Panama, economic growth, Panama Canal, economy, industries, public debt, private investment, employment, laid off, lay offs, agriculture, infrastructure

Where did the economic growth go?

A few days ago Standard & Poor’s improved Panama’s risk rating to BBB – indicating that Panama has shown consistent economic growth and a stable fiscal policy.  This is in line with the rating which Panama has by Fitch. Nevertheless, this rating comes on the heels of news that Panama’s foreign investment dropped by 17% in the first quarter of 2018, compared to the same period in 2017.

A lot of people in Panama are asking themselves – where did the economic growth go?

Shops are closing.
People are getting laid off.
And what about the 30 days of strike by the construction workers and the millions that were lost by construction companies during those days that turned into weeks?

But the cost of living in Panama City is the highest in Latin America.

How do they measure risk?

What many fail to understand regarding this risk rating is that it takes into account global factors such as:  international debt management (with the World Bank), GDP, government fiscal policies, banking and financial transparency, and even private investment in infrastructure projects.

Panama, shipping, transportation, logisticsMany of these aspects are out of the reach of the average consumer on the streets in Panama.  They are not seeing in their pockets (no trickle down here), the efforts from the expansion of the Panama Canal and the ports. No one is talking about all the development that is happening on the Caribbean Coast since opening up the third bridge across the Canal in Colon.  And no one believes that corruption is truly being addressed, as mentioned in the S&P report.

But, the S&P takes into account international aspects, such as exchange of information policies, which have changed substantially over the past 5 years.  They also take into account the new regulations for stopping money laundering and the supervision of previously unregulated business areas (real estate, casinos, and even accountants and lawyers).

All these things that the little man on the street has no real interest in.

Addressing poverty:

In formal circles, there is talk about how this government has addressed poverty, and especially criticism of the report that “150,000 have now moved above the poverty line.” But, as many point out, this is simply because of an increase in welfare subsidies – it is not actually because of increased employment!   The poverty line in Panama is a mere $60.00 a month, and so with the subsidies introduced by this government, they have “effectively” moved people out from below this poverty line.

Panama, poverty, economy, economic growth, trickle downUnfortunately, however, they haven’t actually solved the problem.  They simply moved it to a different place!  While these families are now receiving the welfare subsidy, no new policies, training, education or other measures are being introduced to break the poverty cycle in these communities.  They are simply depending on welfare!

The perception (i.e. the reality of the common man on the street) is that unemployment has increased.

There are more people “camaroneando” – which is basically picking up odd jobs wherever they can!  The Panamanian word “camarón” apparently has it’s origins in “come around” – like “why don’t you come around on Saturday and mow the lawn for me?”

So, while on the one hand you have official government figures saying that they are making headway in addressing poverty, the average worker on the street would disagree.  If unemployment has increased and relying on odd-jobs has become a way of life for many more people, then “how is it that we are better off now than before?”

A more real criticism that I see is that most countries don’t establish an arbitrary figure to calculate their poverty line.  They use their GDP as a measure – anyone that is getting LESS than half of the GDP would be considered to be under the poverty line.  Assuming that Panama’s GDP is still somewhere around $14,000 a year, that means that anyone earning less than $600/month is under the poverty line.  How many people does THIS leave in “poverty”?  In other countries, they will call these the “working poor”.  How are Panama’s “working poor” doing?

And let’s be real: one of the World Bank’s criticisms of Panama in its recent visit was that Government (i.e. size) was growing faster than the economy and the taxable income.  In other words, our government is getting too big for the country – it’s costing more than it receives in taxes!

A $300M injection into the economy

One solution for this situation is a $300 million injection that the Government has requested (taking from Peter to pay Paul), by authorising an increase in the budget deficit.  This is apparently to assist businesses that were hardest hit by the construction strike earlier this year.

The sole purpose of this cash injection (they haven’t actually said what they will spend the money on other than “investment projects”) is to help the struggling economy.  Unfortunately, however, what is true is that the strike did affect two major infrastructure projects – the finishing of the expansion of the Tocumen International Airport and the Metro Line #2.

The government needs to have both of these megaprojects finished by January 2019, because of the World Youth Day celebrations that will take place in Panama!

Looking back over recent years

But, even if we look back at 2015, where Panama was still doing quite well in terms of growth (at least, it hadn’t slowed down as much as we are now seeing in 2018), we are still left with questions.  Where has this economic growth gone? Who is receiving all the money? Where is it going?

If the man on the street is saying we’re in recession – why are official figures still showing national growth?  Car sales have dropped by 9%. Foreign investment drops 17% in the first quarter.  But we’re still fine.  Panama is still growing.

