Panama harbors ambitions beyond its canal

By Patrick Rucker

PANAMA CITY (BestGrowthStock) – A generation after Panama shed a tradition of military rule, canny fiscal management and good stewardship of its emblematic canal have made the tiny country a model of success for today’s frontier markets.

An investor darling that has grown rapidly over the last decade and even managed to dodge recession during the recent global downturn, Panama’s government debt has received a coveted investment grade rating by Fitch and S&P.

Panama will not realize its ambition of joining the world’s most developed nations until it cleans up its murky banking system and narrows a wealth gap that leaves a third of its people in poverty, but economists say it is well-positioned for steady growth.

“What’s striking is that this is such a broad-based economy,” said Boris Segura, an economist with the Royal Bank of Scotland. “Yes, they have the canal but there is also tourism, construction and a growing financial services sector.”

With a population of just 3.4 million, Panama will never be a China or a Japan but local leaders say it can aspire to become like Singapore, an affluent and diverse crossroads for international finance and trade.

“Nobody is going to come to Panama to sell to the domestic market. We tell investors ‘Come to Panama and sell to the world'”, Trade Minister Roberto Henriquez told Reuters. He sees the small isthmus nation’s future as a boutique exporter of high-margin goods and services.

Dozens of multinational companies such as Caterpillar (CAT.N: ), Hewlett Packard (HPQ.N: ) and Dell (DELL.O: ) have been drawn to Panama in recent years as the country has thrown its doors open to foreign investment and President Ricardo Martinelli, in power since last July, hopes to attract more.

While foreign investors put only about $500 million a year into Panama in the 1990s, the country attracted $8.6 billion between 2006 and 2009, according to government and U.N. data.

Low taxes, easy immigration and flexible labor laws have been among the attractions, along with an abundance of available land.

“A multinational company takes baby steps, and we have room to grow,” said Henry Kardonski, who is directing the conversion of a former U.S. Air Force base into 5.4 square miles (14 square km) of mixed-use development near the Panama Canal that will combine light industry and a residential community.

Investors have been impressed with Panama’s tight fiscal balances and pro-business policies, but much of its growth stems from the canal which is a transit point for about 4 percent of global trade.

Storage and distribution centers are expanding along the canal beltway while the transport and finance sectors continue to grow. The government is tapping those industries for tax revenue and drawing from international creditors to expand its infrastructure.

A $5.25 billion expansion of the canal should be complete in 2014 and the government plans to spend another $13.6 billion on infrastructure and social programs in the next four years.

“The numbers tell us that we can continue stepping on the pedal without going into profound financial problems in the country,” said Henriquez.

But with a capital skyline that resembles Dubai of yesteryear and politicians promising to pour even more concrete in a building spree, some fret that spending or growth could spin out of control.

There are also worries Panama has not put to rest the uglier parts of its recent past.

“Are they going to squander these gains? The jury is still out,” said Segura, who is bullish on Panama but uneasy with a recent edict by Martinelli against street protests and his attempts to centralize authority.

It has been more than 20 years since General Manuel Noriega was frog-marched from power after U.S. Marines invaded and extradited the military strongman on drug trafficking charges.

Some worry, though, that Panamanians have uneven memories of the Noriega era and might be too willing to accept another authoritarian figure who promises wealth, stability and more social programs for the poor.

“Back then, there was a lot of money, people say. There was a lot of money in the street,” said vendor Fidelio Chocho, ladling out pineapple juice to customers by the Vatican embassy where Noriega made his last stand, surrounded by U.S. troops,

around Christmas 1989.

“That happened here?” Chocho asked, when told that he was standing next to the historic site.

CANAL SPURS GROWTH

Much has changed in Panama City since that standoff, with luxury condos and a highway overpass now crowding the Vatican Nunciature.

The rise in canal traffic is lifting Panama’s financial industry and the government is parceling out valuable land along the banks of the waterway for warehouses and transfer stations. Caterpillar plans to build an expo center near the canal banks where it can show off its new heavy gear.

Frontier markets do not commonly inherit such valuable assets as the canal, but Panama has also been a meticulous caretaker since the 1999 handover from the United States. Rather than drain money from it, the government has used the Big Ditch as a cornerstone of broader growth.

Panama will get a prolonged boost from the canal upgrade and is reaping a modest windfall too as wealthy economic refugees arrive from other Latin American countries like Venezuela, Ecuador and Bolivia, where left-wing governments have spooked business leaders and investors.

Panama’s dollar economy and small population would have typically meant prohibitively high production costs for foreign firms. But government incentives and the upgraded canal are two reasons to set up a base there, said Kardonski, who is supervising the project at the former air base for London & Regional Properties which hatched its master plan with blessings from the World Bank.

“If you source some parts from Asia and others from South America, you can bring them here for assembly,” he said, listing diverse tenants from aerospace to pharmaceuticals.

Panama still has much growing up to do before it can join the ranks of the world’s most stable, prosperous nations. Its banking system is considered an unfair tax haven eight years after Panama agreed to raise its international standards, prompting banks like BNP Paribas to pull out.

Critics also say the free trade zone, service and building sectors can be a magnet for drug money laundering, and say some promoters of high-rise condos fail to make proper checks on where the money comes from.

Also, while the economy has been growing at breakneck speed, the poverty rate only dropped from 36.8 percent to 32.7 percent between 2003 and 2008.

Some foreign executives worry that Panama’s education system cannot produce enough skilled labor to fill new jobs although the government is creating ad hoc training programs and allowing more foreign workers in as needed.

A Singapore aircraft repair facility, for example, receives technicians with basic qualifications from a feeder program.

The strong economy reflected in growth figures is also seen on the streets of Panama City where Noriega’s former officers’ club is being turned into a boutique hotel and the faded colonial quarter is getting a spruce-up.

Even the notorious Terraplen neighborhood, known for its gritty cantinas and market for fenced goods, is being cleared to make room for a oceanside promenade.

“As a merchant, I don’t like this but as a Panamanian I understand it,” said Andrea Najar, who represents the dozens of merchants who peddle tools, electronics and bric-a-brac.

“Maybe when you come back here I will be selling Gatorade to tourists,” said Roberto Preud’homme, one merchant who said he can adjust to the changes.

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(Additional reporting by Sean Mattson in Panama City, Robin Emmott in Monterrey and Jason Lange in Mexico City; Editing by Kieran Murray)

Panama harbors ambitions beyond its canal