Although growth has slowed down in recent years, Panama’s newly formed relationship with China has refueled future potential.
Panama’s USD-based economy rests primarily on a strong services sector that accounts for more than three-quarters of GDP. The sector comprises the Panama Canal, the Colón Free Trade Zone, logistics, insurance, and container ports, among others. However, a well-developed services sector is always built on the back of mega infrastructure projects. The construction sector has been one of the greatest contributors to Panama’s GDP over the years, fueling the services sector and enabling the country to reach levels of economic growth that have been looked upon with envy by other regional countries.
At USD1.65 billion, Panama’s GDP from construction in 1Q2018 has increased by USD78 million YoY, continuing its upward trend from USD1.48 billion in 1Q2016. This is despite a welcoming drop in annual growth rate, which experienced significant volatility while ranging between 4% and 12% from 2010-2015, before stabilizing around a healthy 5% since 2016. In 1Q2018, the construction sector recorded a YoY growth of 8.3% due to a number of development public and private projects, including the expansion of the Panama Metro, the construction of the Amador Convention Center, a new cruise port on Amado, and Panama Colón Container Port, which is backed by USD1.1 billion in Chinese investment.
The establishment of diplomatic relations between Panama and China on June 12, 2017 is without doubt the biggest development for Panama in recent years, especially as US President Trump and his administration have taken a more protectionist stance on trade. Soon after Panama decided to end ties with Taiwan, both countries signed 19 deals, including a feasibility study on a FTA. Chinese financing will also be injected in the areas of hydroelectricity, energy, infrastructure, and agriculture. Notably, Powerchina has selected Panama as its regional headquarters for the Americas, and in 2017, the company was awarded the water infrastructure project “Extensión del Anillo Hidráulico hacia Panamá Este.“ While talking to TBY, Hou Xiaotun, Powerchina’s Executive Vice President, said: “What sets Panama apart from the rest is its strategic geographical position, economic stability with USD as its currency, political and social stability as a democratic country, and its high-quality infrastructure, as well as its Multinational Corporation Headquarters law that provides benefits at the corporate and personal level such as tax exonerations and special visas for personnel.“
Beyond the national level, Panama’s relations with China bode well for the region as both parties signed an MoU on cooperation within the framework of China’s One Belt, One Road (OBOR) initiative. In February 2018, Panama’s President Juan Carlos Varela said Panama is considering building a railroad between Panama and other Central American countries, with a 450-km track to Costa Rica as the first step, which would require an initial investment of USD5 billion. The Panamanian president added, “50% of cargo ships which come from China’s east coast go back 50% empty. An enhanced infrastructure can help reduce that number and improve two-way trade especially in food and agriculture products.“ Although it was not the first time that a Latin American country appeared in an official statement of OBOR, it was the first time China signed a specific agreement to incorporate a Latin American country into its OBOR umbrella, underscoring Panama’s leading role in the region.
Panama’s economic supremacy over its regional peers was further highlighted by Moody’s ratings in 4Q2017. The US-based ratings agency improved Panama’s credit rating and changed the country’s outlook from stable to positive. Moody’s said, “Panama’s GDP growth rate continues to outperform peers, supporting its economic strength,“ and that, “Panama’s debt trend will improve over the coming years, supported by fiscal consolidation and compliance with fiscal rule.“ The report even suggested Moody’s could improve the rating even further if debt consolidation performs a tad better than predicted, signaling an extraordinary feat for a country regarded as third world by many—an image Panamanians are hell bent on breaking.