FACTBOX-Key political risks to watch in Panama

By Patrick Rucker

PANAMA CITY, May 21 (BestGrowthStock) – After pulling through the
global economic downturn on a streak of growth and winning
investment grade rating earlier this year, Panama is on a roll,
but there are still risks for investors in the isthmus nation.

MARTINELLI’S POLICIES

Panama has had five presidents since military strongman
Gen. Manuel Noriega was ousted by U.S. troops in 1989, and it
has improved its democratic institutions in that time.

Still, President Ricardo Martinelli, sworn in last July, is
accused by some of having an authoritarian streak. A
supermarket magnate who formed his own political party in 1998,
Martinelli is charismatic and energetic and enjoys high
popularity ratings. But opponents say he is clamping down on
civil liberties with moves like a recent law to punish
road-blocking protesters with up to two years of jail, and he
is seen as trying to centralizing power with controversial
Supreme Court judge nominations and by replacing the attorney
general with a political ally.

Martinelli has spoken of the need for political reform,
fueling speculation he may seek to allow consecutive
presidential terms and join a handful of Latin American leaders
who have rewritten the constitutions and extended their time in
power .

What to watch:

— Signs of Martinelli continuing to assert himself and
seeming intolerant of dissent could make investors nervous.
[ID:nN03369350]

— Martinelli taking any steps toward trying to change the
constitution to permit a president to hold consecutive terms.

FISCAL POLICIES

Years of fiscal restraint paid off earlier this year when
Panama’s government debt was given an investment grade rating
by Fitch. But while the government has promised to maintain its
thrifty ways, some see major infrastructure plans as
potentially budget-busting. Officials have promised roughly $20
billion in new spending over the next four years – quite a sum
for a developing nation of 3.4 million people. While $5.25
billion of that is earmarked for the Panama Canal expansion,
another $2 billion is earmarked for an overhaul of Panama
City’s strained public transport system, including a subway
line that some say is unneeded.

What to watch:

— Expanded public spending and infrastructure projects
[ID:nN17134415]

— Government deficits exceeding 2 percent of GDP
[ID:nN10171300]

INFLATION

The long economic boom has created inflationary pressures
in recent years, hitting 8.7 percent in 2008. It then slowed to
2.4 percent last year but some economists fear that rising fuel
costs and a re-energized economy could again push inflation
higher.

What to watch:

— New inflationary pressures.

— As unemployment continues to fall, the government will
face more pressure to ease immigration to keep prices under
control.

REAL ESTATE BUBBLE

More than two dozen towers are going up around downtown
Panama City to join an already sizable huddle of skyscrapers,
but many of the projects that broke ground during the real
estate boom were idled during the downturn. Locals say some
unfinished buildings might be weatherproofed until financing
and demand improves. Pessimists point to a recent decision by
Fitch to downgrade $220 million of senior secured debt tied to
a seaside residential project. Donald Trump has lent his name
to that high-end tower but worrying cost overruns put the
rating agency on edge. There are also signs that would-be condo
flippers smell a market bubble and are getting out.

While Panama City’s housing market is facing a price
correction, many locals point out that their banks are not
highly leveraged on those deals. Cash deposits should shield
creditors from much of the pain of a housing price correction.

The construction boom can be a magnet for drug money
laundering, U.S. anti-drug officials and Panamanian
anti-corruption groups say. They accuse promoters of failing to
ask where speculators’ money comes from and say drug cartels in
the region wash dirty money through apartment buildings that
can produce bogus rent receipts.

What to watch:

— Buyers walking away from condo investments, shredding
contracts and losing deposits.

— High vacancy rates on apartments that have already been
built and with most units already sold. [ID:nN30345797]

CRIME

Panama has largely avoided the drug gang-related violence
that has swept across Mexico and much of Central America but
violent crime is trending upward.

A lawless border with Colombia has turned Panama into prime
cocaine-trafficking territory in recent years. Gangs of
traffickers and street gangs are blamed for much of the
violence. So far, Martinelli’s crackdown on crime has shown few
results. The fight against institutional corruption is also
going slowly.

What to watch:

— Increasing volume of drug-related violence in the cities
and frontier hinterland. [ID:nN11220616]

LABOR SHORTAGE

Foreign companies considering a base in Panama City fret
that the country cannot deliver the steady supply of
well-educated workers needed for a boutique economy
specializing in finance, logistics and services.

Some of that pressure is alleviated by liberal immigration
laws but the government is also creating school programs to
directly feed skilled labor to some specialized projects. The
completion of expansion work on the Panama Canal in 2014 should
bring more laborers online and there is ample room for greater
urbanization.

A large share of the workforce is in agriculture which
makes up only a small share of the economy so efficiencies in
that sector promise to free up labor.

What to watch:

— A growing number of targeted labor programs that try to
feed specific industries but do not raise education standards
overall.

— Liberalized immigration policies not keeping pace with
the demands of expanding service industries.

Investment

(Additional reporting by Sean Mattson and Robin Emmott;
Editing by Kieran Murray)

FACTBOX-Key political risks to watch in Panama