Panama: Present Gains and Past Glories

Last Updated: 25 May 2005
Article by Derek Sambrook

The Economic Commission for Latin America and the Caribbean predicts that the region’s per capita Gross Domestic Product will repeat last year’s result and grow by 4 per cent in 2005. ECLAC reports that the region’s economy grew by 5.5 per cent in 2004, a figure which has surprised everyone and is the region’s best result since 1980.

The current regional recovery has been largely due to GDP growth accompanied by a surplus in the balance of payments current account; at the same time there has been a rise in output, despite large capital outflows (almost $20 billion net). In 2004, regional inflation stood at 7.3 per cent with combined exports of over $460 billion and imports of almost $399 billion. There seems to be less dependency on international capital markets and sovereign risk premiums have been lowered. The level of external debt last year fell from 42.8 per cent of GDP in 2003 to 37.2 per cent. The demand, particularly in Latin America, for labour has seen a marked increase in job creation and not since 1997 has growth exceeded 3 per cent in all six of Latin America’s biggest economies.

It was all quite different just two years ago when Brazil, the leading economy, was expected to follow in the financially faltering foot steps of Argentina. And Argentina has, of course, produced its own surprises since then with economic growth of 8.2 per cent last year. It is a country of contradictions. In 1913 its income per capita was on a par with both France and Germany and it was considered a developed country. It soon lost its status after that and many reasons have been given for the decline, but two stand out: a failure to both industrialise and diversify in the early 1900s and – the perennial thorn – politics. Today’s president, Néstor Kirchner, is seen by many as being the very essence of a Peronist, and they hope, therefore, that he can bring more disciplined governance to their big yet sparsely-populated (38 million) country which, in area, is the world’s eighth-largest. Kirchner descended from Swiss and Croatian immigrants and was previously the governor of Santa Cruz, a barren yet oil-rich Patagonian province. He is authoritarian (some describe him as blunt and mistrusting to the point of paranoia) and it is said that he inspects the government’s accounting books every day. His wife, a Peronist senator, is, in every sense of the word, his closest adviser and is known for not being a shy, retiring violet. Because he has not travelled much outside his country, however, he has also been accused of parochialism (he made his first trip to Brazil just before his election in 2003 and to Europe just shortly afterwards).

But perhaps by paying close attention to the government books he can do what many of his predecessors since the 1930s have failed to do: forget past glories and strive towards regaining the status of a developed country.

"Very, Very Good News"

Another unpredictable country, Venezuela, continues to upset the president of one of its large oil customers, the United States of America, in another example of that continuing political play, George and the Dragon. On a visit to Beijing last December, Hugo Chávez signed an accord with China to sell 120,000 barrels of fuel oil a month and to also allow Chinese companies to help pump oil from 15 Venezuelan oil fields. It’s reckoned that at the moment there is one car for every 70 Chinese vs. one car for every two Americans. If car ownership eventually rises to American levels it would equate to 650 million cars, a figure that exceeds the number of cars in the world today.

Venezuela and Panama have discussed using an existing Panamanian pipeline in conjunction with Panama’s canal to enable oil to be shipped faster and more economically to Asia. The canal, which already carries 4 per cent of world trade, may be widened (apparently, over 100 consultants’ reports have been commissioned). Alberto Alemán Zubieta, administrator of the Panama Canal Authority, is emphatic that if the project goes ahead, the costs (around $8 billion) can be covered by canal tolls, adding that the canal "by the constitution is an inalienable property of the Panamanian people, so there’s no equity participation from anyone else".

If widening the canal is on the cards, narrowing the country’s budget deficit is taking precedence. The new fiscal reform package, promised by president Martín Torrijos, has been presented. Torrijos has said that the reforms are central to his economic plans and he acknowledges that they represent "drastic austerity measures". The expectation is to cut the government’s budget deficit (about $700 million) almost in half by 2006 through tax increases and spending cuts. The government wants to cut its payroll by 30% in 2005 alone and economic growth, together with the reforms, could bring the deficit down to about 1 per cent of GDP in 2007 (it was 5 per cent in 2004). The international market has welcomed the initiative and one Credit Suisse First Boston emerging market analyst shares the view of many in saying that it’s "very, very good news". The new tax regulations have yet to be published, but those with offshore Panamanian companies should not be concerned. Even although the annual company franchise tax is set to increase from $250 to $300 next year, it still makes Panamanian company costs competitive. Offshore financial services are not a target and alarmism is unwarranted.

Many years ago it was said that the Eiffel Tower is the Empire State Building after taxes. I can’t see a parallel and the only tall skeletal structures you will see in Panama are destined to become either new office or apartment buildings. And there’s lots of them.

Letter from Panama is published by Trust Services, S. A. which is a British- managed trust company licensed under the fiduciary laws of Panama. It is written by Derek Sambrook, our Managing Director, who is a former member of the Latin America and Caribbean Banking Commission as well as a former offshore banking, trust company and insurance regulator. He has over 35 years private and public sector experience in the financial services industry. Our website provides a broad range of related essays. Engaging an offshore representative is an important decision and we advise all persons to seek appropriate legal and tax advice from professionals licensed to render such advice before making offshore commitments.

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