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Latin America Investment News on Viva Tropical

Will Panama’s Economy Ever Bust?

Article Summary:

The Panama Canal and mega infrastructure projects continue to drive Panama’s economy. Now it is trying to put its economy, with a nominal value of about $35 billion, on full display at a regional gathering of finance ministers and central bankers for the annual meeting of the Inter-American Development Bank. The objective is to try to bolster its role as regional trade hub.

Photo Credit: Shio Shuili via flickr

Original Article Text From Wall Street Journal:

Panama’s Economy to Extend Strong Growth in 2013

The economy of Panama is slated to continue thriving in 2013 after posting double-digit growth for two straight years as a boom in construction and transportation tied to the expansion of the Panama Canal continue to drive economic growth.

Panama’s gross domestic product expanded a whopping 10.7% last year, driven by large infrastructure projects that include the expansion of the Panama Canal as well as a boom in real estate in Panama City, where high-rises increasingly dominate the skyline.

For this year, the government of President Ricardo Martinelli expects the red-hot economy to grow about 8.5%. The official estimate is a tad more optimistic than some Wall Street projections, but the government says it views the 8.5% figure as a conservative forecast.

The Central American nation is now trying to put is economy, with a nominal value of about $35 billion, in full display at a regional gathering of finance ministers and central bankers for the annual meeting of the Inter-American Development Bank. The objective is to try bolster its role as regional trade hub.

With the expansion of the Panama Canal, set to be completed next year, the government has been able to boost public investment, which is helping drive the faster levels of economic growth.

The expansion will allow for more and larger ships to pass through the canal, a change that will represent a “compete change in the economic model of the country,” Finance Minister Frank de Lima said in an interview. The government revenue from the canal is currently about $1 billion, but with the expansion that figure will jump to $4 billion per year, says Mr. De Lima.

The construction sector expanded more than 30% in 2012, a figure that reflects the sharp increase in public spending since Mr. Martinelli took office in 2009.

After being sworn in Mr. Martinelli raised eyebrows by unveiling a $14 billion investment plan for his five-year term in office. The figure represented nearly about half of the country’s gross domestic product in 2009.

“It was a huge risk but also it gave the economy a tremendous stimulus,” said Joydeep Mukherji, a managing director with ratings firm Standard & Poor’s.

The country of about 3.6 million people is preparing to open its first subway line in the capital next year and other large infrastructure projects are already up and running.

Mr. de Lima says that the government has largely been able to meet the deadlines for executing the projects by streamlining its auctions for public contracts and weeding out corruption.

The booming economy has also brought some unwanted side-effects. Inflation–which is at 4.6% for the 12 months through January–is higher than the government wants, Mr. de Lima said.

But with an economy that has been using the U.S. dollar as its currency for more than a century, there is little that the government can do to fight inflation. Using the dollar essentially means that Panama relies on the U.S. Federal Reserve for its monetary policy and anti-inflationary efforts.

“We depend on the monetary policy of the U.S., but using the dollar helped our country develop as an international banking center and avoid the hyperinflation that afflicted other Latin American countries in the past,” Mr. de Lima said. “The pros have always outweighed the cons,” Mr. de Lima added.

Some observers are also wondering what will drive the economy once the public works are completed and the expansion of the canal is finished. Most analysts project a modest slowdown, but Mr. de Lima says that the next government should be able to continue to ramp up public spending to spur economic growth.

He estimates that the next administration will have enough fiscal room to earmark as much as $17 billion in new investments.

Other sectors could also pick up the slack, Mr. de Lima said. The country has one of the largest undeveloped copper mining projects in the world. Controlled by Canadian mining firm Inmet Mining IMN.T -0.19% Corp, when it is up and running in 2016, it could produce some 300,000 tonnes of copper per year.

Other sectors like tourism and real-estate are also set to continue to perform strongly, Mr. de Lima said.

Mr. Mukherji, from Standard & Poor’s, seems to agree. “This is not a one-horse town. There are other sectors that haven’t received much attention but that will probably do very well,” he said.

Link to Original Article:

From Wall Street Journal

  • Robert in Canada

    Panama’s economy will go down when a left wing government takes over in the future.

    Here is how it works:

    - A free enterprise government builds the economy up and everyone benefits

    - This creates a lot of taxes for government

    - The government starts promising lots of ‘free’ things to buy votes and stay in power

    - Then a left wing anti-business party promises even more ‘free’ things and gets elected.

    - The anti-business government ruins the economy and chases away business people who are the ones that build economies

Latin America Investment News on Viva Tropical