Where?

If we look at 2015, foreign investment was about $5 billion.  For Panama, that means we’re flying! And yet, in 2015 unemployment was already starting to increase and we were already starting to see some shops closing or reducing their sizes.

dollar-1319600_640One reason for this change is the change in ownership of local businesses – Panamanians that owned Café Duran, Cervecería Nacional, the mills, the sugar mills, the milk companies, etc., all sold out for a profit.  They then took those profits and moved to Florida (or wherever).  That’s to say – they cashed out.  Now foreign companies own the production.   Add to that, foreign companies own all the major infrastructure (telephone, electricity, etc.), at least in partnership with the National Government (state owned enterprises).

So, if you took a look at the daily life of Panama – about 95% of the profits of any company in Panama are now headed overseas.  Twenty years ago, although we had none of the infrastructure that we have today (because of all the foreign investment that made this possible), all the profits remained in Panama.

All major infrastructure projects undertaken now in Panama are all foreign investors.  In fact, 45% of all foreign investment into Central America actually comes to Panama – not to the rest of the Central American countries!  But as soon as the project is finished, the company and all its capital leave Panama.  Panama gets the debt and the infrastructure it had built, but all the profits head back overseas.

Let’s blame the Venezuelan crisis

It’s really easy in Panama to fall into the game of just blaming all these woes on those foreigners that come to steal our jobs!  And yes, Panama has received thousands upon thousands of displaced Venezuelans over the past 10 years, and in recent years it has gotten considerably worse.  Yes, there are Venezuelans sending money home every week to their families in Venezuela, trying to keep them alive.  They are working in bars and beauty salons, they are picking up odd jobs anywhere that they can get them. And yes, it is true that violence has increased in Panama, as it has throughout all of Central America!

But really? We’re going to blame it on them?
For me, that fails to address deeper issues!

Panama has so much to offer but at the same time seems to be damned to be just another Latin American country.

So… where is the economic growth in Panama going?  I see it being sent back overseas… the money comes in as foreign investment, bribes are paid, an infrastructure project is built… and the money flows right back out again!

Hopefully I’m wrong!

What now?

I’m no economist and no expert in any of these matters.  I can only speak from where I am seated and what I see.

But I do notice some things that have solution:

  • addressing corruption – let’s stop the bleeding! You can’t save the patient on the operating table if you don’t stop the bleeding. It doesn’t matter how much money you pour into Panama, if we don’t stop the bleeding we have going on, the patient will die on the table!  Is this the biggest problem? Yes, probably!  The corrupt politicians.  The corrupt companies that participate with the bribes and kick backs.
  • addressing the lack of preparation for the new economy.  Panamanians are not ready for the new economy that is taking over world-wide.  Our education system is not up to date. The very mentality in the schools & universities is out-dated.  They are preparing everyone for an economy that existed 30 years ago, and in my personal opinion, not doing a very good job at that, either.
  • agriculture & production – Panama needs a local production and a pride in its own produce. Yes, we want variety & options – but so many countries have established home country brands that its nationals are proud to purchase “made in …”.  That doesn’t seem to exist here in Panama. And we are seeing less and less produced in Panama, and even tradesmen and artisans are shutting down as they cannot compete with the prices of imported goods.
  • science and innovation – related to the last two points – one of the things that I worry about the most in Panama is the lack of innovation and entrepreneurship in Panama.  I don’t see any biotech, a whole lot of clean energy, technology based companies – and especially not owned, operated and run by Panamanians.
  • Why is everyone so scared of entrepreneurship and dependent on someone else being the employer?  Where are all the entrepreneurs?
  • banking and finance – hand in hand with my last question – Panamanians will not change jobs and certainly will not go independent if they haven’t already purchased a home and car, because if they do, they will not qualify for financing from any financial institutions.  The banks will only lend you money if you have a check stub that you can show you receive your fortnightly check from a company and are on payroll.  You are considered “high risk” if you are independent, even if you have your tax returns to show.

 

 

Advertisements
Panama, business, money, entrepreneur, business index, economy, doing business, starting a business, economic indicators, ideal business environment, import, export, fintech, incubators, assistance

Panama’s money stories, part 2

In Part 1 of Panama’s money stories, I highlighted some of the sordid details that Panama has been known for and the ways that Panama has been presented and vilified in the press internationally.  In this Part 2, I want to have a good look at what Panama has to offer, the strengths and weaknesses of Panama’s location, workforce, and infrastructure.  In Part 3, I am simply going to dream of “what could be” – well, because this is PanUtopia.

