Trade hubs the world over have been pummelled by the global recession. World trade flows are forecast to fall 12% this year, many times the drop in global GDP. One wouldn’t expect this context to be very kind to Panama. But the country whose tiny size is its greatest asset is holding its own.
Panama rode the rising tide of international trade in the boom years. Average annual growth reached 7.8% in the 2003-07 period, cresting at 9.2% in 2008. This is well ahead of average South American growth of 5.4%, and even further ahead of the 4.7% increase seen in Central America and the Caribbean. Near-term prospects for the region are much lower, and Panama is no exception. But the trade-dependent republic will continue to outperform its neighbours. What is Panama’s secret?
Capitalizing on world growth in the good years was natural. Trans-Pacific shipping exploded over the past decade with the surge of China-US trade. Traffic through the Canal intensified in the fall of 2004 as West Coast ports hit capacity limits. Frenzied retailers re-routed ships to ports on the US Gulf Coast and up the eastern seaboard through the Panama Canal. To avert future capacity shortfalls, West Coast ports invested immediately, but the spurt of expansion was short-lived. And for the coming five years, the bulk of US port investment will be in the south and the east. As such, global recovery is likely to further intensify bi-directional shipping activity in the Panama Canal.
Geographic attributes and heightened global trade activity are key to Panama’s past, present and future success. But sound economic management is also playing a critical role. Steady revenues and spending restraint generated a decent public surplus in 2008, and reduced public debt from 70% of GDP in 2004 to 46% last year. Moreover, debt maturities were lengthened and average interest rates lowered during the high liquidity years, reducing interest payments significantly. This has reduced Panama’s vulnerability to the economic downturn, and contributed to lower market volatility.
In addition, Panama is paving the way for future growth by negotiating and signing multiple free trade agreements. Since 2002, Panama has signed trade deals with El Salvador, Taiwan, Singapore, and Chile, and just this year inked a deal with Guatemala. To top this activity off, a free trade agreement with the US has been negotiated, and is currently awaiting Congressional approval.
Panama has been hit by sharply lower global trade, but will still post modest growth, thanks to huge public stimulus. The $5.3 billion canal expansion project is well underway, and completion is slated for 2014. Also, new credit facilities totalling $800 million will tide the economy through the lean years.
Canada has participated in Panama’s boom. Exports have increased by 28% annually since 2006, with machinery exports leading the charge, up 54%. Latest figures show that Canadian investments in Panama totalled $111 million in 2006. The bilateral trade and investment relationship is expected to deepen, with the conclusion in August of negotiations for a Canada-Panama Free Trade Agreement.
The bottom line? Panama has capitalized on the global trade boom, and is adding capacity during the recession to gear up for global recovery. Established market presence and a free trade agreement that is well on its way suggest that Canada is poised to participate in this dynamic market’s success.