Panama is already setting the foundation for a soft landing after the current red-hot boom slows in the next two to three years, a senior official told Emerging Markets yesterday.
Dario Espinosa, director of public credit, said the administration was working on a plan to guarantee sustained, long-term growth at 6% annually. Growth last year was in double digits.
“We are looking at logistics, banking and financial services, construction and social investment as sectors that will permit the country to continue to grow at high rates,” he said.
It is the kind of soft landing other countries would covet. Panama is not preparing for a crisis or even a major downturn, but wants to be ready as one of the engines of growth, construction, slows in 2014-2015.
The number of massive infrastructure projects underway in Panama, a country with only 3.5 million people, is dizzying. The lead project is the Panama Canal expansion, a $5 billion project that will be completed toward the end of 2014.
Also underway is a roadway project rerouting major arteries in Panama City, construction of a subway system and a water and sanitation system replacing existing piping to clean up the bay in the capital.
Construction currently accounts for 7% of the economy and is the primary reason why it has the lowest unemployment rate in Latin America - and the lowest in its history - at 4.5%
The canal, while emblematic, accounts for 5.7% of the GDP. That will change. Dividends paid to the central government in 2011 passed $1 billion for the first time in 2011 and there will be annual increases starting in 2015, the first year ships will use the expanded canal.
The administration expects dividends to reach $3 billion by 2020, rising by $300 million annually due to higher rates and increased traffic.
While the administration is planning for a construction tail-off, there are signs this might not happen. There is keen interest in Panama’s mineral reserves and the country’s first large-scale copper mine should start construction shortly.
There is also a joint plan with Colombia to build an interconnected electric system that would include construction of a transmission line from Colombia to Panama. The long-term vision is for the line to extend into Central America and possibly as far north as Mexico.
The energy interconnection will also help Panama lower its import of fossil fuel. This is a key component, because the government subsidizes energy use for clients who use less than 500kV. The subsidy caused the administration to miss its deficit target last year. It was set at 1.9% but came in at 2.3%, due principally to the high price of fuel used to produce electricity.
The soft landing will be helped by a diversification of the economy, which was dominated a decade ago by the canal and financial sector. Today, the largest component of GDP continues to be transportation, but it represents 18%. Other double-digit sectors include real estate and retail, at 18% and 15%, respectively.