Location, location, location

Like any good real estate investment, Panama has a great location.

It is the Bridge of the Americas and the Crossroads of the World: with the InterAmerican (or Pan-American) highway travelling East-West along the entire length of the Isthmus (well, except for the Darien Gap which Panama refuses to open – but that’s fodder for another post). Running North-South through the Istmus is the Panama Canal, recently expanded to allow post-Panamax ships to pass through.

The Pan-American highway has many stories to tell, haivng 14,000 miles of road (or roads) that traverse from Tierra del Fuego all the way to the Arctic Ocean. I remember at 8 years old a French couple that had started riding their motorbikes in Argentina and were heading up through Mexico, intending to get all the way to Alaska! pedal moped, riding bikes, interamerican highway, argentina, alaska, mexico, colombia, Panama, Bridge of the Americas

They were something like this – but much more worn and dirty! And fitted out to carry their bags on the back, and side-bags.  At 8 years old, I could only imagine the adventures they were having!  Roll forward to 2018 and we still get those bikers through Panama – perhaps riding better bikes, but with the same adventuresome spirits!

As the land bridge between the two continents, Panama boasts an incredible variety of species, both plant and animal life.  From North America, it has jaguars, tapirs and deer, from South America sloths, anteathers and armadillos, and from the oceans the giant sea turtles which lay their eggs in Bocas del Toro and even on the Casco Viejo beach in Panama City!

Panama, Isthmus, land bridge, Bridge of the Americas, Crossroads of the WorldPanama is blessed in its location: we are protected from the hurricane belt, getting pelted only by tropical storms and heavy rain.  While Panama rests on the Pedro Miguel fault line, it does not have a history of seismic activity.  You might read about the 1621 earthquake, or the 1991 Bocas del Toro earthquake (which actually happened in Costa Rica, but caused considerable damage in the neighbouring Bocas area).  This is one the strongest recorded earthquakes in Costa Rican history, registered at 7.7! But, as noted, it was actually in Costa Rica…

Since the 1500s (you might remember the pirate stories) Panama has played an important role in international trade routes: from Peru through to Spain, with the French and the United States heavily interested in participation in the possibilities of this location.  Even today, Taiwan and China dispute investment and participation in the Panamanian economy (the ports), and a US presence is continually felt under the terms of the 1979 treaty in spite of the removal of a military presence.

Hub of the Americas

Panama Canal, Miraflores, locks, logisticsFrom this location, Panama has become known as “the hub of the Americas” – one of the most significant transportation and logistics countries in the world.

As a travel hub, Panama has developed Tocumen International Airport to attract flights from Europe (KLM, Lufthansa, AirFrance, Iberia, Turkish Airlines, & Condor), China, and North, Central and South America.  The recent investment in the expansion of Tocumen is about 84% completed, with an expected completion in the third quarter of 2018.  This investment project was above US$900M, taking it up to 54 gates and extending the runway for larger aircraft. By 2025, the two terminals are expected to handle some 25 million passengers per year.

Panama has also become an important hub for telecommunications, with the Submarine Cables passing through Fort Amador and Colon (such as the Arcos Cable that connects Central America, Florida and the Caribbean and the South American Crossing cable).  In 2010, Panama became one of the first countries in the world to offer free wireless broadband access nationwide through the National Internet Network project, which provides free wifi at libraries, some busstops and other government sites.  In Panama City, connectivity is pretty easy to get, but there are generally fluctuations in the areas where there are not fibre-optic connections.  For businesses that rely on fibre-optic level connectivity, there are a limited number of neighbourhoods that can guarantee this service.

Panama, shipping, transportation, logisticsAs a logistics hub, Panama intends to make the most of its geographical location, creating the largest logistics conglomerate in Latin America. Shipping, logistics and trade contribute close to 35% to the national economy, making the concept of “hub” vital to Panama’s growth.  It uses the Canal, the ports on the Caribbean and Pacific Oceans (MIT, CCT, Cristobal, Balboa & PSA), the train line between the ports, and Tocumen International Airport (Copa, DHL, FEDEX & UPS), to provide multi-modal solutions.  This is all interconnected with the Colon Free zone and Panama Pacific zone.  The logistics industry is expected to create 10,000 or more jobs per year for the next 10 years or so – over 100,000 jobs in a growing industry!

Obviously, in order to fully develop this hub, Panama needs to continue investing in additional infrastructure for distribution and storage essential to the international business community.  Georgia Tech maintains a Logistics Innovation and Research Center in Panama, aimed at aiding the country to become the trade hub of the Americas.

