juan De Dianous and Sergio Altamiranda; and government officials Samuel Lewis Navarro, Carlos Vallarino, Olegario Barrelier, Héctor Alexander, René Luciani, Guillermo Salazar, Gustavo Villa, Juan Martáns and Ricardo García. The president decided to create a Special Follow-up Group from among those in the room to continue monitoring the situation. The brain trust, for its part, encouraged the president to continue his budget and economic policies.
Torrijos also announced that the government would be checking on the security of the assets it and other quasi-governmental agencies have deposited in threatened overseas institutions. The most noteworthy deposit of them all, or at least the one that has received the most notice, is the $39 million that the ACP parked in Wachovia bank.
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2008 by Eric Jackson
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