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The following is a piece from my buddy Kent Davis from Panama Equity Real Estate.
I like Kent's work and he's probably the only agent in the country (if not the world?) that talks about negative stuff just as much as positive hype.
Add the fact that I think all his "threats" are very credible and worth taking into account.
Panama has been enjoying a seven year economic heyday: consistent GDP growth, low unemployment, and a voracious national commitment to expand infrastructure.
On the surface all signs point in the direction of continued growth. But political rumblings, an unexpected slowdown of two of the country’s major sources of revenue, and other new issues may end up rocking the boat in 2014.
Political Turmoil In Our Sights?
April’s elections bring three candidates who are for the most part committed to maintaining current economic policy.
The incumbent party’s Jose Domingo Arias has chosen for his vice presidential running mate the current president’s wife. This means that if elected, Panama looks forward to five more years of more of the same:
More money on large government projects, a further consolidation of power for the ruling Cambio Democratico party, and an economy that looks to continue their thrust forward at breakneck, winner-take-all speed.
The current president Ricardo Martinelli enjoys a strong approval rating and his successor Arias is ahead of the campaigns, but what happens if the election results are contested or even worse, if there is a suppression of unfavorable election results?
This type of political scandal would not only turn off foreign investment, it would incite the radical anti-Martinelli minority who took to the streets during the mining protests and government land sales controversies in 2012 and would shake the system to it’s core.
President Ricardo Martinelli’s deep pocket spending and no-bid contract style has accomplished much for the small country of less than 3.5 million residents, including a multi-billion dollar metro system that is set to open in April 2014, but the president is not without his critics.
The anti-Martinelli contingent cite a growing consolidation of power and a repression of civil liberties which, if continued for another five years they argue, would create the type of political discord that the political opposition in 2019 could see the likes of a populist leader vis-à-vis Venezuela’s Maduro.
Souring Relations with Venezuela
Another factor that may negatively impact Panama’s rampant growth is the souring relations with Venezuela and the free trade zone implications that come with a distancing of commercial relations between the two countries.
Panama’s free trade zone enjoys over $30 billion dollars of economic activity on a yearly basis, and Venezuela is a key trading partner.
Not only is there an outstanding debt of one billion dollars that may go uncollected, which would put many small business owners out of business…but Venezuela accounts for over 20% of the free trade zone volume in exports.
This, combined with the recent trade embargoes approved by the government of Colombia has been a one-two punch that could be difficult for Panama to recover from quickly.
Speedbumps With Canal Expansion
A third potential chink in the armor of Panama’s economic charge is the massive engineering venture that is the Canal expansion project.
While construction is once again moving forward, the Spanish group SACYR has been teetering on the verge of bankruptcy and is rumored to have underbid the project in the hopes of claiming cost over runs from the Canal Authority.
The drama unfolded in the first two months of 2014 and while a tentative agreement’s been reached, the threat of work stoppage or an outright abandonment by SACYR is not beyond the realm of possibility.
While this wouldn’t be a nail in the coffin, it would be a black eye for Panama’s earnest attempts to deliver the expanded canal on time and prove themselves capable of completing one of the largest engineering projects in this decade.
Construction delays and heaven forbid a rebidding process would shake things up and may put back other projects, including the planned fourth bridge over the Canal and line two of the metro.
Inflationary pressures are catching up to Panama’s lower and middle classes, as rising food and transportation prices keep the savings rate down to next to zero.
This issue has been on the radar for the 2014 candidates and the hope is that the new administration will enact policy to combat rising prices that are causing angst in some of Panama City’s exploding middle class communities such as Chepo, Araijan, and Chorrera.
On the heels of a near 30% increase of the minimum wage and subsequent across-the-board negotiations from higher paid employees, inflation will in all likelihood be a continued issue: if unaddressed, it could lead to a more aggressive wave of discontent.
And while Panama enjoys one of the lowest levels of unemployment in the world, as government spending slows on infrastructure construction, many laborers could be displaced and unable to find work in the private sector.
Crime On the Rise
The first three months of 2014 have seen a number of alarming incidents involving both foreigners and locals in Panama’s beaches areas, and members of the community are concerned at the reaction (or lack thereof) by Panama’s legal system.
Armed robberies, home invasions, and other violent crime are on the rise in the popular tourist areas surrounding San Carlos and could have a huge impact on both tourism and expat relocation if left unaddressed.
Many see a growing income gap as one possible driver for this new crime wave, as locals cope with rising prices and an increased presence of wealthy visitors make for easy targets.
While crime rates in Panama City have dropped significantly over the past few years, crime in Panama’s tourist heavy interior is alarmingly on the rise and has locals and foreigners worried for their safety.
What’s to Come?
Panama remains in the international spotlight for an admirably strong economy and relative political stability. With elections at the beginning of May, here’s to hoping the party continues.
Of course, this is A LOT of attention and development for the one-time Banana Republic. Uncertainty is always present in predicting Panama’s near (and long term) future but as things stand, we here at Panama Equity are still optimistic and confident that the next administration will address these issues and help keep the course of growth.
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