Open for Business

Panamanians are complaining that the economy has really slowed, and yet it continues to be the 2nd fastest growing economy in Latin America. While the growth rate dropped from 11% in 2013 and 5.3% in 2016, it is still over 4.6% in the first quarter of 2018!  Infrastructure investments are underway in a number of areas, including the building of the second metro line in Panama City and the studies underway for another bridge across the Canal, which will include a metro rail bridge for the third line.

Depending on who you believe, and how the scoring is done, Panama ranks #3 in being “open for business”.  The World Bank rates Panama as 79th, taking into account a number of factors, and 39th for the ease of starting a new business.  Apparently registering for and paying taxes in Panama is one of the most difficult aspects of doing business in Panama!  But, hopefully that ranking will change, with the adoption of the online tax payment system implemented recently.  Panama is also ranked 54th in Economic Freedoms, which looks at rule of law, government size, regulatory efficiency and open market criteria.

That said, Panama continues to consolidate its position as a business hub, as the headquarters for more than 130 multinational companies!  The principal business and investment attractions for Panama are:

  • corporate headquarters & regional services
  • multimodal logistics
  • infrastructure development
  • maritime services
  • light manufacturing (free zones)
  • renewable energy investments
  • tourism

This translates into the following prime locations/special laws and incentives:

  1. Panama Pacific 
  2. Ciudad del Saber
  3. Colon Free Zone
  4. Special Free Trade Zones (dotted around the country)
  5. Multinational Headquarters

In terms of quality of life, Panama is ranked #1 in Central America and #4 in Latin America (UNDP).

Workforce & other challenges

workforce, employees, professional, training, educationAs I pointed out in my previous blog post about Panama’s money stories, corruption is probably the biggest obstacle that Panama faces – and it certainly is as far as perception goes. While Panama’s economy is stable and Panama has a well-developed services sector (most employment in the areas of banking, commerce, tourism and logistics), Panama continues to under-prepare its workforce for modern challenges. The poorly educated workforce ranks as the third obstacle in business for firms!

Education standards are considered to be poor by the World Economic Forum. The quality of public school education in Panama is still under fire, with a World Bank study indicating that upon completion of secondary school, the quality of the education is equivalent to 8 years of education, rather than 12.   Panama has taken important steps in improving the level of English in the public school education system, but still needs to modify the focus at Univeristy level.  Nonetheless, tertiary education is not in line with the needs of the marketplace – as social sciences, administration and law continue to be the predominant choices for students, rather than technology and sciences!

Back in 2016, news sources were reporting the problems employers faced at job fairs: while 72,000 jobs were on offer, only 25,000 people joined the labour market through these fairs, because they were under-qualified or lacked experience.  Call-centers in Panama provide about 14,000 jobs to the Panamanian workforce – the principal ones in Panama are Dell and HP.  But there continues to be a need for better qualified English-speakers for Call-Centers.  Even in 2018, Panama faces these same challenges in logistics, tourism and even the construction industry.  Among the listed skills required are “soft skills”, such as discipline, punctuality and others.

At the same time, it appears that Panamanian firms do not do well in offering formal training to their employees, which does not assist employees in getting the industry specific training that they need.  Training for tourism or customer services is virtually non-existent and foreigners are constantly complaining of the bad service in restaurants.

Retraining, especially in technical schools, is very low.  There is a “stigma” attached to working in “manual labour”, and yet a dearth of properly qualified electricians, plumbers and specialist construction workers. Improvement is especially necessary in the vocational and technical areas. Everyone is a “handyman” and “knows how to do it”, but the reality is that you wouldn’t be able to pass inspections!  And as Panamanians have sought to move out of “menial labour”, Nicaraguan, Colombian & other immigrants have taken the posts of maids and housekeepers.

There are laws protecting many professions, such as law, medicine, dentistry and engineering. This means that foreigners cannot practice in these professions in Panama.  Yet, one of the fallacies is that chemical engineering is reserved solely for Panamanians – but Chemical Engineering isn’t actually taught in Panamanian Universities! Guess how many chemical engineers we have…

Inflexible labour laws are another cause for complaint among prospective investors into Panama: firing is heaving regulated, labour mobility is limited and labor typically costs 41% more than the paid salary (including social security, holiday pay, liquidation costs, etc.).  Panama’s minimum wage is the highest in Central America, and it is often difficult to find fluent English speaking employees.  Panamanians typically have an intermediate to advanced level of English, but are seldom proficient in business writing and customer service level English.

 

All of that said, Panama continues to be one of the most attractive places in Latin America for investment.  And yet, with respect to innovation, Panama still has so much to learn.